Niveshak Sep15

Niveshak THE INVESTOR

VOLUME 8 ISSUE 9

September 2015

BROKEN PROMISE

FROM EDITOR’S DESK Niveshak Volume VIII ISSUE IX September 2015 Faculty Chairman

Prof. P. Saravanan

THE TEAM Abhishek Bansal Bhawana Saraf Maha Singh Gulati Palash jain Prakhar Nagori Ramesh Jaiswal Rahul Bajaj Sandeep Sharma Vishal Khare

All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong www.iims-niveshak.com

CONTENTS

Dear Niveshaks, The month of September ended with a lot of buzz. The biggest news was Prime Minister Narendra Modi’s visit to the United States to attend the 70th annual session of the United Nations General Assembly. This visit also included meeting with CEOs of top firms like Apple, Google, Microsoft etc. He also had a session in town hall with the promoter of Facebook Mr. Mark Zuckerberg where he spoke about Digital India. The month also ended with some exciting news from the economic side. The governor of the Reserve Bank of India, Mr. Raghuram Rajan announced further rate cut by 50 basis points in the end of this month. This surprised the market positively as the market was expecting a rate cut of up-to 25 basis points due to cooling inflation and status quo by US Federal Reserve. This rate cut was following the lowering of GDP growth rate estimates to 7.4 percent by the RBI citing lack of new private investment, banks’ stressed assets and waning business confidence in context of slow global growth. Another major news is that India has moved up 16 positions to rank 55th out of 140 countries on global competitiveness index. India has ended five years of decline by showing improvement in the competitiveness of the country institutions and macroeconomic environment and a slight improvement in infrastructure but need to work on factors like corruption, access to finance etc. for further improvement in competitiveness. There were a lot of activities in the foreign investments as well. During Prime Minister’s visit to US, 7 MoU were signed aimed at giving a boost to the start-up environment in India which has become one of the major focus of the government. This can be validated from the fact that both the countries have launched a joint work stream on the ease of doing business and increasing the bilateral trade to USD 500 million. Also there were investment proposals with Iran to the tune of INR 1 Lakh Crore in the areas of oil, gas, railways, highways, and steel. On the magazine front, the cover story focus on the importance of strong corporate bond market in India that helps to mitigate the financial risks and stress led on banking sector. The Article of the Month analyses the reason behind the constrained Indian defence production which led to 70% of demand met by import of weapons. Also it put stress on the solutions need to be adopted towards achieving self-reliance in the defence sector. The Fin Gyaan section explains how the Big Data Analytics can transform the Financial Services industry by supporting them on the comprehensive decision making and risk management front. FinView has the excerpts from the discussions with a visiting IIM professor about the need of innovation for future growth of the companies. While the Fin Sight section details about the global impact of Chinese yuan devaluation that provoke a huge currency war in the world. In our classroom section, we have explained the “Bollinger Bands” a useful tool for the technical analysis enthusiasts. To end this brief note, it’s important that we thank you, our readers, for your constant support and appreciation. Please continue to motivate us so that we can come out with more insightful reads in the issues to come. Keep pouring in. Stay Invested! Team Niveshak

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears no responsibility whatsoever.

Cover Story Niveshak Times

04 The Month That Was

Article of the month

Corporate Bond Market in 10 The Indian Defence Indus- India: Where are we heading? try - A Global Perspective

FinGyaan 18 Transforming

Financial Services with Big Data Analytics

Finsight

Yuan Devaluation & Global Currency Wars

FinLife

Commodity Market: Diversify Your Portfolio

FINVIEW

Interview With Prof. L.R.Natarajan - Visiting Professor at IIMs and consultant on innovation

CLASSROOM

31 Bollinger Bands

NIVESHAK

www.iims-niveshak.com

The Niveshak Times

Team NIVESHAK

IIM Shillong RBI Provides Booster Shot To Economy, Cuts Repo Rate By 50 Basis Points In a big boost for the markets and economy, RBI governor Raghuram Rajan cut repo rate by 50 basis points to 6.75%. The repo rate now stands at a 4-1/2 year low. Rajan kept the Cash Reserve Ratio (CRR) unchanged at 4%. As per RBI, the bulk of conditions for further accommodation have been met since last review done by them. The January 2016 target of 6 per cent inflation is likely to be achieved. In the monetary policy statement of April 2015, the Reserve Bank said that it would strive to reach the mid-point of the inflation band by the end of fiscal 2017-18. Therefore, the focus should now shift to bringing inflation to around 5 per cent by the end of fiscal 2016-17. RBI also acknowledged the need for a more accommodative policy. “Investment is likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow. The Reserve Bank Governor has been under pressure from the Finance Ministry as well as the industry to cut interest rate to spur economic recovery and mitigate the impact of slowing China on India. Federal Reserve Announces No Interest Rate Hikes, For Now The Federal Reserve will not be hiking interest rates, Fed Chair Janet Yellen announced on 17th Sep, 2015 in a much-anticipated decision that sent stock markets soaring. Economists and Wall Street have been abuzz about the possibility of a rate hike, which would have been the first since 2006. The Fed has kept rates near zero for years as a tactic designed to boost a faltering economy. A hike would have signaled that Yellen believes the economy has recovered enough for the Fed to begin “normalizing financial policy.” The Chinese economy roiled over the summer, marked by a pop in the stock market bubble and the Chinese government’s harried attempts to shore up the economy, including the devaluation of the yuan. The tempest underlined global traders’ suspicions that the Chinese economy was softening,

SEPTEMBER 2015

NIVESHAK

sending financial markets around the world into a tailspin. The Fed might still raise hikes later this year. But some economists are saying there’s no rush: despite promising unemployment rates, a slowdown in job growth and remaining slack in the labor market means that the Fed doesn’t need to worry about inflation–the main risk of low interest rates–quite yet. India’s April-August Fiscal Deficit At 66.5% Of Full Year Target The Centre’s fiscal deficit for the first five months of the current fiscal through March 2016, stood at Rs 3.69 lakh crore, or 66.5% of the full year target of Rs5.56 lakh crore. The fiscal deficit during the same period last year was 74.9% of the full year target. The government’s revenue receipts during AprilAugust were Rs 3.45 lakh crore, or 30.3% of the full fiscal target of Rs 11.41 lakh crore. The revenue receipts were boosted by an all-time high surplus transfer of Rs 65,896 crore by the Reserve Bank of India to the exchequer, as dividend. The total expenditure of the government until August was Rs 7.32 lakh crore or 41.2% of the budget estimate (BE) for the full year. Total expenditure in the corresponding period last year was 37.5% of the BE. Finance Minister Arun Jaitley said he is confident of maintaining fiscal deficit at 3.9 per cent in the current financial year. The government is committed to meeting fiscal deficit target and continuing on the path of economic reforms. RBI Names 10 Companies To Set Up Microfinance Banks The Reserve Bank of India has selected 10 financial institutions to set up separate small banks to lend to small businesses and farmers, who typically struggle to get funding from traditional lenders. Privateequity backed Ujjivan Financial Services Pvt Ltd and Janalakshmi Financial Services Pvt Ltd were among the 10 granted approval to seek one of the niche small finance bank licences. Most of the others were microfinance companies that already make small loans to businesses and

farmers. Nearly half the population of India, Asia’s thirdlargest economy, did not have a bank account before a government programme led to millions of new accounts this year. More than 100 million people in the country work at small businesses but only about 4 per cent of small businesses have access to institutional finance. Existing non-bank finance companies, local area banks and micro-finance institutions were eligible to apply for the permits and 72 submitted applications. The winners will in future be able to become fully fledged banks depending on their performance and if they comply with rules for banks, the RBI has said, although the transition will not be automatic. Sebi Seeks Greater Disclosure In Debt Public Issues Of Nbfcs To safeguard investors’ interest, markets regulator Sebi asked NBFCs to make greater disclosures before launching public offer of debt securities to raise funds. The new disclosure norms, which would be applicable to draft offer documents to be filed on or after November 1, have been finalised on the basis of feedback from the market entities and to align the norms in line with the stipulations required by the Reserve Bank of India (RBI). Consequently, the NBFCs would need to disclose “aggregated exposure to the top 20 borrowers with respect to the concentration of advances”, as against the current requirement for top-ten borrowers. Also, they would need to disclose details of all loans, which are overdue and classified as non-performing as per RBI guidelines. Currently, they need to disclose details of top ten loans, which are overdue and classified as NPAs. Sebi said the NBFCs would also need to state a lending policy, containing overview of origination, risk management, monitoring and collections. Besides, classification of loans or advances given to associates, entities or person relating to the board, senior management, promoters, etc. would need to be disclosed, as is being disclosed currently. Government Fixes Rs 1.22 Lakh Crore Loan Disbursement Target Under MUDRA Scheme Banks will disburse loans worth about Rs 1.22 lakh crore to small business units under the Pradhan Mantri MUDRA scheme during the current fiscal year.

The banking sector has been allocated an overall disbursement target of Rs 1,22,188 crore during 2015-16 for MUDRA loans and the banks have already disbursed Rs 15,566 crore as of August 17 to more than 20 lakh borrowers under PMMY, as per Finance Ministry. The PMMY provide loans between Rs 50,000-Rs 10 lakh to small entrepreneurs. The Micro Units Development and Refinance Agency Ltd (MUDRA) focuses on the 5.75 crore self-employed who use funds of Rs 11 lakh crore and provide jobs to 12 crore people. The scheme was launched by the Prime Minister Narendra Modi in April. Three products available under the scheme are ‘Shishu’, ‘Kishor’ and ‘Tarun’ to signify the stage of growth and funding needs of the beneficiary micro unit or entrepreneur. While Shishu covers loans up to Rs 50,000, Kishor covers above Rs 50,000 and up to Rs 5 lakh. The Tarun category provides loans of above Rs 5 lakh and up to Rs 10 lakh. In lending, priority will be given to SCs/STs enterprises. Cabinet Allows Automatic FDI Route For White Label ATMs The Cabinet on Wednesday permitted 100 per cent foreign direct investment (FDI) under the automatic route for white label ATM operations, a move that is aimed at promoting financial inclusion. This decision will ease and expedite foreign investment inflows in the activity and thus give a fillip to the government’s effort to promote financial inclusion in the country, including the Pradhan Mantri Jan Dhan Yojna. The decision was taken in the meeting of the Union Cabinet chaired by Prime Minister Narendra Modi. This would help in government’s objective of enhancing ATM networks in semi-urban and rural areas, also participation of foreign investors in the sector will contribute to furthering financial inclusion. Till date, foreign investment in while label ATM operations (WLAO) was allowed through the government approval route. This required some processing time and projects were delayed. White labeled ATMs are set up by private non-bank companies that own and operate their own brand of ATMs. White label ATM operators in the country include Srei Infrastructure Finance Ltd, Muthoot Finance and Vakrangee Software.

The Month That Was

www.iims-niveshak.com

Market Snapshot

NIVESHAK

Market Snapshot

26500

4,000

BSE

DII

FII

3,000

26000

2,000 25500

BSE

FII, DII Net turnover (in Rs. Crores)

BSE

1,000 25000 0 24500

-1,000

29/09/15

28/09/15

24/09/15

23/09/15

22/09/15

21/09/15

18/09/15

16/09/15

15/09/15

14/09/15

11/09/15

10/09/15

09/09/15

08/09/15

07/09/15

04/09/15

03/09/15

02/09/15

24000

-2,000

Source: www.bseindia.com www.nseindia.com

MARKET CAP (IN RS. CR) BSE Mkt. Cap

96,48,121.92 Source: www.bseindia.com

LENDING / DEPOSIT RATES Base rate Deposit rate

9.70%-10.00% 7.25% - 8.00%

Index

Open

% change

Sensex AUTO BANKEX CG CD FMCG Healthcare IT METAL OIL&GAS POWER REALTY TECK Smallcap MIDCAP PSU

25454 17154 18581 15443 10665 7679 17546 11184 7108 8581 1752 1229 6074 10750 10437 6572

26155 17391 19682 15111 10810 7752 17779 11578 6834 8695 1842 1397 6256 11020 10799 6695

2.76% 1.38% 5.92% -2.15% 1.36% 0.95% 1.33% 3.52% -3.86% 1.33% 5.09% 13.62% 2.99% 2.52% 3.47% 1.87%

% CHANGE

% Change CURRENCY RATES INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling INR/ 1 SGD

RESERVE RATIOS 65.52 73.27 54.67 99.16 46.02

CURRENCY MOVEMENTS INR/1 USD

Euro/1 USD

2.00% 1.50% 1.00%

GBP/1 USD

JPY/1 USD

SGD/1 USD

CRR SLR

TECK, 2.99% Smallcap, 2.52%

4.00% 21.50%

PSU, 1.87% POWER, 5.09% OIL&GAS, 1.33% MIDCAP, 3.47%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

7.75% 6.75% 5.75%

METAL, -3.86%

0.50%

IT, 3.52% Healthcare, 1.33% FMCG, 0.95% CD, 1.36%

CG, -2.15%

0.00% -0.50%

REALTY, 13.62%

-1.00%

Source: www.bseindia.com 2nd September 2015 to 29th Sep 2015

-1.50%

Data as on 29th Sep 2015

BANKEX, 5.92% AUTO, 1.38% Sensex, 2.76%

-2.00%

SEPTEMBER 2015

Article Market of Snapshot the Month Cover Story

Article ofSnapshot the Month Market Cover Story

NIVESHAK

Performance Evaluation

Niveshak Investment Fund

Done on 30/6/14

CONS NON DURABLE (6.08%)

Informa(on Technology (12.76%)

Infosys

Wg: 3.77% Gain : 38.22%

HCL Tech.

Wg: 4.81% Gain : 27.45%

TCS

Wg: 4.18% Gain : 5.03%

GODREJ CONSUMER Wg:6.08% Gain:34.23%

BANKING (6.19%)

FMCG (14.76%) Britannia

Colgate

HUL

ITC

Tata Motors Wg:2.99% Gain :-‐35.61%

Pharmaceu(cals (13.74%)

Dr Reddy’s Labs Wg:5.27% Gain:41.34%

Lupin Wg:8.46% Gain :74.56%

Wg: 6.19% Gain : 15.51%

Asian Paints Wg:6.76% Gain:27.98%

MISC. (3.63%)

MANUFACTURING

Titan Company Wg:3.63% Gain:-‐14.37%

Page Industries Wg:5.92% Gain:5.92%

(5.92%)

145

103

140

102

135

Performance of Niveshak Investment Fund since IncepDon

130

101

125

100

120

115

110 105

100

HDFC Bank

Chemicals (6.76%) Amara Raja BaS Wg:4.92% Gain :41.30%

Sept. Performance of Niveshak Investment Fund

Wg:6.72% Wg:5.72% Wg:4.05% Wg:4.35% Gain:195% Gain:23.11% Gain:11.37% Gain-‐6.77%

Auto (7.90%)

As on 29th Sept2015

Sensex

NIF

Values Scaled to 100

Opening Por+olio Value : 10,00,000 Current Por+olio Value : 15,47,671 Change in Por+olio Value : 54.47% Change in Sensex : 25.75%

Scaled NIF

Scaled Sensex

Values Scaled to 100

Risk Measures: Standard DeviaDon : 15.15(Sensex 22.35) Sharpe RaDo : 2.11(Sensex : 2.07) Cash Remaining:281897

Comments on NIF’s Performance & Way Ahead : Throughout September 2015, Sensex was seen under swing from the 26212 highest to 25201 Lowest, mainly on the concern of Chinese slowdown and weak European market cues. In our por+olio FMCG, Auto were two heavily impacted sectors along with Titan and Chemical sector, Pharma made some recovery led by Lupin and Dr. Reddy’s. On global front the United States Fed delayed the rate increase further by at least October on wake of weakening Chinese economy , however by the month end the Indian central provided some spark into the market by cu_ng rates by 50 basis points The por+olio did not witness any re shuﬄe during this month, however we have invited recommendaDons and are planning to use excess cash to shore up por+olio at lower levels of exisDng and new stocks, stocks such as VST industries are currently into our watch list some new entry could be seen in this month considering the recommendaDons from “Vishleshan” winning team

NIVESHAK

and effectively carry out their work of protecting the nation.

THE INDIAN DEFENCE INDUSTRY - A GLOBAL PERSPECTIVE Sadhvi Chopra

SCMHRD Pune Abstract The Indian defence industry is a huge infrastructural manufacturing base but its contribution domestically is rather insignificant. India primarily depends on its imports to meet their defence requirements. Being an over populous country, it has huge defence expenditure requirements. Inability of catering to these needs domestically hinders the growth process of the home country while it accelerates the growth of exporting economies. Through this article we intend to analyse the history, current scenario, problems and solutions towards achieving self-reliance in the defence sector.

SEPTEMBER 2015

History The Defence Industry of India, previously set up as a Military Department, was created by the Supreme Governor of the British East India Company. The military department was concerned with coordinating and recording orders relating to the army. It was initially a part of the Public Department. After Independence in 1947, the aim of the Indian Leadership to attain self-sufficiency in the entire domain of the defence production led to the establishment of the Defence Public Sector Units under the aegis of the Government. This industry being led by the President of India provides policy framework to the armed forces so that they can efficiently

produces a large number of engineering graduates who are proficient in quantitative concepts. This skilled manpower is critical to establishing a military technical industrial complex in India. • Infrastructural Progression: The progression in availability of the industrial infrastructure is aiding the industrialisation of the country. Governments of different Indian States have taken steps to promote Special Economic Zones (SEZs) for developing an ecosystem where all the major activities like the core and ancillary activities related to defence manufacturing can co-exist. Through the setting up of dedicated industrial parks backed by supporting infrastructure and an enabling policy framework, India can emerge as a regional hub for Defence Manufacturing Activity. The above factors along with the normalization of geopolitical relationships have led to the emergence of an economic atmosphere wherein global defence companies could establish a presence in India and Indian private industry is equally eager to support the growth of this planned military.

Why Should Indian Industry Step Into The Defence Sector? There are various factors which suggest that the Indian industry should step up into the defence sector. These include: • Capability to emerge as a manufacturing hub: The expertise and skills of the Indian workforce along with low wages have contributed in making India an engineering hub. Factors like availability of precision machining, fabrication, subassembly facilities, engineering design services, low infrastructure costs and strong managerial capability are some of the key factors that give India the competitive advantage in the manufacturing domain. Various global defence manufacturing primes have now formed joint ventures and entered into sourcing agreements with Indian industry players. • Enabling Policy Framework by Ministry of Defence: In the recent years, there has been a liberalization of the Foreign Direct Investment (FDI) policies. Policy measures like the DPP has brought transparency in the procurement Current Scenario And Problems process while the Press Note 2 (2002) has removed defence manufacturing from the list The Indian defence sector has wide possibilities of restricted sectors requiring prior Government ranging from setting up manufacturing bases, Approval. tapping investments, obtaining technologies to generating skilled employment. This sector • Human Capital Advancement: The strength of has been open to domestic, private as well as the Indian Industry lies in the easy availability foreign investment; however the private and of a technically skilled workforce. It is expected foreign sector dimensions haven’t been fully that India will register the largest addition to tapped. the working age population in the world and will have the India has the 3rd largest working largest armed age population forces in the worldwide world. India is a by 2050. prime importer Furthermore, the of defence Indian education equipment system, with its and is listed strong emphasis among the top on mathematics 10 countries in and science, the world with Figure 1: India’s defence exports and imports since 2011-12

Article of the Month Cover Story

NIVESHAK

respect to the expenditure on military. It allocates 1.8% of its GDP towards defence spending. The domestic defence production is constrained and only 30% of the demand is met internally. Even among the domestically manufactured products there is a large import component at both the system and sub system levels. The private sector contributes only 10% at the tier 2 and 3 levels. India has 9 defence public sector undertakings and 31 ordnance factories. While the industrial workforce is equivalent to the size of the workforce of large producers of defence equipment such as France, UK etc., the production output falls short by sufficiently large margins. The country primarily depends on imports due to insufficiency in the demands being met domestically. The private sector lacks the incentive to set a foot forward in the sector due to considerably lower profit margins and at the same time difficulty in penetrating the sector due to several restrictions imposed on equipment contracts.

Figure 2: India’s arms export as a share of global transfers

The need is to leverage the private industry as a partner in the growth and modernisation plans. The multiplier effect of a proactive defence sector generates benefits to automotive, communication and manufacturing industries

SEPTEMBER 2015

too. A vibrant defence sector would accelerate the country’s manufacturing capability. It has the ability to generate a million jobs. Inefficiency to make the indigenous defence sector vibrant would devoid us from the ability to earn valuable foreign exchange and also generate jobs in the domestic nation. Import of defence equipments and hardware enables the exporting countries to create more jobs and enhance their Gross Domestic Product. Defence spending made an increase of 10.95% over 2014-15 budget. An important issue is that since the government spends huge amount on defence expenditure and revenue from the industry is relatively a small proportion, this aspect contributes significantly to the fiscal deficit as a major contributor of the non-plan expenditure. Also India, though topping the import charts, lacks significantly behind in the export dimension, leading to a huge import export divide. The import export ratio of India is approximately 194:1. India ranks 28 in the arms export and the average export share in the global export share accounts to meagre 0.8%. The reason why India lacks behind in exports more than countries having an even smaller infrastructural base are: • Lack of technology • Uncompetitive pricing • Negative countries whose markets cannot be tapped • Poor national export policies • Lack of marketing • Restrictions and large number of clearances required Thus we see that to ensure that Indian deficit falls, export import gap narrows, certain steps needs to be taken to ensure indigenisation of

the defence industry with greater potential. Selfreliance is the means and the end. The following solutions are proposed for the same. Solutions The solution to strengthening the challenges faced by the defence industry today cannot be resolved within a matter of few days or as a matter of fact few months. Several years are required to strengthen the technology at the very grass-root level. Several solutions are 1) We need to enhance the quality of education in mathematics and sciences both at the school as well as university level since they are used in pure form in defence. 2) The government needs to undertake national innovation programmes to come up with new technological methods which would contribute towards strengthening the defence industry 3) Strengthening research and development is another solution to the challenges faced by the defence industry

is imported from other countries .Hence it is essential to strengthen the manufacturing sector in order to reduce India’s dependence on other countries. 8) Increasing the FDI above 49%. Increase in FDI will bring in muchneeded capital and top-notch technology in the Indian defence sector and will at the same time also attract foreign investors. Conclusion India is taking significant steps in order to become a global exporter of defence equipment. It has taken its initial steps to be a part of the Wassenaar agreement, a multinational agreement between 41 countries that controls exports of conventional arms and technologies. India, through these initiatives, seeks to redesign its export scheme and progress and become an exporter rather than an importer of defence equipment.

4) Defence Procurement Policy needs to be revamped for faster acquisitions which in turn reduces the cost overruns due to delay in the procurement. 5) Active participation from the private sector is also essential for strengthening the defence structure. 6) Add One Rank One Pension as a subsidiary problem, which leads to dissatisfaction among the soldier, leading to shortage of officers. Hence apart from the technical crunch, there is a human resource crunch as well. 7) Strengthening the manufacturing sector could also be another alternative solution to combating the problems faced by the defence industry. About 70% of India’s defence hardware

Article of the Month Cover Story

NIVESHAK

Corporate Bond Market in India: Where are we heading?

Table 1: FII limit on bond purchase

Rahul Bajaj

IIM Shillong Introduction Over the last year we have heard a lot about India being a bright spot among the falling global economies. Also we have seen people expressing faith in the growth story of India, which again has been supported by the recent events RBI rate cut of 50 bps and jump of 16 places in the World Economic Forum’s global competitiveness ranking of India. However the highly leveraged corporate debt structure and rising NPA’s in the Indian banking sector is one thing that can pull back the fast moving Indian economy. As per the latest report from the Reserve Bank of India, bad loans at Indian PSU banks (which account for about 2/3rd of the Indian banking sector’s assets) have increased significantly over the last few years due to stalled projects, delayed in project approvals and land acquisition problems

SEPTEMBER 2015

which have crimped corporate cash flows and made it difficult for borrowers to repay debt. Banks exposure to stressed assets has increased to 11.1% of total advances in March, 2015 from 10.7% in September, 2015. Stressed assets include gross non-performing assets (GNPAs) and restructured loans. GNPAs of banks increased to 4.6% of total advances in March, 2015 from 4.5% in September, 2015. Also it is projected that Indian PSU banks require an infusion of 5 lakh crore by 2019 in-order to comply with the Basel III norms. One solution which has been proposed by major institutions and the finance ministry is existence of a strong corporate bond market which will bring stability to the existing financial system (primarily dependent on the banking system of the country), mitigate financial risks and support the credit needs of

Cover Story

corporate sector, which is vital for the growth of our economy. In comparison to the developed economies Indian corporates have little debt exposure through the bond market and even lower through listed bond market. Indian Bond Market India bond market was valued at US $812 billion in FY-15 with lions share occupied by the government bonds of $570 billion (30.0% in terms of GDP) and a relatively smaller share by the corporate bond market of $242 billion. FIIs had exhausted their investment limits of US $25 billion in government bonds in August 2014. After that, they have been paying reasonable premiums to buy limits which get freed mostly due to redemptions. Government and Corporate Bonds as percentage of GDP March 2013 Debt as % Government Corporate Total of GDP Republic of 48.7 77.5 126.2 Korea Malaysia 62.4 43.1 105.5 Singapore 53.1 37.0 90.1 Hong Kong 37.8 31.4 69.2 Thailand 58.6 15.9 74.4 33.1 13.0 46.2 Peoples Republic of China India 49.1 5.4 54.5 Philippines 32.2 4.9 37.1 Indonesia 11.4 2.3 13.7

Country

Bank Corporate Equity Credit (%) Bonds (%) (%) China 73.9 8 18.1 Hong Kong 17.5 2.5 80 Indonesia 41.9 2.4 55.7 S o u t h 73.9 8 18.1 Korea Malaysia 40.1 12.4 47.5 Singapore 26.2 8 65.8 Thailand 51.1 6.3 42.6 India 71.5 18.4 10.1 Table 2: Country wise breakup in investments

Corporate bonds in all account for only 30% of total outstanding bonds in India. NSDL data show a very marginal fall in debt utilisation status by foreign funds compared to the beginning of April. According to National Securities Depositories (NSDL) data, FIIs have utilised 76.26% of their $51-billion quota in Indian corporate bonds as on September 30, while, on April 1, the utilisation status was at 77.43% — a fall of only 1.23%. This also implies that FIIs have just used ¬$39 billion out of the $51-billion investment limit in corporate bonds. It is interesting to note that the issuances of corporate bonds have seen a huge rise compared to last year with much of the corporate borrowing shifting to the bond markets due to attractive yields. Companies have borrowed a whopping R2.16 lakh crore through the corporate bond market in the first five months of this fiscal. Between May and September, this year a number of events like the selloffs in global bonds, the China market meltdown followed

NIVESHAK

these entities are by Yuan depreciation, generally long eurozone crisis term investors and intermittent and tend to fears of rate hike hold bonds till in the US had maturity rather led to a spike than trade for in volatility. short term profit Despite this, making. This the Indian again prohibits Figure 1: FII Flows vs Yields debt markets liquidity and have been in a comparatively stable position depth in the secondary markets. Retail participation considering that there has not been any remains low due to absence of knowledge and considerable exit by FIIs from the corporate understanding of bonds as an asset class. The only bonds although their approach was cautious. FII way retail investors have exposure to the corporate attention over the last year has brought down the bond market is through mutual funds who have corporate bonds in their portfolio. It is imperative to consider innovative ways for expanding the investor base. The fund management industry has to contribute significantly to attract the retail investor to corporate debt.

credit spread to less than 45 bps in Dec’14 from ~120 bps seen in Sep’13. The lowest base rate offered by the Indian banking system is 9.70% whereas a AAA-rated public sector unit can raise funds through longterm bonds at a rate close to 8.55-8.60% — a difference of at least 110 bps. This makes the corporate bond market very lucrative for the companies. At the same time this also gives investors an opportunity to achieve higher fixed return. If we look at the participation. Currently maximum participation (more than 85%) in the corporate bond market happens through private placement. This limits the availability of the bonds for trading in the secondary market. Banks are the largest group of investors in the corporate bond market in India. Followed by banks are Insurance companies, provident and pension funds who also invest in corporate bonds due to the nature of their long term liabilities. However,

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Private placement of corporate bonds increased more than three times in the initial four months of the current financial year compared to the same period last year. Companies have raised approx. 1.70 lakh crore through this route in FY16, according to data released by SEBI. From the figure Private placement of corporate bonds, we see that month over month there has been a substantial increase in the debt raised through private placement, which is a positive news for the corporates. Having said this, this again is very small in comparison to the global corporate bond markets. The Securities and Exchange Board of India (SEBI) plans to overhaul the corporate debt market by pushing reforms and issuance on an electronic platform in a bid to boost market activity. Also RBI Governor has proposed bankruptcy code in India, on the lines of the bankruptcy laws elsewhere in the world, which will not only give the creditors more ability to resolve distress, but will also help strengthen the nascent corporate bond market in the country. However there still exists many challenges which have to be tackled by the central bank and the regulator in order to promote the corporate bond market of the country.

Issues And Challenges In Development Of Corporate Bond Market Multiple and overlapping financial supervisory bodies The Indian financial regulatory structure is complex with a lot of overlapping and ambiguous regulatory jurisdictions viz. SEBI, RBI, IRDS. With multiple agencies entrusted with the task of regulation and supervision, the lines of jurisdiction become blurred often leading to inefficiencies in the regulatory process. This sometimes has regulatory bodies working at cross purposes to each other often causing friction. Work towards Unified finance code brings a sense of relief in this direction but it has to be fast tracked. Legal impediments Several missing and inadequate legal structures are observed in the context of corporate bond markets, the most prominent being the enforcement of contracts and corporate insolvency. A corporate bond is essentially a debt and the expeditious enforcement of debt contracts is a natural concern for lenders. In India enforcement contract litigation is often embroiled in delays and deficiencies of India’s due to registration of cases in multiple courts. Lack of a benchmark yield curve The availability of a liquid government securities market is often observed to be a prerequisite for the development of corporate debt markets in India. The presence of a well-defined yield curve provides a price discovery and economic tracking mechanism for the institutional investors. With a dependable yield curve, the private issuer only needs to concentrate on the credit spread for its issue. The Government’s and investing banks’ preference for 10 year securities has resulted in a lack of a reliable yield curve across maturities, which has in turn hampered the pricing of corporate bonds. Limited set of investors As a consequence to the limited set of investors because most of the market being dominated

by banks, financial institutions, and quasi government bodies (PSUs) and Insurance companies. Due to this trend, other investors mostly stay clear of the market since the market is unable to cater to their unique requirements. Considering the limited investor base, it is better for issuers to opt for private placements and have no incentive to list securities. Further, this hampers participation and liquidity in the market. Amtek Auto Default Amtek Auto, a small cap company engaged in manufacturing and commercial sales of automotive components can stand out among the biggest corporate default in recent years. JP Morgan Asset Management Company had subscribed to bonds of Amtek Auto worth approx. 200 Crore. Company defaulted in September, 2015 on its Rs. 800 crore bond payment. This has raised concerns over the rating of debt papers, fund management practices and existence of the corporate bond ecosystem in the country, and has the potential to negatively impact the already weak corporate bond market of India. Conclusion Debt markets is undoubtedly a very essential segment of the country’s financial markets and vibrancy in these markets is imperative to meeting the massive funding requirements of the country. Going forward, special impetus has to be provided for the growth of corporate debt market and a guiding government yield curve, which can serve as benchmark for corporate issuances. Also regulatory and administrative reforms to institutionalize debt markets has to be in place which can increase the efficiency of these markets through better reporting, purchase, settlement and clearing platforms.

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Transforming Financial Services with Big Data Analytics FinGyaan

Shashank Garg, & Ranjit Singh

IIM Calcutta

Transforming Financial Services With Big Data Analytics Financial services as an industry is perhaps as old as the language itself. Yet, for the most part, this history had remained limited to banking services. It was only thirteenth century onwards, as Venetian bankers began trading in government securities, that the securities market picked up. Finally, when Merrill Lynch bringing in a supermarket insight to selling of financial products, the modern financial services industry essentially developed into a space of monstrous variety and complexity.

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Financial markets thrive on volatility which is really a two-pronged devil. The traders and investors, on the whole, like to be sure about the amount of risk they are taking and hence prefer low volatility, yet it makes rooms for trading for the marginal gains in split-second trades. In this area, big data analytics (BDA) is emerging as an answer to the questions that are yet to be asked. Essentially, Big Data is a huge set of structured or unstructured data, with varying definitions and formats across the multiple sources that it is collected from. The data is multi-dimensional

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and complex so that extracting insights from it, is considered best left to the professionals. BDA can help the BFSI organizations in spotting hidden sales opportunities through analytics, enabling comprehensive decisionmaking through Decision Support Systems, and regulatory compliance and risk management. Within this wide landscape of services where BDA can support BFSI sector, the decision support and risk management in BFSI are the two critical areas where a transformation will become visible in the coming years. Regulatory Compliance And Risk Management In financial services, the application of BDA is not limited to predictive analytics. It is being applied in exploring system inefficiencies and new opportunities, and fixing vulnerabilities through an organization-wide analytical oversight. In fact, the Basel document on Risk Aggregation principals (BCBS239, PERDARR, 2013), acknowledges the need of analytics and data management for tackling the emerging threats to Global Systemically Important Financial Institutions (G-SIFIs). To learn from the recent history, the financial crisis of 2008 saw a great number of institutions go down under. An often cited reason was that

the institutions had lodged themselves into extremely risky positions. Their inability in quantifying the risks prevented the institutions as well as the regulatory bodies from getting a consolidated view of their net risk exposure. Factors like distribution of risk management across geographies and silos, and disparate risk control mechanisms for the G-SIFIs made it even more difficult to do so. Failure in communicating these risks effectively and timely to the concerned parties led to an abysmal low in investor sentiment, and the uncertainty in the market eventually led to a precipitous crash. The Basel-III norms necessitate management of several standards like regulatory capital, risk coverage, and liquidity ratio, maintaining which â&#x20AC;&#x201C; across global locations and silos of large banks is a logistical nightmare. This makes it imperative upon the banks to look up to BDA for managing their daily positions, and have a cross-organization perspective of its exposures â&#x20AC;&#x201C; not only of the credit and market risks, but of the operational and geographical risks as well. Basel Committee on Banking Supervision recognized the infrastructural short-comings of the banks and financial institutions, laying down fourteen principles for the financial institutions to enhance and improve their risk assessment

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and mitigation capabilities (BCBS239). In light of this fact, the banks are now turning to IT services firms for comprehensive risk reporting frameworks, which collate huge amounts of data from across the geographies and silos of the organization, and provide visualization of the current positions of the exposure of the organization to the risks. Decision Support System Other than risk management, the greatest contribution that BDA can make to financial services domain is in Decision Support Systems. The executive and business managers in any financial services institution need to take decisions in short times, and based on intuition and heuristics. While this is effective as far as short term goals are concerned, in the long run, there needs to be a demonstrable basis for all such non-formalized decisions. DSS can provide a data-backed foundation for executive and managers to visualize the data in real-time and draw insights through BDA, which will be readily actionable. It is important for financial institutions to maintain transparency in their management procedures to attract investors, and hence itâ&#x20AC;&#x2122;s paramount that there is a cross organization framework for decision-making to aid the board of directors and executives to view their opportunities and threats in a consolidated and interactive manner. Such a visualization

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can only be enabled by BDA, with the aid of huge data lakes which will aggregate data from various complex and incompatible sources â&#x20AC;&#x201C; both internal and external, clean it up in realtime, make it usable and available across the organization and perform analytical operations on it, to generate interactive and insightful diagrams and visuals. Exploring Opportunities Predictive analytics in BDA has already been used in credit rating and loan suitability assessment by banking and finance institutions. On a grander scale, BDA can help organizations in assessing markets worth expanding in. Going global in a highly regulated industry is not without its dangers since the failure of a bank in any location has an organization-wide impact. A data-backed approach can help in reducing cross-market information asymmetries. Not only this, BDA is also being explored by banking and insurance organizations to look for potential customers in the yet unaddressed economic sections in the emerging economies. A better understanding of the current and potential customers will reduce the operational cost of the banks. Granted that analytical resources will take huge capital expenditure in channeling data from all structured and unstructured sources, still, in the long run the benefits are expected to pay off the capex easily. An interesting development to watch out for

will be the change in financial products with the emergence of BDA used in the pricing of stocks and options. As the stronger analytics firms start feeding back insights on price volatility into the system again (through trading), the resulting volatility will be flatter, and more predictable than earlier, helping those with BDA capabilities earn better in split-second arbitrages. And A Word Of Caution As it has happened with innumerable firms in the past, indiscriminate application of IT services and products has translated only into huge expenses and no significant gains for the organizations. A similar pitfall exists for BDA as well. Banks and financial institutions which omit the step of cost-benefit analysis before going for analytics in any aspect of the firm, will find that analytics is really a bottomless well, and if applied without restraint, it will just keep on sucking in the resources. As the Economist article Data, Data, Everywhere explains, there is no dearth of data in the world today. It can essentially be collected from any source and analyzed for days without an end in innumerable ways, but there has to be bottomline to any such effort. The chief information or technological officers will need to ensure this. One thing that is clear though is that while the promise of BDA in BFSI is immense, there are glaring trade-offs needed to be balanced if any long term benefit is to be achieved from it.

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Article of the Month FinLife Cover Story

Diversify Your Portfolio

Gaurav Jotriwal

IIM Shillong Whenever we come across the term ‘trading’, the thing that pops out of our mind is ‘stock market trading’. . But in recent years investors have become increasingly interested in utilizing assets within their portfolios, seeking nontraditional securities that may be capable of enhancing returns, smoothing volatility, or both. Commodity is a relatively new entrant in India and not many investors are acquainted with the market and get benefits from it by trading in various commodities. But, what is a commodity market and what do we trade in it? A commodity market trades in primary products such as wheat, coffee, sugar, gold, rubber, oil, etc. These — energy, metals, and agricultural products — are the three classes of commodities, and they are the essential building blocks of the global economy. Commodity Market is regulated

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by Forward Markets Commission (FMC). It is considered to be a new avenue for investors and traders to diversify their portfolios beyond shares, bonds and real estate. There are two types of commodity market: spot market and futures market. In the spot market, the price of the commodity is determined at the time of trading and cash and commodity are delivered within two working days from the trading date. In case of futures market, an agreement is made between two parties to buy or sell the commodity at a future date at a fixed price. Spot prices can be very volatile due to the factors that impact the price of a commodity and, therefore, are riskier than the futures market. Between the two, futures market is the more popular to invest in commodities. Commodity futures market is not a new concept

Investors and traders have three options to go for trading in commodity futures- NCDEX (National Commodity and Derivative Exchange), MCX (Multi Commodity Exchange of India Ltd) and NMCE (National Multi Commodity Exchange of India Ltd). All these three exchanges have electronic trading and settlement system and are of national importance. Just like the stock market, commodity market also involves brokers and a separate commodity demat account from the National Securities Depository Ltd to trade in the commodities. Commodity Futures trading is done on margins. The investor only deposits a fraction of the value of the futures contract with the broker to cover the exchange specified margin requirements. This gives the investor greater leverage and thus the ability to generate higher returns.

Commodities are inherently risky assets, but understanding the price drivers and details of the vehicles that offer exposure to these resources can empower investors to use this asset class efficiently. There are numerous reasons to invest in the commodity market, among which the major reason is diversification of the portfolio to reduce unsystematic risk. Often, investors are advised to put their savings in different baskets, so that if one breaks, another is there to compensate the loss. Trading in commodity futures is transparent and a process of fair price discovery is ensured through large-scale participation. Another appealing aspect of commodities lies in the ability of this asset class to act as a hedge against inflation. When inflation kicks in, the purchasing power of an investor declines and it affects the returns on all types of assets. At this point of time, these commodities help in compensating the losses incurred elsewhere in the portfolio. Along with, commodities being a hedge against inflation, they can also serve as a hedge against unstable events or even catastrophes. In the time of crisis such as natural calamities or wars, it is natural for commodity prices to increase. For the emerging economies, commodity market is an attractive investment option. As developing economies continue to urbanize at an impressive rate, the rural population gravitates towards cities which in turn demands for raw materials for infrastructure, agricultural products to feed the population, manufacturing consumer goods and raw materials to generate energy to satisfy the needs of growing cities. Unlike investment vehicle like real estate, investment in commodity futures offers high liquidity. It is equally easy to both buy and sell futures and an investor can easily liquidate his position whenever required.

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Commodity Market:

in India. In fact, it was one of the most vibrant markets till the early 70s. But due to numerous restrictions the market could not develop further. Now that most of these restrictions have been removed, there is an enormous scope for the development and growth of the commodity futures market in the country. One of the major reasons among the people reluctance for trading in the commodity market is that it required a significant amount of time. Also, commodities are complex assets, and the options investors have for accessing this asset class are often nuanced and difficult to grasp. But nowadays, there are some state-ofthe-art electronic market such as MCX/NCDEX which provide an electronic, transparent, well organized and centralized trading platform with the facility to access and participate in the market remotely. Moreover, with the setting up of three multi-commodity exchanges in the country, retail investors can now trade in commodity futures without having physical stocks.

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these risks. The investors should check these documents properly because detailed information about all the risks involved in commodities trading and the liabilities of the investors remains in these documents. These documents also provide enough information about the expected volatility of the market. Commodity market looks an attractive option to invest and diversify the portfolio but like any other investment option, it has both pros and cons. One needs to make the right decision at right time to gain out of this market and if done in the correct way, this other option of trading can bear fruitful results.

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There is also another advantage of being able to use the profits from a trade elsewhere, without having to close the position. Commodities investing is volatile, promises big gains and is capable of big losses. But this volatility can work in your favour in a broad investment portfolio, where a small amount of investment in commodities can offset risks associated with stocks, bonds and cash. Investors are generally advised to allocate about 5%-10% of their portfolio in commodities. But, data shows that picking stocks don’t have much of an impact on your portfolio’s performance, as long as you make reasonable choices. The commodities market has the potential to provide a huge return to the investors but like all other investment options, there are a number of risk factors associated with this too. It is important to be apprised of the pros and cons of every choice that is available. As an investment option commodity trading is preferred but it is related to different unpredictable factors like weather, foreign exchange rates, national monetary policies, inflation and a lot more. The risk factors associated with the commodity trading may affect the returns. A number of factors are there that can cause a sharp downfall in the commodity prices. Commodities prices are related directly to the weather condition. At the same time, political instability in a country may cause problems for the commodities market. On the other hand, sudden fall in the exchange rate of a particular currency may cause a huge financial loss for an investor. These situations can cause financial losses that can be more than the initial margin payment and even one may have to face additional losses. The risk disclosure documents, provided by brokerage firms, are very important for handling

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Yuan Devaluation & Global Currency Wars Akankhya Jena

XIMB

“Chinese yuan devaluation will have a global impact and provoke a huge currency war”. Most of us have been reading these headlines since last month. The Chinese central bank’s (PBoC) decision to devalue the Chinese currency by 3pc within 11-13th Aug sent shockwaves through global equity markets. So Question Arises Why This Shocked The World And What Exactly Is A Currency War? A currency war which is also called “competitive devaluation” is a situation in which a group of nations intentionally depreciate the value of their currencies with the target to boost their domestic economies and they do it simultaneously. And floating exchange rates are prevalent in the current situation, where currency values are influenced by market forces, depreciation is usually crafted by economic policies of a nation’s central bank. Why A Nation Would Depreciate Its Currency? Weak domestic currency makes exports cheaper and competitive and more exports fuel ecomomic growth. In the same way it also makes imports

expensive, so consumers go for local cheaper alternatives which provides fiscal & monetary stimulus to boost domestic economy. So overall trade gets a boost and leads to faster GDP growth and lower current account deficit. What Did China Do And Why? The Chinese yuan traded at a new low of 6.4510 per U.S dollar in August this year, which is its lowest since August 2011 and lost 3.5 percent against the U.S. dollar in China in two days, and approx. 4.8 percent in global markets after People’s Bank of China (PBoC) tweaked the calculation of the reference rate around which the yuan is permitted to trade in a 2%age point band. The PBoC said now calculation of yuan would be done on a daily basis considering the market forces and even closing price of previous day’s stock market. A common notion prevails that this move was meant to boost growth and fuel the export sector which cannot be ruled out completely. The Chinese exports market has been losing its

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Figure 1: Asian currency percentage change

competitiveness owing to weak global demands and increase in production costs due to Chinese manufacturing wages. Exports fell by 8.3% in July. So although PBoC has assured that yuan won’t fall further, global markets are apprehensive that China is stimulating its exports market with competitive prices and would continue to do so for some time. A similar dismal situation is with investment as well, another important growth driver for the Chinese dragon. The fixed asset investment growth or how much companies are investing to increase their productive capacities is at an estimated mere 4 to 5 per cent, from 6.6 per cent in 2014. Allowing for the depreciation of existing plant and machinery, it is possible that China’s growth in net capital formation is at or below zero. Are We Heading Towards A Global Currency War? This is the crucial question. The yuan has been an anchor of stability for emerging markets’ (EM) currencies and has protected the latter from depreciation against US dollar. So although it’s too early to say we are heading towards a fullfledged currency war but the Chinese episode no doubt has created unrest and volatility particularly among EM currencies which have

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also depreciated against the US dollar. Some of the susceptible currencies such as the Indonesian rupiah & Malaysian ringgit have already gone down significantly as compared to US dollar. So there are chances that the central banks of these economies will go for aggressive steps to control their currencies in case there is sharp depreciation in near future. The net result is that China’s export competitiveness has not altered much relative to emerging markets even after its devaluations. A point worth noting is a small decline of 4% has minute impact in terms of real exchange rates as according to Bank for International Settlements (BIS), CNY is about 32% overvalued in comparison to its trade partners. On other side, both India and Indonesia currencies stand undervalued by about 10%. So such minor devaluation could barely improve export competitiveness. It can be said that PBoC has interfered to prevent excessive depreciation of yuan, but a currency war remains a distant probability. Beggar Thy Neighbour Since currency devaluation seems an escape route to boost export competitiveness it can be said without any second thought that if nation X devalues its currency, nation Y will soon follow suit, and then nation Z, and so on. This is the

theory of competitive devaluation. This phenomenon is also known as “beggar thy neighbour” which refers to the underlying fact that a nation which follows this theory is aggressively pursuing its own self-interests at the cost of everything else. Effect On India The Indian rupee is already reeling under pressure due to US dollar strengthening. As per ASSOCHAM, these situations might cause a “triple whammy” for India as rupee volatility might rise, the exports would shrink and there will be Chinese goods dumping in Indian markets. Here’s how India will be affected by the Yuan Devaluation: 1) Rupee volatility: Depreciation in rupee will force RBI to continue with high interest rates. As India already has a Current Account Deficit, this will rise & further pressurize the Rupee 2) Pressure on exports: Normally falling rupee should have helped domestic exports, which have in contrast shrunk for seven straight months until June 2015 and are not expected to rise too because of global slowdown. Apart from this, China and India compete in several export item categories such as textiles, gems etc. will not only affect domestic exporters but also Indian exporters

would face threats from Chinese counterparts. The slowdown in Chinese economy - which is among the top five markets for Indian exports is another major issue for Indian exporters. 3) Dumping of Chinese goods: There is high probability that Chinese devaluation may provoke China to dump its goods into Indian markets and thus negatively impact domestic manufacturers. India’s Possible Reaction: There are few points as to why Indian policy makers should avoid an aggressive retaliation. • India imports more from Middle Kingdom but exports are relatively lesser. Hence a cheaper yuan would reduce India’s import bill and with competition somewhat limited in third markets owing to diverse export mixes, Indian exporters will also be comparatively unaffected by the cheaper Yuan. • India is an ample importer of commodity like oil. The more the Chinese devaluation pushes down the global commodity prices, the more it would benefit India. On a concluding note, India has comparatively limited tools to fight back. In case a currency war-like situation arises in future leaves RBI with two options: Sell forex reserves to intentionally drive down Rupee value, or interest rate cut. The first option is not healthy as far as India’s

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reserves are concerned which were dwindling only a few years ago in 2013. Also a cut in interest rates which ultimately seeks to weaken the currency may also have further ramifications on RBI’s inflation control objectives. If at all RBI goes for a rate cut in future due to further dip in global commodity prices it must consider India’s inflation prospects before doing so. In the current situation, the global currency wars are unlikely to happen in near future. So India’s best strategy should be to hold on to firm neutrality and RBI focussing on a different war: the war against domestic inflation. Deferred US Fed Rate Hike May Stable The Investors And Halt The Rapid FII Outflow Owing to the huge uncertainties and volatility prevalent in the global markets, the Federal Reserve decided to hold on to federal funds rate at 0-0.25 per cent for the time being as it would have hit the already weak investor sentiments further in emerging markets. Since August 1, 2015, the foreign institutional investors have pulled out over INR 20,000 crores from Indian equities and around INR 1,500 crores from domestic debt owing to Chinese slowdown and hence its ripple effect on emerging markets. Not only the market but also the government and RBI were prepared for a rate hike by the fed and resulting volatility in the stock market, debt and currency markets. RBI had built forex reserves worth $350 billion to face the instability. Now that it has remained unchanged, it is expected that rupee will stabilize against dollar and the Indian equities and debt markets will be less volatile. Adverse Effects Of A Currency War Lastly the countries should realize currency depreciation is a myopic approach but not the magic bullet for all economic problems in longterm. We can consider the currency devaluation of Brazil. Since 2011, the Brazilian real has plunged 48%, but such steep devaluation has failed to solve issues such as falling prices of crude oil and other commodity products, and

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increasing corruption. Consequently, IMF has forecasted the Brazilian economy to contract by 1% in 2015, after bare growth in 2014. So what are the adverse effects of a currency war? • Currency devaluation may affect long-term productivity, as they make imports expensive affecting the capital equipment expenditure of domestic businesses. So unless depreciation is supported by genuine and robust structural reforms, the productivity suffers. • The amount of depreciation has to be strategically planned keeping in view the consequences otherwise higher than required rate may ultimately cause capital outflows and rising inflation. • A currency war can lead to greater protectionism and trade barriers, and hinder global trade. China is one of the leading global trade powerhouse and such desperate measures might create deflationary pressures all through its global supply chain and pressurize competitors to depreciate their own currencies.

Interview With Prof. L.R.Natarajan Visiting Professor at IIMs and consultant on innovation

What Is The Impact Of RBI’s Recent Monetary Policy On The Indian Economy? The current government is focusing on the startups of the country to drive growth through innovations. Do you think that the environment in India is conducive to innovation? And what steps should government take to improve the environment? I would say that some concrete steps have been taken by the government. Doing something is better than doing nothing. The problem is that it is not the startups alone who can drive innovation. People should be trained right from the start i.e. education system. They should be more open to new ideas rather than rote-learning. The student evaluation should include creativity as one parameter to evaluate candidates. That is one area where we are very weak, and applied research is at a temperamental stage. You have to develop teachers as well to deliver an experiential learning experience. Otherwise some of the steps taken by the government are much welcome. Startups are mushrooming like anything which was not the case before. Regarding the timing I feel that any time is conducive for innovation. The person who has great ideas will find a way out to get funding. What is important is belief in the idea along with conviction, perseverance and hard work. So, if your conviction is 100%, you will find solutions falling in place. Individual traits and skills should be developed right from the early age which will condition people to take risks. You should know the real and creative applications of a concept. A sea of change is required as far as India is concerned because of the political environment in the country. A committed leadership is required for this, which should be a few notches above from what we have today. Small organizations are able to drive innovations with much ease as compared

to large organizations because they are much more agile and are open to new ideas. What are the impediments to innovation for large organizations and how can we overcome them? Large companies are successful and they have seen success in the past. And they get glued to it. Though they are aware that innovation is important, there are some impediments. First is that you have to devote time for the future. But the organizations have become so big that you have to manage the present well as stock markets continuously evaluate you. But because they have grown, they are structured to maintain to present. Everyone is up to their neck, to manage the present. They have to understand that future is equally important. If they ignore the future, they should realize that they will face slow death depending on the competitive intensity. Another thing is that people perceive that everything can be measured except innovation. I have three suggestions for the large corporates. One is genuine dis-satisfaction with the present (in a positive sense) because than you feel like challenging the status quo. And once you challenge the status quo, you pose challenging questions like why, why not, what if etc. The moment it starts from the top leadership you have those questions in front of you. Second is the strong belief in your people. You have to invest in them by training them to innovate. Because no one else from outside is going to do that for you, it has to be done from within the organization. Third is intelligent risk-taking. You should not run blindly behind an idea, there should be a calibrated risk taking effort. There is a very good book by Ken Tencer “The 90% rule” in which he says that even in this fast changing environment if you have achieved your targets, you should celebrate only 90%. Keep 10% for the future.

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Depending upon the competitive intensity, you should at least keep 5% of the resources for the future. Resources could in terms of monetary amount or the people as well. How and where to spend the resources is something that should be discussed and once the discussion begins, the opportunities will emerge. Building future is about working on non-routine activities with uncertain outcomes. Can you please share your experience of Theory of Constraints (TOC) implementation at Titan. What constraints did you address and how did you go about it? TOC journey started in Titan in somewhere around 2008. Jewellery division was making Rs 1500 crore revenue at that time, the market size about Rs 150000 crore, so were 1% player in the market. From 1995 to 2003 , the jewellery division was bleeding and it was only later that the brand got established and we started making money. But cash was a major constraint for the expansion activities. The company was a quasi-government company with 26% stake with government and 26% with TATA. The board had decided that the money for investment should come only from the earnings of the company. And in the jewellery business a lot of working capital is required to expand the showrooms as huge inventory of gold is required. The best option was to utilize the existing resources in the best possible manner. We got engaged with Goldratt Consulting and the challenge was to improve the stock turn from 2 to 4 as part of the TOC implementation. That is how the whole program started. The entire stock that was divided into three categories namely tail, belly and head. The heads are the fast moving stock or the best sellers, the belly is the variety driver stock and tail is the rotation of aged inventory. The head has to be replenished faster, as there is opportunity cost because of lost sales associated with it. This was addressed by populating the fast movers in all the showrooms. The inventory replenishment was also automated for this category. The time for inventory replenishment was brought down from 3 weeks to 24-48 hours. We implemented technology solutions for the other two categories as well. As a result of which, the average age of inventory in the showrooms was brought down from 180 days to 81 days. We rationalized the stock as per the price point category by mapping the numbers across all the stores. The

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high stock turn stores were given importance in terms of inventory replenishment. As a result of this, we could reduce the inventory by 20% and our stock turn went up from 2.5 to 3.7 in two years’ time. So, that roughly saved us about 1000 kgs of gold inventory, and if on an average a store takes 40 kg of inventory, we could open 50 stores with the inventory that was released from the system. You have significant experience in the automotive industry as well. Your quick thoughts on the Volkswagen crisis Just one word for the crisis - unfortunate. This should not have happened. Two things are important for any company – one is vitality and second is stature. The stature comes from the good things you do, the way you treat your stakeholders or the CSR activity you do. This incident has shattered the stature of Volkswagen. Ethics and governance are very important and if any organization violates these, than there could be only short-term gains. Your advice to the management students who want to make a career in the innovation management field Well, the interest of the students should be converted to conviction as it is very important. The interest should be combined with the hard work and time investment. Innovation managemeny as subject cannot be ingrained in twenty class sessions. It is like learning driving from a driving school. You learn to drive when you make mistakes as they cannot be taught. You have to fail and keep learning. Spend 3-4 hours daily to read about what is happening in the innovation space across the globe. Also keep sharpening your thought process and knowledge on innovation. The world is fast changing and Innovation cannot be looked as an opportunity now as it has become a necessity today. Whether you are in this field or not, you have to practice this in the company that you join or even if you decide to go for your own entrepreneurial venture. Innovation management should be pursued in true spirit and not in isolation as one more subject to study.

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BOLLINGER BANDS Ramesh Jaiswal IIM Shillong

Sir, while going through the concepts of technical analysis, I came across the term “Bollinger Bands”, could you please explain me the meaning? Bollinger Bands is a technical analysis tool invented by John Bollinger in the 1980s as well as a term trademarked by him in 2011. Having evolved from the concept of trading bands, Bollinger Bands and the related indicators % bandwidth can be used to measure the “highness” or “lowness” of the price relative to previous trades. Bollinger Bands are a volatility indicators. Sir, but what is the real purpose behind using this technique? The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition, prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.

touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when the price falls below the lower Bollinger Band. Moreover, the use of Bollinger Bands is not confined to stock traders; options traders, most notably implied volatility traders, often sell options when Bollinger Bands are historically far apart or buy options when the Bollinger Bands are historically close together, in both instances, expecting volatility to revert towards the average historical volatility level for the stock. Sir, can these bands be used only in the equity market? Traders in equity, forex and commodity market use this technique for technical analysis. Sometimes it is also coupled with other technical analysis tools such as candlestick for better results. Thank you sir for explaining the concept of bollinger bands. This would definitely help while investing in stock market.

Sir, how do traders interpret the movement of prices along and across the Bands? The use of Bollinger Bands varies widely among traders. Some traders buy when price touches the lower Bollinger Band and exit when price

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