Audentes Fortuna Iuvat Dear Niveshaks, Our zeal to serve our readers with more insights from the financial world is getting stronger with every edition that we publish. With new sections, we present to you the 10thanniversary edition of our Niveshak magazine. The past month kicked off with second consecutive rate hike by RBI for the first time in 5 years to check volatility of rupee amidst trade war advances. Due to rising crude oil prices and sustained dollar demand
from importers, Rupee saw an all-time low ₹71 against USD on last day of August. The cover story of this month features an Exclusive report on the country’s financial health as provided by the Reserve Bank of India in it’s annual report., the many creases in the economy that have been straightened out because of the government’s recent initiatives and the ones which are still left. The AOM of this month by Tanay Rasal and Durga
Jadhav from NMIMS University covers an empirical study to quantify the impact of performance-Chasing Behaviour v/s Buy and Hold Strategy of Mutual Fund Investors in Indian Equity Market. The study also discusses the steps That would help the investors to not enter the market at a wrong time and make poor decisions. The FinGyaan section of this edition features a write-up by Pranav Daund from IIM Bodhgaya on the
theme- Is a Currency Crisis looming for India? The article features an assessment of the Indian economy and analyses the key factors which are leading to the currency crisis. FinFails, which is a new section added to the magazine, talks about big failures in the financial world. In this edition, we have covered the story of Washington Mutual and how this wellknown bank got the worst blow in the American banking sector. The section ends with various moves that the bank could have taken to avert this failure. The Classroom section of this month holds a discussion on mutual funds and various investment styles. The FinView presents the opinion of Mr P M Pethe, corporate consultant and trainer to FEDAI, on issues such as sliding currencies in emerging markets and its impact on Indian Rupee, India’s stance on competitive devaluation, capital account convertibility as a variable in India’s growth and road ahead for India to deal with plunging Turkish Lira. Movie Review, features ‘The Big Short’, which dissects the events that led to the final crash of 2008 while explaining the financial jargons with a comic view. Finally we provide you with our anniversary special story about the recent investment of Berkshire in Paytm and what it means for the future of Paytm and Hathaway. As we strive to keep you updated with the financial world, we hope this magazine gives you a fun and insightful reading experience. Stay Invested, Team Niveshak
THE TEAM Aayushi Abhishek Soni Arpit Murarka Bhushan Bavishkar Mahesh M Priyanshu Gupta Samprit Shah Sheshav Dosi Sriya Gupta Aman Jain Harsh Jain Rajat Magotra Rohit Garg Shreyansh Parakh Suchitra Mandal Trisha Waghela Vinti Singla Yukti Rajpal All images, design and artwork are copyright of IIM Shillong Finance Club
© Finance Club Indian Institute of Management, Shillong
Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever.
Contents NIVESHAK: AUGUST 2018
06 08 10 . . . 14 18 20 . . . The Month That Was
Niveshak Investment Fund
Article of the Month: An Empirical Study
Cover Story: The Country’s Report
FinFail: Washington Mutual
FinGyaan: Is Currency Crisis Looming In India
24 26 28 . . . 29 .
FinView: Mr. P.M. Pethe
Classroom: MovieReview: Options & Strategies The Big Short
Anniversary Special: Berkshire Hathaway Enters India
THE MONTH THAT WAS
NIVESHAK | AUGUST 2018
THE MONTH THAT WAS Kotak Bank: RBI vetoed promoter stake dilution RBI on 14th August rejected Kotak Mahindra Bank’s plan to comply with central bank’s rule to restrict promoter shareholding to 20% of paid-up capital by 31st December 2018 and 15% by 31st March 2020. Under the proposal, the bank issued hybrid instrument PNCPS (perpetual non-convertible preference share) worth Rs 100 crores to investors at Rs 5 per share, aggregating to Rs 500 crores. Revised paid-up capital stood at Rs 1,453 crores from Rs 953 crores. Post the issuance of PNCPS, Uday Kotak's (promoter) holding in the bank had fallen to 19.7% from 29.7%. Looking at the intent of the central bank’s guidelines it seems correct. As per RBI’s norms types of preference shares are treated as part of paid-up capital and its rule refers to holding cap as a percentage of paid-up capital. Record direct tax revenue Revenue from direct tax through Income Tax stood at a record of Rs 10.03 trillion during the year 2017-18 as per the CBDT (Central Board of Direct
Taxes). Moreover during this period a record count of 6.92 crores I-T returns were filed, which was 1.31 crores more than 5.61 crores returns filed in the year 2016-17. The Department this time added 1.06 crores new return I-T return filers during 2017-18 and further targets to add 1.25 crores new filers for the 2018-19. There is a further scope of increasing the direct tax revenue by increasing the tax net but due to parliamentary elections scheduled to happen in 2019 and assembly elections in various states, we don’t expect this move in coming period. RBI second rate hike The RBI hiked interest rate back to back for the first time in almost 5 years to control inflation and prevent a volatility in the rupee as the global trade war advances. The Monetary policy committee (MPC) comprising of 6 members during their meeting voted 5-1 for the agenda to raise policy rates by 25 basis points revised at 6.5%.
Since October this is the first time that Central bank has raised rates in back to back consecutive meetings of its ratesetting panel. MPC raised rates by 25 basis points in June. We can expect further rate hike during the current financial year because of 4% inflation target, because of volatility in crude oil and the larger-than-average increase in minimum support price (MSP). [6]
THE MONTH THAT WAS
NIVESHAK | AUGUST 2018 Rupee breaches 71 mark against Dollar Rising crude oil prices and sustained demand for dollar from importers resulted in the Rupee hitting the 71 mark against US Dollar on the last day of the month. The currency has depreciated more than 9 percent since the start of 2018 and close to 11 percent year to date on August 31, 2018, making it the worst performing Asian emerging market currency. The downward trend is likely to continue among expectation of further rate hike by the US Federal Reserve. The breach led the RBI to sell off dollar in small amounts through state-owned banks to prevent free-fall of the currency but no major intervention is expected from the central bank as they remain focused on keeping domestic inflation in check. Reliance Jio closes down the gap to Bharti Airtel Financial data put forth by TRAI showed that Reliance Jio has overtaken Vodafone India to become the 2nd biggest telecom operator in the country in terms of revenue market share.
It has also closed down the gap to market leader Bharti Airtel with a 14 percent increase in overall Adjusted Gross Revenue (AGR) for the first quarter of 2018 as compared to just 0.9 percent of Bharti Airtel. Jio’s Revenue Market Share (RMS) has reached 22.4 percent and it is inching closer to Airtel which leads the market with 31.7 percent of RMS. Jio, which launched less than 2 years ago as a ‘nationwide 4G network’, has gained substantial ground in rural markets due to aggressive pricing and lack of 4G network from other operators.
It is also now the 4th largest telecom operator in terms of number of subscribers which stand at 21.5 crores at the end of June 2018.
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NIF PERFORMACE EVALUATION As onAsAugust 31stJuly , 2018 on 31th 2017
August Month's Performance of NIF 106 104 102 100 98 96
Scaled Sensex
Scaled Portfolio
265 255 245 235 225 215 205 195 185 175 165 155 145 135 125 115 105 95
Performance of Niveshak Investment Fund since Inception
Sensex Scaled values
Total Investment Value: 10, 00,000 Current Portfolio Value: 24, 54,790 Change in Portfolio Value: 145.48% Change in Sensex: 88.522%
Portfolio Scaled Values
Value Scaled to 100
Risk Measures: Standard Deviation NIF: 34.82 Standard Deviation Sensex: 17.34 Sharpe Ratio: 4.06 (Sensex: 4.88) Cash Remaining: 37,788
Comments on Equity market and NIF’s Performance: Sensex and NIFTY scaled record highs in the month of August. The rupee continued its glide on downward spiral and touched record low of Rs.71.085. India clocks in growth rate of 8.2% in Q1 of FY19. Fund raising via NCD rises 5 times to Rs.21,000 crore in April-July. For NIF, PVR, NELCO & Dr. Reddy’s were the biggest gainers for the month of August earning returns of 22.77%, 20.35%, 14.74% respectively. While the biggest losers for the month were Asian Granito, Paramount Comm & PPAP Automotive. The country's economy is recovering from twin shocks of demonetisation and the goods and services tax (GST). Going forward the NIF team remains bullish on Fertilizers and Banking sector. Rising discretionary incomes fueled by increased MSP and a strong monsoon would continue to fuel rural demand.
NIVESHAK INVESTMENT FUND INDIVIDUAL STOCK WEIGHT AND MONTHLY PERFORMANCE
NIF Sectoral Weights
Monthly Performance Portfolio Weight
1.50% 7.80% 6.61% 14.19%
5.71%
1.45%
14.68%
11.60%
4.68%
31.78%
Auto Infrastructure Chemical Media Financial Services FMCG Pharma Telecommunication Misc
TOP GAINERS FOR THE MONTH • • •
PVR (+22.77%) NELCO (+20.33%) Dr. Reddy’s (+14.74%) TOP LOSERS FOR THE MONTH
• • •
Asian Granito (-21.65%) Paramount Comm (-9.49%) PPAP Automotive (-6.34%)
ARTICLE OF THE MONTH
NIVESHAK | AUGUST 2018
An Empirical study to quantify the impact of Performance - Chasing Behaviour v/s Buy & Hold Strategy of Mutual Fund Investors in Indian Equity Market -Tanay Rasal & Durga Jadhav M.Sc. Finance NMIMS University, Mumbai
The standard theory of finance states that the investor should take all the information available in the market, think rationally, apply some reasons and then take any decision based on the above analysis. This is a simple theory which anyone would agree with and this this should be the process for any decision making. But in actual the investor does not look for all the information available, without rational thinking, just based on some biases or investors strong instinct they take the decision most of the time and end up making losses. Any investors’ ultimate goal is to generate higher returns and in the process of generating higher returns the investors opt for the stock or fund which has recently generated good returns. The concept is that the investors track the past records for any mutual fund and investor or chose to invest in mutual fund from its past performance. The investors try to move with the market swings, which
leads to loss. The investors enter in the mutual fund when it has already given the strong returns in the previous period. This behaviour can be explained by discussing various biases in the behavioural finance. Some of them are Representative heuristic, framing effect. When investor experiences below average return (in mutual fund), their immediate action is to move assets from one fund to another fund with strong performance track record. In short, these investors end up chasing performance. Given the popularity of this behaviour, we decided to study its underlying assumptions and historical performance. According to the study done by the morning star analyst, “Morningstar calculates investor returns for open-end mutual funds to capture how the average investor fared in a fund over a period of time. Investor return incorporates the impact of cash inflows and outflows from purchases and sales and the growth in fund assets. Investors know they should hold diversified portfolios, but many chase past performance and end up buying funds too late or selling too soon. As a result they suffer from poor timing and poor planning. Investor return measures the experience of the average investor in a fund. It is not one specific investor’s experience, but rather a measure of the return earned collectively by all the investors in the fund. The gap between investor return and total return indicates how well investors timed their fund
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ARTICLE OF THE MONTH
NIVESHAK | AUGUST 2018 purchases and sales. When investor return is less than total return, it means that more investors participated in the downside returns and less in the upside returns. This sometimes happens when investors chase returns and assets flow into a fund at its peak of performance. This effect can be exacerbated when investors aim to break even and refuse to sell a losing fund.� In theory, performance chasing succeeds if past performance is can be true indicator of future performance. By performance chasing people assume past performance is a true indicator. In contrast investors who follow Buy & Hold strategy assume performance chasing is fairly weak strategy. In this Study, comparison of performance chasing with Buy-and-hold strategy to determine whether taking action based on recent performance holds true. Buy and hold strategy is to hold tight, hold onto the mutual fund investment for a longer duration of time period. We have made an attempt to study and compare returns generated by buy and hold strategy and returns generated by performance chasing behaviour. Limitation of the study: 1. Only 60 funds studied. 2. Time horizon is from 2013-2017. 3. Mutual funds selected are from Indian Equity Markets. Study Sample: For our primary analysis we chose the
mutual fund from Indian Equity Markets. We randomly selected mutual funds from Large Cap, Small & Mid Cap and Diversified Fund from MoneyControl database for the period of 4 years (2013- 2017). After filtering we include funds which were in existence for a minimum of 4 years, we arrived at a study sample of 60 funds. Research Methodology: In Buy-and-Hold strategy, we invested in all the Funds in a particular category. For sell, we sold only if particular Fund was discontinued. In Performance Chasing Strategy, initially we invested in all Funds (same as Buy-and-Hold strategy) for a period of one year. For Sell, we sold funds that achieved below median returns during a particular year. For Reinvestment, after any sale, we immediately reinvested randomly in any fund that had achieved above median return for current period. The above study has resulted out that on an average that the buy and hold strategy any any fund whether it be large cap,, mid cap or diversified , buy and hold has clearly out- performed the performance chasing behaviour and buy and hold strategy has generated over 2% more returns. The strategy can be implemented while choosing a fund for the investment. The research has led us to believe that the performance chasing behaviour costs to the investors and generates less returns and this can be avoided by
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ARTICLE OF THE MONTH
NIVESHAK | AUGUST 2018 using buy and hold strategy. Patience plays most important role and helps to stay invested in mutual fund for a longer duration. This has been proved profitable for the investors. Investment Rule for Analysis:
Performance Chasing
Clear Winner: Buy and Hold In all the categories – Large Cap, Small & Mid Cap and Diversified Fund, the returns produced by the Buy-and-Hold strategy were better than those of the performance chasing strategy (Refer Figure 1 & Figure 2). These results underscore that investing in mutual funds solely on the basis of their recent performance is not likely to improve future return.
Initial Investment: At the start of the analysis period, we invested in fund for a period of one year. Sell Rule: Using one year period of returns, we moved forward one year at a time. Funds that achieved below-median returns at any time were sold, as were funds that were discontinued Reinvestment Rule: After any sale, we immediately reinvested in each fund that had achieved above median return over the prior rolling period
Figure 1: Buy-and-Hold was superior to a Performance chasing strategy for the period: 2014-2017
Buy-and-Hold Initial Investment : Invest in any fund Sell Rule: Sell only if a fund is discontinued Reinvestment Rule: Reinvest in the median performing equity mutual fund within the particular category [12]
ARTICLE OF THE MONTH
NIVESHAK | AUGUST 2018
is misguided, as Buy-and-hold strategy has outperformed performance chasing over the period 2014-2017.
Figure 2: Detailed result of buy-andhold strategies versus Performance Chasing strategies: 2014-2017 Investors are instinctively attracted towards the past performance of any of the mutual fund. The result for the investor when he chases the performance doesn’t always turn out to be in its favour as past cannot be a true picture for the theory and the investor is entering when after a phase of potential returns from the fund. The investor loses out on the profits or returns which he could have generated if he would have had stayed in the same fund and ends up entering at wrong time and make poor decision. Our study demonstrates that this behaviour
To improve the odds of their long term success, investor should understand that there a period of lows. The investor should control the enticement to chase the performance of any mutual fund and should stay invested in one mutual fund only. The following steps would help the investor make a profitable decision and help them stop entering the market at wrong time and make poor decision: 1.
2. 3. 4.
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The investor should take disciplinary action and should not react to the noise in the market. The investor should not switch frequently from one fund to another. Stick to strategic asset allocation plan. Find funds that work for the individual objective.
COVER STORY THE COUNTRY’S REPORT
COVER STORY
NIVESHAK | AUGUST 2018 Projection and perception are the two terms that hold the key to unlocking the electoral & economic success in a subcontinent like India. Agencies project the future of the economy, which eventually drives the perception around the policy framework of the nation. Statistics jump into the debate & they translate the euphoria into pragmatism. Over the years one agency that has been doing it successfully without a spec of partisanism is the Reserve Bank of India. The RBI annual report is said to be one of most accurate perception of the Indian economy which eventually paves the way for future projection. Throwing caution to the wind the report begins its assessment with words like inflexion & lingering; clearly landscaping the languishing position of the Indian economy in a post GST demonetization era with wavering and fluctuating consumer sentiments. The report proceeds to highlight the general corporate sentiment of positive future economic outlook with the projection: "Indian economy is set to step up its growth trajectory"; all the while pointing out two priority aspects to realize the high growth goal: Infrastructure & Employment. As per RBI’s analysis “infrastructure holds the key to unleashing the impulses of faster growth. In particular, the reasonable success achieved in the transportation space is worthy of emulation in other areas." At the same time settling the euphoria around double-digit growth, the report mentions that the sentiment can be
effervescent if the momentum of growth does not hinge around inclusiveness of infrastructure benefits & if it does not impact employment intensity. The global economy expanded at a strong pace in the first half of 2018 with a robust rate of 3.8% before it is expected to slow down gradually over the next two years. In advanced economies (AEs) the growth is expected to be 2.5% before it eases down to around 2% rate of expansion, the credit for this growing rate was credited to tightening labor markets, firm commodity prices and resilient trade dynamics. Emerging market economies’ (EMEs) growth rate stood around 4.9% percentage points frontran the AEs in Q1 but fell back somewhat in Q2 as capital flows exited on risk aversion generated by a cocktail of trade wars, rising interest rates in the US, low commodity prices, slower global demand, geopolitical tensions and the unrelenting hardening of crude oil prices. Headwinds could nonetheless rise from the further tightening of financial conditions, escalation of trade tensions and intensification of geopolitical risks. Increasingly, financial markets are emerging as the main conduit for transmission of global spillovers to financial, and eventually, macroeconomic conditions in EMEs, including India. Though the RBI mentions that India has enough cushion against the upcoming economic doldrums, we believe there is enough that can torment the market
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COVER STORY
NIVESHAK | AUGUST 2018 and the government. The depreciating rupee forecasts doomsday for India’s import bill & with the government already on a spending spree, the election year can translate into a threating Current Account Deficit (CAD) figure which already stands at 2.4% for quarter ended June and although less from the previous Deficit has actually increased in absolute terms by around $.8 Billion. The Fiscal Responsibility & Budget Management targets can go for a toss if the government misses its disinvestment deadlines owing to sizable outlays on agriculture and infrastructure particularly if we consider the overall debt waiver provided to farmers which stood at .32% of GDP during FY18. India’s external sector exhibited resilience despite the widening of the CAD on account of a surge in prices of major import commodities. A net inflow of foreign capital, however, exceeded the funding requirements of CAD which led to a significant build-up of reserves. The external sector outlook will be shaped by international commodity prices, the course of monetary policy in major AEs and the resulting cross-border spillovers, and the rising incidence of protectionism. The report has been all praises for the government for its economic experimentation & has instilled hopes of rich rewards for this adventurism. The surge in the number of tax assesses, especially new ones which increased from 85.51 Lakh to 99.49 Lakh, augurs well for raising the taxGDP ratio to at least the levels of peers
While the GST may gradually expand revenues as it stabilizes and gains traction, terms of trade losses associated with the hardening of international crude prices could restrict fiscal space. From the regulators perspective, the report calls for progressive improvement in infrastructure particularly when projected spending to maintain a sustainable and stable growth in this segment is calculated to be at INR 50 Trillion by 2022 to enhance robustness, safety and security of the digital payments network. This is especially significant in the light of the recently launched India post payments bank. Robust customer grievance redressal mechanisms will continue to be developed further to increase trust and confidence in payment systems. The uptick in credit growth is likely to be supported by the progress being made under the aegis of the Insolvency and Bankruptcy Code, 2016 (IBC) in addressing stress on balance sheets of both corporates and banks, recapitalization of PSBs, and a positive outlook on the economy because of its focus on providing a collective mechanism to lenders which is particularly helping in resolving the twin Balance sheet problem with current outstanding NPAs standing at INR 10 Crores majority of which comes from PSUs which can be a catalyst in suppressing the investor sentiments in the market. In short, the report highlighted the upside risks faced by the headline
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COVER STORY
NIVESHAK | AUGUST 2018 inflation over the rest of the year. Agricultural productivity is likely to remain strong for the 3rd consecutive year & credit growth is likely to be robust. Internal consumption coupled with strong global economic headwinds augurs well for the Indian economy. Going further the RBI has exuded confidence in the steps taken
for financial inclusion & development of the payments infrastructure. RBI has promised some major economic reforms & series of steps to improve the asset quality of the Indian banking sector. Overall, the report ends on an optimistic note with a hope for future prosperity & the probability of strong economic expansion.
Image Courtesy: Times of India
Image Courtesy: NewsX
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FINFAILS
NIVESHAK | AUGUST 2018
FINFAILS Washington Mutual When we talk about 2008 financial crisis, what strikes our mind first is Lehman Brothers, AIG and favorites among right-wing conservatives, Fannie Mae and Freddie Mac. A few cognoscente might conjure up Bear Stearns, Merrill Lynch, Countrywide or New Century Financial. At the top of the list for left-wing conspiracy theorists would surely be Goldman Sachs. What’s interesting about that list is that none of those institutions was a vanilla-variety bank, the kind that takes in government-insured deposits and makes consumer and business loans. But that’s not because such banks avoided the crisis. Washington Mutual, facing huge losses from risky mortgage lending and a run by depositors, became the biggest bank failure in U.S. history. A bank that dates back to 1880s, Washington Mutual (WaMu) started its journey with the slogan ‘The Friend of the Family’. In the years to come the bank grew by leaps and bounds with major acquisitions mostly in the state of California. From mid-1900’s to early 2000, WaMu
undertook numerous acquisitions to leverage the growing real estate sector in US and was successfully able to grow and gain market share which helped it to become the biggest bank of US. WaMu also leveraged the boom in subprime lending by acquiring PNC Mortgage that was operating in the same domain. By the end of 2007, the bank had grown large enough to employ 43,000 employees with most of its business coming from retail banking.
But then things turned unfavourable and the glorious expansion of WaMu spun to the trail to biggest bank collapse ever. The expansion of WaMu came out bad for the business since its new branches in poor locations extended mostly subprime mortgages which had high chances of default. Also the bank was adversely affected from the plunging housing prices in California since most of its business came from that state. The condition was further aggravated by the fall in the national average home value which witnessed a historical dip. Not to mention, it became difficult for WaMu to raise cash from investors to sell the mortgages since the house prices were lower than the mortgages. The liquidity position of the firm worsened since the depositors withdrew their savings . Situation got so bad that the government had to
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FINFAILS
NIVESHAK | AUGUST 2018 step in and finally the bank was sold to J P Morgan Chase for a meagre amount of $1.9 billion. In this entire story there were several instances where the ultimate fate of the bank could have been averted. The expansion of bank aggressively in the country was a wrong move since it enhanced the reliance on sub-prime lending in poor locations.
Also the investment by the bank in the shiny sector of real estate which touched it’s all time high CAGR of 20%, pounded back on the bank in terms of collapse of real estate industry and fall in the house prices. The bank could have rather progressed for asset backed securities and should have sold non-mortgage loans to investors. WaMu failed to learn lesson from the fallout of multiple savings and loans in the early 1980’s. Kirsten Grind in her famous book ‘The Lost Bank’ tries to fill in a missing piece of the puzzle of the 2008 financial crisis with a tale of a bank that grew too big to manage but was too small to bother saving.
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FINGYAAN
NIVESHAK | AUGUST 2018
IS A CURRENCY CRISIS LOOMING FOR INDIA ? PRANAV DAUND Batch 2017-19 IIM Bodhgaya It is a common belief that the past directs the way to the future. It is the best market analyst, in distressful times for global finances. Being a longer witness to severe crises than financial conjectures and unanimous views on the same, it is more capable to provide signals for impending times of woe. Through this article we shall look at some of the important macroeconomic factors that over the years have been playing a vital role in an economy’s currency position. The August – 2015 currency slip saw the INR record instabilities against the USD, which raised speculations, of whether this would culminate into a bigger crisis. The rupee had tanked to a whopping two-year low of 66.66 against the USD, in August 2015. The reason behind this was mainly the Yuan depreciation, as China’s move to devaluate its currency sparked fears of a global currency war. The Yuan devaluation had a rippling effect on all the Emerging Markets. As far as India is concerned the stock markets faced a significant amount of volatility due to risk aversion by global investors. India had faced a gloomier picture of its currency crisis in August 2013, when
when the INR had dropped dramatically by 14% to 68.83, versus the USD. It was due to the unprecedented widening of the Current Account Deficit, because of huge gold imports and high crude oil prices. The INR experienced a depreciation from Jan 2018 to March 2018, after a successful 2017 for the Indian currency. Fears of whether the rupee will have to face highly severe times ahead were certainly resurfaced particularly on the back of a significantly high CAD in Q4 2017. Falling US Dollar in 2017? The U.S. Dollar Index, which measures the value of the dollar against a weighted basket of currencies belonging to six of the United States’ biggest foreign trade partners—the euro, yen, pound sterling, Canadian dollar, Swedish krona and Swiss franc—recently slipped to its lowest level in more than two years. In 2017, the dollar lost 12% of its value and the continuous decline period of over six months was the longest period of fall faced by the USD in the last 14 years. The USD saw a continuous and consistent collapse throughout the year 2017 on the turn of various events like change in the government (the Trump Bump), government’s failure to pass tax cut reforms and growing strengths of other currencies. The Euro for instance experienced a remarkable recovery last year which was at one point of time up by almost 15 percent from its low of December 2016.
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FINGYAAN
NIVESHAK | AUGUST 2018 This is a significant factor which must be analysed in preparing any assessment for Indian currency in 2018. A Stellar performance by INR in 2017 The INR performed strongly in 2017 and ended at a high note in 2017 by ending a 6-year continuous period of fall. The year saw Indian rupee gain 7% y-o-y growth in 2017. One of the major factors for the successful year was large foreign funds inflows which crossed over USD 30 billion. Approximately $7.73 bn was bought by Foreign institutional investors (FIIs) in equity and $23 bn bought by debt.
The fall of the US Dollar index throughout the year of 2017 as explained above was a major factor too. Excessive selling of American currency by banks and exporters lifted the Indian currency against the dollar.
Current Assessment To study the current scenario, we need to identify and analyse the key factors leading to a currency crisis.These indices give a clearer idea into India’s present economic scenario, and what can bring about a serious currency upheaval. In Q4 2017, Indian Current Account Deficit widened sharply to USD 13.0 billion which is almost 2 percent of GDP. This is an increase from USD 8 billion in the previous year (1.4% of GDP). The situation is further undermined due to firmer oil prices which is India’s largest import item. The fiscal deficit was contained within 3.5%, as of 2017-18. This implies a lessened burden of external debt, at a significantly high value of USD 513.43 billion. The fact that India has a relatively significant external debt, it has more chances of facing a currency collapse than in the previous years
US Dollar Index (the fall of 2017) 105
100
95
90
85
80 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17
Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18
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FINGYAAN
NIVESHAK | AUGUST 2018 when the public debt was around $475 bn (2015-16). The Indian economy thus needs to maintain its credibility in the global markets, which leads to infusing a positive sentiment in the investors. A low fiscal deficit precludes redundant public expenditure. The Reserve Bank of India maintained a record forex reserve of USD 422 billion in Q4 2017, to support the economy in an event of any financial crisis like a credit squeeze, or a fall in foreign investments. Since then, the forex reserves are on a constant declinecurrently at USD 404 bn (August 2018). However, the position is still strong compared to historic statistics.This is one of the major factors which will play a vital role in avoiding currency crisis in face of a disappointing current account position. A major concern in the current scenario
would be the FII outflow. FII inflows have slowed in the past few months for India as a result of underperforming emerging markets. FII outflow on the other hand have increased recently. The overall FII is an outflow as of 2018 depicts one of the worst performances by India over more than a decade. Emerging markets have provided a yield of 7.3% which is better than previous periods but still less than other nations like Turkey at 20% and even Mexico which is at 7.5%. Developed countries have return rate up to 60%. The disinvestment has occurred due to a larger sentiment of risk aversion among FIIs, against the backdrop of such a bleak picture of the EMs. Lastly, India’s political scenario has been more or less disturbed and is currently characterised with logjams and halted business in parliament, over
FII flows India 1,60,000.00 1,40,000.00 1,20,000.00 1,00,000.00 80,000.00 60,000.00 40,000.00 20,000.00 0.00 -20,000.00 -40,000.00 Gross Purchase
Gross Sales
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Net Purchase/ Sales
FINGYAAN
NIVESHAK | AUGUST 2018 divided opinions on various government reforms. However, a stable and majority of central government adds a positive to ensure an organised and efficient administration from centre. The overall assessment is that a massive currency crisis for the INR is highly unlikely. However, the rupee can continue to fall further this year in the near future. The major concern at the moment is the high value of Current account deficit and external debts which are at a record high. India can be affected by a financial contagion at this position in 2018 due to high foreign investment in the Indian market at present. India’s high forex reserve and protection layer from a lower fiscal deficit should be beneficial to avoid such a contagion if any. Also, global markets are currently
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performing well with no direct signs of a shock. Record forex reserves and stable investor environment will help the Indian economy not result in a currency crisis on account of CAD. A controlled fiscal deficit implies that the government does not have very heavy financial liabilities and is not indulging in redundant expenditures. This signal low rates of inflation. A low rate of Inflation, is another significant positive, strengthens the currency, and creates a window for a repo rate cut. Although the RBI follows stringent monetary and economic policies to maintain the robustly performing banking sector of the economy, NonPerforming Assets is a serious deterrent, to the same. Banks are failing to handle the excess liquidity from foreign capital inflows and this is aiding to extremities in the currency.
FINVIEW
NIVESHAK | AUGUST 2018
M r. P. M . PETHE
East Asian currencies crisis India did not succumb on account of prudent policies of RBI.
is a corporate consultant & trainer to FEDAI and various foreign banks, private banks, public sector banks, cooperative banks and management and professional institutes like The Institute of Chartered Accountants of India (ICAI), The Institute of Company Secretaries of India (ICSI) and The Institute of Cost Accountants of India. Q-1) Currencies of emerging market are sliding down. The biggest losers this year are the Turkish Lira, Indonesian Rupiah, Russian Rouble, Filipino Peso and Argentine Peso. Will Indian rupee be the next casualty? How prepared are we for the same? Ans.) In my opinion Indian Rupee will not slide down in tandem with the aforesaid currencies. This is on account of the fact the Central Bank of our country RBI keeps a close watch on the movement of exchange rate in line with REER and intervenes whenever required.
Secondly our economic indicators are getting stronger day by day. When similar situation arose nearly about two decades ago despite the South
Q-2) Should India join the competitive devaluation game to protect it's exports or stay away to boost foreign investors' confidence? Ans) At this point in time India should promote Foreign Direct Investments as the exporters in India are facing competition in International markets and protection by devaluation is not going to boost exports at the desired level. It is therefore suggested that we need to promote FDI as against FPI like China and this can be achieved if the conducive atmosphere is created at all fronts to attract FDI. Q-3) The Rupee has depreciated over 9% in the current financial year, which in turn has offset the real returns from Indian equity markets for the foreign investors. Considering the situation, what are your views on the future trend of foreign investments in the market? Ans.) This is an extension to previous question, so as to further elaborate India should be able to face the situation if we augment more and more FDIs for steady growth. Q-4) Can Capital account convertibility become one of the facilitators of India's accelerating growth?
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NIVESHAK | AUGUST 2018 Ans.) In fact the Tarapore Committee Recommendations suggested a road map way back in 1997 for achieving CAC. Before that de facto Current account convertibility was announced in 1994. FEMA 1999 was implemented in June 2000. However the PMLA was passed in 2002 but implemented in 2005. In the process the measures taken by RBI to achieve Capital Account Convertibility were abused. Even after 20 years from the Tarapore Committee recommendations, our economic indicators are not up to the mark. Certainly CAC will accelerate growth. My opinion is once the Current Account Convertibility is announced, CAC cannot be withheld for a long time. It is more than two decades now and hence we are trying to achieve CAC gradually.
I may infer India is fully convertible on Current Account and partially convertible on Capital Account. Q-5) Is the plunge in Turkish Lira issue of concern for India? How do we plan to deal with it? Ans.) USD is our Trading Currency/Investment Currency as well as Reserve currency. In the process the issue of Lira should not cause concern as the impact will be more on Europe. What is required to be done is to make efforts to strengthen INR and its movement against USD be tracked in line with REER. Though due to the concept of Global Village, even a small country's crisis will impact the Global currency market there will be indirect impact on India as well but the same will be to a limited extent
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NIVESHAK | AUGUST 2018
CLASSROOM
OPTIONS AND STRATERGIES
An option is a derivative contract which derives its value from the underlying. There are two parties option buyer and option seller. The contract offers right to the buyer but not the obligation to buy(call option) or sell(put option) at a predetermined price and date. The predetermined price is known as the strike price. The option seller is under the obligation to sell the security at a predetermined price in case of a call option and to buy the security for a put option seller. The option seller receives the option premium and the profit is limited to the premium received. A call option buyer purchase an option because he is bullish on the market. The call option seller faces the risk of unlimited loss due to the unlimited upside potential for a stock. A call option buyer enjoys unlimited profit in case of a call option as the stock price can rise to infinity notionally. [26]
So an investor generally do not sell the naked call and try to hedge with stock or other options. A put option buyer is bearish on the market and thinks that stock price will fall down until the expiry of the option. The loss amount of put buyer is limited to the option premium paid upfront while buying the option. The profit amount of put buyer is limited to Strike Price – Put premium . Maximum profit will be attained when the stock trades at 0 during the expiry of the options. Stocks are generally combined with options to hedge risk and also It can be combined with other options. Options price is also affected by the time of maturity of the asset and volatility of the stock. Both these factors positively affect the stock price.
NIVESHAK | AUGUST 2018
CLASSROOM
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A Bull Call Spread is a strategy that involves buying the call option on a particular asset at a lower strike price and writing a call option at a higher strike price on the same asset. In this strategy, the investor thinks the stock price will rise but it will not rise above a particular level. In this way, the investor is able to reduce its funding cost. There is an initial outflow of cash as the lower strike price will be traded at a higher price as compared to a call with a higher strike price. The profit of this strategy will be limited to the difference of the strike price of the call option – the initial outflow of premium. The loss will be restricted to the initial outflow amount. Example: Stock of A Ltd. Is traded at Rs.48. The trader buys a call option with a strike price of Rs.50 at Rs.2 and sells a call option with a strike price of Rs.55 at Rs.0.5. Maximum Profit= Difference of strike price – Net cash outflow from call premium Maximum Profit= (55-50) – (2-0.5) = 51.5 = Rs.3.5 Maximum Loss= Net call premium paid(Call premium paid –Call premium received ) Maximum Loss= 2 – 0.5 = Rs. 1.50 [27]
A Bear Call Spread is a strategy that involves selling the call option at a lower strike price and buying the call option at a higher strike price. This strategy is used by the trader when the trader views that stock will not rise until the option expiry so the trader can enjoy the call premium received. In this case, there will be an initial inflow of cash. The main reason why the trader buys an option with a higher strike price is to limit its upside potential for the loss, because if the seller sells a naked call then he might face an unlimited loss if the stock price rises significantly. This is done to hedge the trader against the risk. Taking the above example Maximum Profit= Net cash outflow from call premium Maximum Profit= 2 – 0.5 = Rs.1.5 Maximum Loss= Difference of strike price – Net cash inflow from call premium Maximum Loss= (55-50) – (2-0.5) = 5- 1.5 = Rs.3.5
NIVESHAK | AUGUST 2018
MOVIE REVIEW
THE BIG SHORT
Adam McKay’s idea of involving celebrities to explain the technical terms, coupled with an already star studded cast, makes it even more entertaining. Michael Burry, played by Christian Bale, is an eccentric hedge fund manager who first identifies the absurdity in the mortgage derivatives market. He is followed by other Wall Street mavericks. The most interesting team to follow suit are the young, novice investors Jamie Shipley and Charlie Geller, who are in turn led by Brad Pitt. This group of investors ‘short’ the market before the bubble bursts.
How to make finance interesting? That is exactly what Adam McKay has done, directed a perfectly satirical movie (adapted from a nonfiction best-seller by Michael Lewis) which is completely different from the ultra-serious documentary, The Inside Job. The big Shorts was released on 23rd December 2015, by Paramount Pictures. With a budget of $50 million, the film was a huge success, grossing $133 million. The film has won the Academy Award for Best Adapted Screenplay, and has been nominated for Best Picture, Best Director, Best Supporting Actor (Christian Bale) and Best Film Editing.
Witty yet intricate, the Big Short strikes a balance by explaining the financial jargons with comedy, something which could be quite hard to achieve. To dissect the events which led up to the final crash of 2008, this film is a perfect start for an outsider in the world of high finance.
This Oscar nominated film not only explains the biggest financial crises of the 21st century, in the most lucid manner, but also manages to keep the audience engaged throughout the film. [28]
ANNIVERSARY SPECIAL India-the new Playing Ground for Berkshire Hathaway
ANNIVERSARY SPECIAL
NIVESHAK | AUGUST 2018 Berkshire Hathaway which is best known for its acumen in Value Investing and choosing the right companies at the right time to invest in has this time chosen Paytm, India’s largest digital payment channel. Despite the inhibitions that Mr Buffet had about the tech space and the unpredictability it threw the way of investor’s, Berkshire Hathaway is all set to invest in Paytm. For the digital financial services provider, this investment means adding another Big name to its kitty with existing investments from Big shots such as China’s Alibaba as well as Japan’s Softbank. However, Berkshire’s Investment coming at a time that it does symbolizes more than just an investment notably because it was only five years back when it withdrew its FDI in the insurance sector citing regulatory issues. Back in the time when the genre’s guru played a wager by investing in India, the country was the 9th largest economy in the world. But he gave up on India’s insurance market in just two years and that too at a time when India was just unveiling its Plans to open up the economy to FDI like never before. And the fact that Warren was not alone in this, but Walmart, POSCO as well as Arcelor Mittal were also pulling out made the wound that much deeper leading to a sad demise for Indian FDI. The political dysfunctionality is to be
held the culprit in this scenario. The country was performing poorly on each grounds, GDP growth slumped from 6.69% to 4.47% from 2011-12 to 2012-13 giving clear signs of the economy hitting rock bottom, mainly due to the domestic policy deadlock and tax disputes. The current account deficits soared to a record high of $78.2 billion (4.2 per cent of the GDP) in 2012, from 2.7% of the GDP in the previous year. So Maybe Berkshire saw something in the country when it started, but along the way, the signs were clear enough for the company spearheaded by the “Oracle of Omaha” to pull out as he clearly might not have seen any sustainable and long-term growth in the country. So what happened five years later when Berkshire came back for India and Particularly for Paytm or is it the Digital Payment’s Network and its potential that attracted Berkshire? Digitalization of payment channel has been the Buzzword of the Indian Fintech Industry for more than a year now, and since then this space has also seen swift participation from various players including Government’s own payment’s network BHIM, Google’s Tez, Amazon Pay, Flipkart’s PhonePe, and of course Paytm. Paytm which was launched in India when the digital payments market was almost negligible and who had long
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ANNIVERSARY SPECIAL
NIVESHAK | AUGUST 2018 been holding on to its monopoly is now struggling to stay relevant and distinguished with so many competitors entering its foray. Since its launch Paytm has seen its own share of ups and downs. It has grown at an exponential rate and got the boost it needed 2 years back from the demonetization drive led by the government such that “Paytm Karo” has been ingrained in the minds of Indians which is not restricted to cities but towns and villages too. It started as just a Digital Payment System but has added e-retail and mcommerce in its offerings and was one of the eleven entities to get approval from RBI to launch a payments bank. The concept of payments bank is particularly significant seeing as it was spearheaded for the primary purpose of financial inclusion even to the remotest part of the country. Being on the priority list of the incumbent government 80% of the Indians have Bank accounts, all credits to the Jan Dhan Yojana. However, the financial Inclusion levels are still not up to the par. For instance, only around 1% of these beneficiaries utilize overdraft facilities, and about 38% of the total bank accounts are inactive. And as far as access to formal credit goes, the growth has almost been negligible. So the debate of whether Bank-led Financial Inclusion or Mobile led Financial inclusion is the best way to go is no debate at all.
As per the Consumer Payment Insight survey done by Global data, India has one of the highest adoption levels of mobile Banking, and the mobile wallet transaction grew around two and half times just between 2016 and 2017.
As per the Consumer Payment Insight survey done by Global data, India has one of the highest adoption levels of mobile Banking, and the mobile wallet transaction grew around two and half times just between 2016 and 2017. The potential for growth in this segment cannot be overstated. And it is imperative to tap into this segment now more than ever as India postPayments Bank was launched on 1 September 2018 and has the backing of Prime Minister Modi himself. India Post specifically has an advantage with the availability of 3,00,000 postmen in rural and urban areas to give it the push that it might need to get ahead of the existing players. This is something worth capitalizing on and it can be one of the reasons why Berkshire made a comeback. If we look at the existing competition that Paytm faces in the payment’s wallet scenario the Closest one to Paytm can be considered Flipkart’s PhonePe with 133 Million app downloads lagging behind Paytm’s 150 Million downloads.
This is particularly significant as the recent infusion of about 2500 crore is seen as a direct reaction of Walmart’s injection of $66 million in Flipkart
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ANNIVERSARY SPECIAL
NIVESHAK | AUGUST 2018 which would imply a advantage for PhonePe.
substantial
Of course, it is no trade secret that the actual reason for Walmart’s Investment in Flipkart is Not Paytm directly. However, it sure has the potential of killing two birds with one stone. Paytm reported total consolidated losses of INR 899.6 crores for the year ended 31st March, 2017. This infusion will give Paytm the support it needs financially as well as boost the market sentiment for Paytm.
And while Berkshire has named two top officials Greg Abel, CEO of Berkshire Hathaway Energy Company, and Ajit Jain, executive vice president of Berkshire Hathaway's National Indemnity Company insurance subsidiary to the company’s board, it’s succession plans after Warren buffet look foggy and this could again be a factor of uncertainty for Paytm as this deal did not see the direct involvement of Warren Buffet. There is not an iota of doubt that this is a turning point, but the direction is yet to be seen.
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ANNOUNCEMENTS ALL ARE INVITED Team Niveshak invites articles from participants from all B-Schools across India. We are looking for original articles related to finance and economics. Participants can also contribute puzzles and jokes related to finance and economics. References should be cited wherever necessary. The best article will be featured as ”Article Of The Month” and would be awarded cash prize of Rs. 2000/- along with a certificate.
Instructions: • Send in your articles before 28th September, 2018 to niveshak.iims@gmail.com • The subject line of the mail must be ”Article For Niveshak_<Title>” • Do mention your name, your batch and institute name along with the article • Please ensure that the article has a word count between 1500—2000 • Format: Microsoft Word; Font: Times New Roman; Size: 12; Line Spacing: 1.5 • Please DO NOT send PDF Files and stick to the format • Number of authors is limited to 2 for each article • Mention your mail id/blog if you want readers to contact you for further discussion • Also certain entries which could not make the cut to the magazine will get featured on our website.
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