Niveshak Sep17

FROM EDITOR’S DESK Niveshak Volume X ISSUE IX SEPTEMBER 2017 Faculty Chairman

Prof. P. Saravanan

THE TEAM Akshay Kaushal Anand Mittal Arjun Bhargava Dhruvika Chawalla Girraj Goyal Pratibha Sapra Sankeerth Bondugula Saurabh Gupta Vinay Gundecha Aayushi Garg Abhishek Soni Arpit Murarka Bhushan Bavishkar Mahesh M Priyanshu Gupta

Dear Niveshaks, The winds of change are blowing here at IIM Shillong. Amidst the hustle of the placement season, 18 fellow Niveshaks are hard at work at crossing one of the most significant milestones of our existence. The Niveshak Investment Fund, NIF as it is commonly known, is set to fight it out with the big boys. NIF will soon be going live, an ambition that is finally close to becoming a reality. It is with great pride and gratitude we dedicate this significant achievement to the forbearers of our office who have set the bar high and have been instrumental in creating a hard culture and heritage of the Finance Club, the oldest and proudest club of IIM Shillong. This month’s magazine starts with “The Month that Was” looking at the latest happening of the financial world. We weigh in on the BRICS summit which was threatened at that point due to the Doklam crisis, something for which this administration has to be commended in succeeding to come out of the confrontation smelling of roses. The cover story of this edition tries to objectively analyze an issue we seldom have had to face before: the issue of plenty. As the country’s foreign exchange reserves peaked at a staggering US$ 402.246 Billion, we look into what is the ideal amount of foreign currency assets we should be holding and what is the cost, opportunity cost and otherwise, of holding such high levels of currency. Ms. Bekxy Kuriakose, who charmed during the recently concluded Manthan, weighs in on issues mainly relating to fixed income securities and the enormous potential that it has. The guest articles for the month are especially interesting with the article of the month taking an interesting look at decentralized IT systems and its implications for the banking and financial systems. While the FinGyaan opines about how the consolidation of the state-run banks could play out if the existing potential synergies are exploited. FinFame looks at Viral Acharya, one of the most influential men in the Indian financial industry and widely tipped to be the next RBI governor. Finally, in its second edition, Juxtapose compares and contrasts the Zimbabwean economic crisis and US Great Depression. We hope you have as much reading the magazine as we had in making it. Stay Invested, Team Niveshak

Samprit Shah Sheahav Doshi Sriya Gupta

All images, design and artwork are copyright of IIM Shillong Finance Club

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

CONTENTS The Niveshak Times Pg.05 - The Month That Was

Cover Story

Article of the month Pg.11 - Towards Decentralized IT Systems and Beyond

Pg.14 - India’s Forex Blues

FinGyaan

FinView

Pg.18 - Consolidation of Banks: Pg.29 - Ms. Bekxy Kuriakose Finding Merger Synergy

FinFame

Juxtapose

FinSight

Classroom

Pg.22 - Viral Acharya: Poor Pg.31 - Zimbawean Economics Crisis and US Great Depression Man’s Rajan Pg.25 - Is the world moving Pg.32 - Big Mac Index towards deglobalization?

The Niveshak Times 2017 BRICS summit held at Xiamen The 2017 BRICS summit was held from 3rd to 5th September at Xiamen, China where the heads of the five-member states met. Five guests outside BRICS were invited to the summit by ChinaEgypt, Guinea, Mexico, Tajikistan, Thailand. The highlights of the summit include the discussion on terrorism which was an advancement from the Goa declaration. PM Modi had talks with each of the government heads on various issues to advance the bilateral relationships and improve India’s position at the international level. He strongly pitched for a BRICS credit rating agency to move away from the western rating institutions and provide financial needs for the member countries. In a statement, the five nations group said that it “strongly deplores” North Korea’s latest nuclear test which adds to the global condemnation of Pyongyang. Surprisingly, there was no mention of OBOR during the summit which is one of the main reason for the rising tension between India and China. Bilateral meeting between Narendra Modi and President Xi Jinping Indian Prime Minister Mr. Modi and China’s President Xi Jinping had their first bilateral meeting since Doklam standoff on the sidelines of the BRICS summit. This meeting in Xiamen came just a few days after August 28, 2017 when both the nations made an announced that they had withdrawn all their army troops from the Doklam plateau in Bhutan after the 73-day standoff. The meeting was reported as being “forward-looking” and was focussed on building a healthy and stable India-China ties with discussion about peace and tranquillity along the tensed border. “China is willing to work with India on the basis of the ‘Five Principles of Peaceful Coexistence’ (or Panchsheel), which were put forward by both countries, to improve political mutual trust, promote mutually beneficial cooperation, and push Sino-Indian ties along a right track”, said President Xi Jinping.

SEPTEMBER 2017

PM Modi revamps the cabinet team With an eye on 2019 elections, Prime Minister Narendra Modi did a major reshuffle to his team. Nirmala Sitharaman became the second woman defence minister of the country, only after Indira Gandhi to hold the responsibility since Independence. She took over this post from Arun Jaitely who had been given additional responsibility after Manohar Parrrikar had left to become the Chief Minister of Goa in March. The reshuffle includes inducting nine new members in the team and changing the major portfolios to bring more dynamism and efficiency in the governance. Piyush Goyal replaced Suresh Prabhu to become the railway minister, when Prabhu offered to resign after a continuous spate of fatal train accidents. Suresh Prabhu became the minister of commerce and industry by replacing Nirmala Sitharaman. The street expects this to be the last major cabinet restructuring before the 2019 general elections and thus, Modi displayed boldness and innovation in picking the new ministers and dropping half-a-dozen of non-performers.

Unruly air travellers will be banned from flying In a major crackdown, civil aviation ministry government came out with new set of rules to ban unruly passengers from flying for a duration ranging from 3 months to life. The list of misdemeanours people for whom there may be a ban on flying, the civil aviation ministry has recommended three levels of unruly behaviour by flyers, each with a different period of ban on flying. The first level of misdemeanour behaviour is verbal harassment, which would invite a ban of three months. The second category under the rules comprise physically-abusive behaviour and will carry a ban of six months, while the third level involves life-threatening behaviour, which would carry a flying ban of two or more years without limit. The no-flying list will be given by the airline that is involved in the incident and will be maintained by the DGCA. This move comes in

The Month That Was

NIVESHAK

The Niveshak Times the wake of a few incidents, including the one involving Shiv Sena MP Ravindra Gaikwad, who allegedly hit a staffer of Air India with a slipper for not getting a business class seat in the flight. Modi and Abe Flag off bullet train project Japanese Prime Minister Shinzo Abe and Indian Prime Minister Narendra Modi flagged-off the Rs 1.08-lakh crore ($17 billion) AhmedabadMumbai bullet train project near the Sabarmati railway station in Ahmedabad. The bullet train, which has a capacity to accommodate 750 people, would run at 320 km per hour and would cut the travel time between the two cities from seven to three hours. The bullet train corridor will lift economic growth by giving a boost to the industrial sector and creating more jobs, the Indian prime minister said. At a time when China and Japan are locked in an fierce rivalry for providing the high-speed train technology to countries around the world, Japan’s Rs. 88,000 crore-soft loan to this project will cement a longstanding relationship between the two nations. The loan will have to be repaid to Japan over 50 years. With this pompous inauguration of the 508-km high-speed train project, India became the second nation to import the Japanese ‘Shinkansen’ bullet-train technology which has been looking for a buyer for long. Suzuki to set up India’s first Lithium Ion battery unit Suzuki Motor will be investing more than Rs. 1,150 crore along with Japanese partners, Toshiba and Denso to set up India’s first lithium ion battery manufacturing unit in Gujarat. The announcement by the parent of Maruti Suzuki, the country’s largest carmaker, will prove to be a

major boost to the Modi’s ambitious Make in India and vehicle electrification initiatives. In this battery venture, Suzuki will hold 50% of the stake, Toshiba will own 40% and Denso will hold the remaining 10% stake. Osamu Suzuki, who made the announcement coinciding with their Prime Minister Shinzo Abe’s India visit, said that the proposed joint venture between the three companies would leverage India’s presence as a base for manufacturing batteries, which could be mounted on the hybrid vehicles and could be sold in both the local and the export markets. This project will take the Japanese automaker’s investments in Prime Minister Narendra Modi’s home state to Rs. 13,400 crore ($2.1billion). Tata Steel and ThyssenKrupp to merge Europe Operations Indian Tata Steel Ltd and German steelmaker Thyssenkrupp AG have agreed to merge their European steel operations and create Europe’s second-biggest maker of the alloy. The European market leader in steel ArcelorMittal. This announcement concludes the one-and-a-half years of tortuous negotiations and is expected to be completed by the end of next financial year after the two partners receive the necessary regulatory approvals. This decision to create Thyssenkrupp Tata Steel, a Netherlandsbased entity with an annual sale of around Rs. 15 billion, shipments of 21 million tonnes of flat steel products and 48000 employees, will allow the Indian counterpart to reduce its debt and focus on expansion in its home market. The MoU signed by the two companies outlined annual synergies of Rs. 400-600 million as well as up to 4,000 job cuts, which is about 8% of the joint workforce. Tata Steel spokesperson said that this deal will not involve any cash. Both the groups have agreed to contribute debt and liabilities to realise an equal shareholding and will remain long-term investors.

The Month That Was

NIVESHAK

32600

6,000

DII

FII 4,000

32200 32000

2,000

31800 31600

31400 31200

-2,000

31000 30800

-4,000

FII, DII Net turnover (in Rs. Crores)

BSE

32400

BSE

Market CoverSnapshot Story

Market Snapshot

30600

29-09-2017

28-09-2017

27-09-2017

26-09-2017

25-09-2017

22-09-2017

21-09-2017

20-09-2017

19-09-2017

18-09-2017

15-09-2017

14-09-2017

13-09-2017

12-09-2017

11-09-2017

08-09-2017

07-09-2017

06-09-2017

05-09-2017

04-09-2017

01-09-2017

30400

-6,000

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

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

1,31,81,353 Source: www.bseindia.com

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

1.00%

INR/1 USD

0.50%

0.00%

Euro/1 USD

GBP/1 USD

65.29 77.15 58.04 87.47 47.82

JPY/1 USD

SGD/1 USD

LENDING / DEPOSIT RATES Base rate Deposit rate

9.00% - 9.55% 6.25% - 6.75%

RESERVE RATIOS CRR SLR

4.00% 20.00%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

6.25% 6.00% 5.75%

-0.50%

-1.00%

Source: www.bseindia.com

-1.50%

-2.00%

-2.50%

SEPTEMBER 2017

Date as on September 30th

NIVESHAK

Market Snapshot

Market CoverSnapshot Story

BSE Index Sensex Auto Bankex Capital Goods Consumer Durables FMCG Healthcare IT Metal Oil & Gas Power Reality TECK Smallcap Midcap PSU

% change -1.41% 2.07% -1.51% -0.92% -0.83%‑‑‑

Open 31730.49 23688.67 27440.82 17330.85 17700.91

Close 31283.72 24180.04 27025.26 17172.12 17554.86

-3.95% 2.57% -1.16% 2.11% -2.21% -2.44% -3.38% -1.78% 0.76% -0.67% -3.74%

10174.12 13149.26 10063.83 13284.05 15177.26 2261.46 2137.67 5708.99 15991.63 15539.79 8645.18

9772.71 13487.76 9946.6 13563.9 14842.54 2206.23 2065.41 5607.57 16113.68 15436.01 8322.24

% Change TECK, -1.78% Smallcap, 0.76% Reality, -3.38% PSU, -3.74% Power, -2.44% Oil & Gas, -2.21% Midcap, -0.67% IT, -1.16% FMCG, -3.95%

Metal, 2.11%

Healthcare, 2.57% Consumer Durables, 0.83% Capital Goods, -0.92% Bankex, -1.51% Auto, 2.07% Sensex, -1.41%

NIF PERFORMACE EVALUATION As onAs September 30, 2017 2017 on 31th July September Month's Performance of NIF 105

215

104

205

103

Performance of Niveshak Investment Fund since Inception

195

102

185

101

175

100 99

165

155

145

135

125

Scaled Sensex

29-Sep-17

27-Sep-17

25-Sep-17

23-Sep-17

21-Sep-17

19-Sep-17

17-Sep-17

15-Sep-17

13-Sep-17

11-Sep-17

09-Sep-17

07-Sep-17

05-Sep-17

03-Sep-17

01-Sep-17

Scaled Portfolio

Total Investment Value : 10,00,000 Current Portfolio Value : 19,15,312 Change in Portfolio Value : 91.53% Change in Sensex : 52.62%

115 105 95 Sensex Scaled values

Portfolio Scaled Values Value Scaled to 100

Risk Measures: Standard Deviation NIF: 22.57 Standard Deviation Sensex: 12.08 Sharpe Ratio : 3.88 (Sensex : 4.02) Cash Remaining: 96,190

Comments on NIF’s Performance & Way Ahead: The S&P BSE benchmark index fell by around 2% in September whereas there was a loss of 0.96% in the portfolio of NIF. The fund added 200 shares of ADF Foods into its pool, which has given positive returns over this month. The data released by Central Statistics Office (CSO), showed that the GDP growth for the first quarter of 2017 was only 5.7% as compared to the growth of 7.9% in the same quarter of last year, signifying that the country was still reeling under the shock of demonetisation and disruption caused ahead of GST’s rollout. For NIF, Speciality Restaurant saw a stiff fall of 17%. The fundamentals of the stocks are still strong as the news of them partnering with McDonalds is out in the market. ITC continued its bearish run after the rollout of GST, which lost around 9% in the last month. NELCO was the highest gainer for NIF for the month as its stock rose up by around 20%. The North Korea factor still creates havoc in the market, which resulted in a huge sell-off during the end of the month with 8 sessions out of 9 ending in red for the Sensex. The NIF team expects that markets will be majorly governed by macro events in the coming future. The team is of the opinion that Midcaps and Smallcaps will continue to outperform the benchmark indices. The team recommends “hold” position in the market for coming sessions.

NIVESHAK INVESTMENT FUND INDIVIDUAL STOCK WEIGHT AND MONTHLY PERFORMANCE

NIF Sectoral Weights

Monthly Performance Portfolio Weight

5.61%

9.97%

15.04%

7.36%

3.89% 8.10%

6.18%

13.57% 28.64%

1.66%

Auto

Infrastructure

Chemical

Media

Financial Services

FMCG

Pharma

Telecommunication

Misc

Services

TOP GAINERS FOR THE MONTH • NELCO (+19.90%) • Thirumalai Chemicals (+11.08%) • Dr. Reddy’s Laboratories(+5.05%) TOP LOSERS FOR THE MONTH • Speciality Restaurant(-17.23%) • ITC(-8.94%) • PVR(-8.70%)

NIVESHAK

Article of the Motnh Cover Story

FINANCIAL SECTOR: TOWARDS DECENTRALIZED IT SYSTEMS AND BEYOND Ankita Mittal and Aditi Singh IMI, New Delhi India is emerging as the fastest growing major economy in the world according to 2 prominent global organisations, namely, the Central Statistics Organisation (CSO) and International Monetary Fund (IMF). The Government of India (GoI) forecast predicts a growth of 7.1 percent in the Indian economy in light of the combined strength and impact of strong government reforms and inflation focus of the Reserve Bank of India (RBI), supported by benign global commodity prices. The diversified Indian financial sector is undergoing rapid expansion, both in terms of strong organic growth of existing firms and new entities entering the market. Although the sector comprises of commercial banks, insurance companies, NBFCs (Non-Banking Financial Corporations), cooperatives, PFs (Pension funds), MFs (Mutual funds) and other smaller financial entities, the sector is dominated by banks which account for more than 64 % of the total assets held in the financial sector. However, in the recent past, the rising digitisation has dramatically altered the financial-services landscape, as evident from the growing number of Financial Institutes offering financial planning and trading applications via smartphones, growing acceptance of cloud technologies, and robotics and automation reducing operational cost and increasing quality. Since 2011, the number of fintech start-ups has risen by more than 50 %. Providing both, new opportunities as well as new threats for the industry, there is an increasing stress on the performance of the Information Technology (IT) teams in Financial Service institutions to offer

SEPTEMBER 2017

competitive, feature-rich digital products/services, while reducing costs â&#x20AC;&#x201D; the IT division must be flexible, efficient and responsive. In most Financial Services firms, centralised Information Technology structures are prominent. The rationale behind centralisation is that it has allowed resource pooling, data consolidation, and efficient software maintenance. But these traditional labour-intensive processes and data silos are reducing the ability of finance executives in innovating, driving growth and achieving business objectives. A cloud-based system, with interoperable and digital technology, allows diverse systems to work together easily. It allows the Financial Services firms to keep the benefits of one digital system while promoting flexibility and relationships with the customers throughout their value chain. But many Financial Services Firms are unprepared to accept/ implement innovative technologies because their older Information Technology core does not permit a smooth integration of these technologies. As evident from the above figure, although most executives agree on the importance of innovation and technological advancements, very few are prepared to implement these changes in their firms. The reasons vary from resistance to organisation-level changes to problems in smooth technology transitions/ integration. Hence, the more effective alternative is to change the entire organisational IT system. These can be oriented towards improving market presence, gathering data and responding to customer feedback. The philosophy of IT decentralisation has been in the air for the past couple of years, but many financial

Article of the Motnh Cover Story

NIVESHAK

services firms still resist fully embedding IT in the organisation, despite knowing its potential revolutionary impact. This resistance will not be sustainable for long. The industry is at a tipping point of transformation. If the established firms hope to compete in the evolving global environment, they must embrace the embedded IT model in their core platforms. The following figure highlights this change, as more and more financial services firms increase their IT expenditures, in an attempt to compete effectively in both their domestic as well as global markets, by leveraging technology as a competitive advantage. There is also an increased focus in utilising this technology to create entry barriers for new firms and for defeating the more traditional competitors. The pivotal areas in the sector will be affected in 2 major ways – • Fin-tech competition: Financial technology disrupters offer better customer experience and lower fee arrangements than established firms because of their lean cost structure, which is not saddled down with legacy technologies and centralised IT systems. Traditional firms need to become more agile and decentralised in IT operations to compete and seize emerging opportunities. • Data-driven product development: Advances in data analytics and digital behaviour tracking present an opportunity to develop products/services that meet and anticipate customer needs, driven by Artificial intelligence (AI), machine learning, and customer analytics. Very few firms are ready to use

their data to full advantage. The platforms will also help blockchain - style of transaction tracking, making it feasible to focus on differentiation. A new study conducted by Gate-Point Research examines the “Top Pressures Facing Finance Executives”. These are summarised as follows – • The digitisation of the economy, globalisation and the accelerating speed of business have made greater operational efficiency a top objective to achieve competitive advantage • Improved data handling, faster delivery of key reports, improved cross-department collaboration • Pressure to cut costs — achieve more with less staff These poorly integrated environments leave the firms ill-equipped to adapt to fierce competition, regulatory reforms and evolving customer needs; locking the professionals in inefficient manual processes, while the management expects accurate and timely information delivery for informed decision-making. Several organisations are turning to cloud-based solutions to transform the finance division to have enhanced visibility, efficiency and control. Cloud-based financial management delivers realtime data, process automation and controls while enabling cost reduction and simplicity of functions. Since embedded IT teams can work faster compared to teams in centralised IT, this approach will improve customer response time and timeto-market for innovations and products. It will also increase transparency, by making it easier to

NIVESHAK

Article of the Motnh Cover Story

track the ROI (return on Investment) of specific IT initiatives. Above all, this approach will allow FS firms to focus on their differentiating capabilities. As we can see from the figure, the level of automation of tasks in financial services firms is extremely low. This is especially so in data gathering and business analytics functions of these firms. The most extensively automated systems include a report generating systems and the systems that provide workers with timely actionable data. Hence, the nature of these systems is still transactional and rudimentary. There is a need for the firms to realise the importance of incorporating an integrated IT system to analyse data and make use of the vast repository of data that the firms already possess. This would require lower expenditures while driving maximum benefits for the company. Realigning IT in this manner will not be an easy task, but the resulting advantages are necessary

SEPTEMBER 2017

to compete effectively against the numerous fintech companies emerging in the financial industry. This is especially so, keeping in mind the sensitive and private nature of the data involved in the financial sector. Hence, along with an integrated It approach, firms must also consider the following challenges – • Competition from non - traditional market players • Robust cybersecurity and data privacy to stave off threats from multiple sources • Changing risk management culture, ethics, and disclosure norms • Search for new revenue opportunities, organically or through mergers and acquisitions • Managing cross-border regulatory challenges Together, these factors will be difficult to manage. Any firm that fails to adapt will lose the battle. In words of Darwin, this is a challenge of “Survival of the fittest”, both in economical and strategical terms. How the traditional firms will adapt and evolve in these changing times remains to be seen.

NIVESHAK

Cover Story

India’s Forex Blues Finance Club

IIM Shillong Is the cost of having a large war chest for fighting the volatility of the Rupee against the Greenback costing the country too much? India’s foreign exchange reserves crossed 400 billion USD for the first time in our history. This has opened up a debate we have seldom had to have in our recent past: the problem of plenty. This is especially stark considering we started this journey with 1 billion dollars in our kitty back in August 1991 when the country was gripped with a severe balance of payments crisis when the P. V. Narasimha Rao government had to pawn 67 tonnes of gold to the IMF to tide over this crisis. Now up to 8th in the value of foreign monetary assets in the world it is time to answer the question, what is the perfect amount? Beyond just a policy decision of the RBI, it seems

to want to take advantage of the higher national deposit rate and the poor credit outtake. Forced to mop up the excess liquidity following demonetisation, these deposits have a CRR of 100%, and to keep the exports competitive, the central bank is facing issues in paying interest to the banks. Taking advantage of this excess liquidity, the RBI is continuing to buy foreign monetary assets. The problem comes because majority of these dollar assets are in the form of US treasury bills which pay just about 2% interest. On the home front, utilising the monetary assets are often seen as an easy way to recapitalise the banks or to invest in public infrastructure

NIVESHAK

Cover Story

spurring the economy which grew at just 5.7% the previous quarter. Looking at the breakup of the Indian FCAs, the feeling is often that India should reduce its dependence on US treasury bills and instead boos its SDRs and its reserve position within the IMF. India has also been steadily increasing its gold holdings, now up to 10th in list of countries with highest gold reserves. Gold again is a commodity which Warren Buffet famously described as an asset that “doesn’t do anything but sit there and look at you”. This again fuels the burning question of whether we have too much FCAs. To answer these questions, we first ask why does RBI have to maintain its reserves. The primary aim of RBI is to maintain the cash flow balance keeping in cognizance potential inflows and outflows in the short to medium term. The fact of the matter is that in an emerging economy like India where the markets are relatively opened up, the outflows happen with

SEPTEMBER 2017

such ferocity and force that RBI need tools of equal size to ensure foreign exchange stability. Recently back in 2013 when Rupee went on a freefall with FIIs converting the rupee back into dollars on the back of rapidly improving US bond yields, RBI was left helpless and decided against any intervention citing “far stronger forces”. This was in spite of us having about 250 billion dollars’ worth of FCA at that point in time. Clearly, to deal with such forces, the RBI needs an arsenal that has the firepower to ensure exchange rate stability. Hence the general rhetoric that foreign exchange reserves should be roughly equal to 6 months’ worth of imports is flawed because that is clearly not the issue here. The RBI has to be prepared for the worst-case scenario where in case of sudden dollar outflows, how can it at best maintain the status quo for the economy ensuring global confidence in the Indian market. Different central banks have different outlooks about how to best go about this issue, for example, the UK has only about 164 billion and

Cover Story

NIVESHAK

Germany with about 200 billion but these are again a function of how powerful the Pound or the Euro is and how much confidence is there in the market. At 250 billion there was clearly a need to further ensure India’s ability to pay back its debt, lack of which caused the slide in rupee valuation in 2013.

Second key point of consideration is that the RBI acts as the heatsink of both excess supply and demand of dollars. The current situation is that there has been a strong surge in Dollar inflows. This is evidenced by the RBI’s outstanding net forward purchases of nearly 14 billion on back in April. The global market seems to be betting on the dollar rupee depreciating and hence ditching Dollars for the Rupee. In such a situation of large unhedged exposure, our currency markets will be subject to a lot of volatility, precisely what the RBI is trying to safeguard against. In the central bank’s agenda, the cost of holding these FCAs is of the lowest priority with its ability to engender investor’s confidence being a much more primal concern.

Now a natural question is whether the RBI can do anything about the capital inflows. The key incentive here is because the interest rates in India is on the higher side in comparison to the rest of the world. This is a direct result of having monetary policy that is targeting inflation. The interest rates have to be kept higher to suck out the excess rupee in the domestic market, incentivising the purchase of rupee in the global market, where investors see the benefit of such a high rupee outweighing the potential fluctuations in the Dollar/Rupee exchange. Thus, this raises the question of whether the RBI is as toothless as it is pretending to be? Could it not, for instance, tax short term gains on the Dollar. It could also tax large currency purchases. These questions are clearly unanswered as yet and are potential directions that the RBI should look at. The RBI has so far been rather passive where it could intervene more aggressively. Another question that is often raised what form should the RBI keep its FCAs in. Looking at the possible choices, the RBI chooses to primarily hold US treasury bills and Gold as opposed to having either special drawing rights (SDRs) or reserves with the IMF. The key difference to be considered here is the cost of holding these funds. The RBI as to pay interest for holding SDRs and reserves while holding Bonds returns money, albeit a low amount. Since the build-up of these dollar assets is to safeguard against

NIVESHAK

This column is of the view that the current amount of foreign exchange reserves is the

SEPTEMBER 2017

bare minimum that the RBI requires if it is at all to fight the volatility. Accumulation of reserves beyond say 450 Billion dollars should attempt to be more diversified and hedge against the systemic shocks that the exchange market faces. The RBI could explore the possibility of investing in Oil bonds and even having a national sovereign fund. The question of whether we are getting the best out of our reserves in terms of returns is a fair one given the rate at which they have been rising. There is also the question of whether the central bank should invest in gold given the amount of private holding we have but rather invest in a special oil reserve which is a rare commodity for India in the truest of sense and now is the right time for us to have it given the basic need for the RBI to have a sizable FCA reserve to fight volatility has been met. When the RBI is focusing on maintaining the status quo it is left open to being accused by both sides, one who say that the RBI is being too aggressive and the build-up of foreign reserves is indicative of the Rupee being artificially kept down and the other party which cites the REER (real effective exchange rate) and claims that the Rupee is grossly overvalued.

Cover Story

an eventuality that could happen any time, holding open ended SDRs makes little sense. Additionally, the RBI is often asked to consider using Forex reserves to fund infrastructure investment and more recently recapitalisation of the banks in the face of the Basel 3 norms. This was especially advocated by the former Finance minister Montek Singh Ahluwalia, who eventually persuaded the RBI to invest in infrastructure through a SPV in the form of IIFCL. This however raises the question of whether having reserves in the form of investment in infrastructure is liquid at all. Evidently to combat the volatility of sudden Dollar inflows/outflows, the RBI need completely liquid currency. RBI too felt this to be the case which ultimately led to the demise of the IIFCL with the Government now looking to merge the IIFCL with the IFCI. Additionally, does it make sense for the RBI to invest its FCAs, which are essentially its war chest against volatility, in the countryâ&#x20AC;&#x2122;s infrastructure which inherently shares the same systemic risk as the currency. Additionally, this investment could spark further inflation directly going against its mandate of fighting inflation.

NIVESHAK

FinGyaan

Consolidation of Banks: Finding Merger Synergy Anand Parekar SIMSREE Post the financial sector reforms of 1991, popularly known as ‘LPG’ reforms, the banking sector in India has played a key role in economic growth. However, since the Global Financial Crisis in 2008, the Indian economy has come across multiple challenges including the issues confronting the Indian banking sector. Stressed assets (nonperforming loans plus restructured assets) have been rising since 2010, hampering bank’s capital requirements, especially in the wake of the Basel III requirements. In addition to this, there is a number of other issues which banks in India, especially Indian public sector banks (PSBs) are encountering like balance sheet management, technological advancements, risk

management, human resource issues, etc. All this has negatively affected the asset quality, capital adequacy, performance and profitability of PSBs for a relatively long period. The various measure is taken by the government to reduce the menace of NPAs as listed below: • Infusion of capital (Rs. 70,000 cr.) out of budgetary allocations as part of the ‘Indradhanush’ scheme till 2018-19 • Announcing strategic debt restructuring scheme • Introduction of the Scheme for Sustainable Structuring of Stressed Assets (S4A scheme) • Introducing provisions for revaluing their real estate assets • Consolidation of PSBs

NIVESHAK

FinGyaan

Over five years it was suggested by the government that ‘Big Banks’ in India should come forward and look for an appropriate candidate for merger, but not a single bank came. Let us try to find if such merger synergy exists among the PSBs like PNB, Allahabad Bank, Oriental Bank, Corporation Bank and Indian bank.

Oriental Bank of Commerce OBC commenced its operations on February 19, 1943, in Lahore. The bank was nationalised on 15 April 1980. At the time OBC ranked 19th among the 20 nationalised banks. In 1997, OBC acquired two banks - Bari Doab Bank and Punjab Cooperative Bank, and it has become stronger with a network of 2378 Domestic branches as of March 2017.

PNB Bank Punjab National Bank, India’s first Swadeshi Bank, commenced its operations on April 12, 1895, from Lahore, with an authorised capital of Rs. 2 lac and working capital of Rs. 20,000. During the long history of over 122 years of the Bank, seven banks have merged with PNB, and it has become stronger and stronger with a network of 6937 Domestic branches and 10681 ATMs as on 31st March 2017.

Allahabad Bank The Oldest Joint Stock Bank of the Country, Allahabad Bank was founded on April 24, 1865, by a group of Europeans at Allahabad. During the long history of over 150 years of the Bank, seven banks have merged with United Industrial Bank Ltd., and it has become stronger with a network of more than 2500 Domestic branches as on 31st March 2017.

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Corporation Bank The journey of Corporation Bank started about 110 years ago in 1906, with an initial capital of just Rs. 5000. The bank has a pan-Indian presence. Presently, the bank has a network of 2,440 fully automated CBS branches, 3,040 ATMs, and 4,724 branchless banking units across the country. Indian Bank Indian Bank is an Indian state-owned financial services company established on 15th August 1907 as part of the Swadeshi movement and headquartered in Chennai, India. It has 20,661 employees, 2682 branches as on 31.03.2017 and is one of the top performing public sector banks in India. Collection of data: The secondary data which has been mainly collected from banks’ Annual Report of several years to evaluate the impact of M&A’s on the performance of said banks. Financial data has also been collected from www.moneycontrol. com for the study. Method of Analysis: For attaining the result, pre and futuristic postmerger performance have been compared. The pre and post-merger financial performance have been achieved in terms of Priority sector advance as % to total advance, Business per employee, Business per branch, Interest income as a % of total income, Non-interest income as a % of total income, Interest expenses as a % of total expenses, Return on Asset, Net NPA as % to net

advances, Capital Adequacy Ratio CAR (%) etc. Post financial parameter analysis we compare the other attributes like sector wise exposure, geographical presence, etc. Financial ratio used: 1. Credit -Deposit Ratio = Total Advance/Total Deposit X 100 2. Priority sector advance as % to total advance = Priority sector advance / Total Advance X 100 3. Business per employee = Total Business / no of employees X 100 4. Business per branch = Total Business / no of branches X 100 5. Interest income as a % of total income = Interest earned / Total income X 100 6. Non-interest income as a % of total income: Noninterest earned / Total income X 100 7. Interest expenses as a % of total expenses= Total interest expended / Total expenditure 8. Return on Asset(ROA) = Net profit/ Average assets 9. Net NPA as % to net advances = Net NPA/ Net advances 10. Capital Adequacy ratio (%) = Tier-I Capital (%) + Tier-II Capital (%) 11. Provision coverage ratio (PCR) From above results it is clear that the performance of the merged entity (PNB + Indian Bank) would improve in terms of Credit -Deposit Ratio, Priority sector advance as % to total advance, Interest income as a % of total income, Capital Adequacy Ratio, Noninterest income as a % of total income, Return on Asset, Business per employee, Business per branch, Interest expenses as a % of total expenses, Net NPA

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as % to net advances. Key Improvements are observed in net NPA which comes down to 6.69% for PNB which is significant. 1. Benefits due to the diversification of exposure to different sectors: The merger of two entities will benefit the newly formed entity having diversified exposure to various sectors. Currently, PNB has major exposure to infrastructure and power & metal sector which also majorly contribute to a stressed asset of PNB, on the other hand, Indian bank has major stressed assets in education and home loans. The diversification will help reduce the risk arising from non-performance a particular sector. 2. Wide Geographical presence: The merger would also help both the entities when consolidating the branch operations. PNB, a bank with a strong foot in north India will benefit with wide exposure to southern India currently captured by Indian bank as shown in the figure. This shows a win-win situation for both entities as it also opens market in northern India for Indian Bank. 3. Improved equity performance: Indian bank has been able to continuously deliver strong Return on equity (ROE) to its stakeholders. It

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improved from 5.46% in 2015-16 to 9.97% in 2016-17. Market Capitalization also improved from `4990.23 cr. as on 31.03.2016 to `13364 cr. as on 31.03.2017. The Earning per share (EPS) for PNB was Rs. 6.4 in Marâ&#x20AC;&#x2122;17, while for that of Indian Bank was Rs. 29.3. For the stakeholders PNB was unsuccessful in generating positive returns, also it failed to retain market share. The merger will stabilise the declining the market share of PNB and also will improve the return on equity. Conclusion The results suggest that the performance of banks has been improved in terms of credit -deposit Ratio, priority sector advance as % to total advance, interest income as a % of total income, capital adequacy ratio, non-interest income as a % of total income, return on asset, business per Employee, business per branch, interest expenses as a % of total expenses, net NPA as % to net advances. In a nutshell, merger analysis of PNB and Indian bank shows that synergy exists between two these two entities. It also depicts that the consolidation could be helpful in strengthening banks to handle NPA issue, though it may not solve the issue completely.

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Viral Acharya: “The Poor Man’s Rajan” Samprit Shah IIM Shillong If you ask me, there is no better sight in cricket than the Nawab of Najafgarh splashing his bat & dispatching the ball off the boundary rope in a stylish Upper Cut. First ball six hitting aggressive style may have found many admirers, but the deputy RBI governor Viral Acharya is probably not one among them. In the previous edition we talked about the “hawk” of the Indian banking system: Urjit Patel; in this edition, I will explore the journey of his deputy from being a music composer to being nicknamed “the poor man’s Rajan.” Imagine a professor sitting in the aristocratic & regal offices of a reputed university in New York called on to handle one of the most fragile yet a rapidly growing economy. So in

a newly found zeal to rebuilt the economy of Indian subcontinent the govt. Of India has been plucking economic wizards from the orchards of Oxfords & Harvards of the world. The latest addition to the list has been Viral Acharya roped in as the deputy governor of RBI from the New York University Stern School of Business for a three-year term. Mr. Acharya began his career with a bachelor’s degree in computer Science from Indian Institute of Technology, Mumbai & then moved on to receive a doctorate in finance from NYU-Stern. In his professional career, he has served as academic director of the Coller Institute of Private Equity at LBS (2007-09) and a Senior Houblon-Normal Research Fellow at the Bank of England (Summer 2008). Before joining RBI he has been associated with the government

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In an article published in Mint on January 23, Tamal ends by sketching Mr. Acharya as an agent of change who moves swiftly & believes in taking the bull by its horns. So when media has set such a tone for him I will begin analyzing his policy works by his incisive words at an RBI meeting on February 21, “With our healthy current level of growth and future potential, with our hardfought macroeconomic stability, with our youth climbing echelons of entrepreneurial success day after day, with our vast expanses of rural India that need infrastructure and modernization, and with our levels of poverty that has steadily declined but still need substantial reduction, we simply don’t as a society have any excuse or moral liberty to let the banking sector wounds fester and result in amputation of healthier parts of the economy”. Later in the same address, he talked at length about his three models to tame the NPA issue. He focused on two models of building Asset Management companies based on the sector they operate in & based on the type of bad asset exposure they have. Though I agree that Private Asset Management companies can

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help resolve the bank NPA headache in cases when economic turn around of stressed assets is possible in short run, I opine that involving more government funding to manages assets that generate long-term returns by setting up a National Asset management company can be a huge drain on country’s resources. The government can primarily focus on building infrastructure to raise demand in sectors like Power(reeling with problems of over-capacity) & the private agencies can go around building a portfolio of stressed assets enabling the investor to diversify his risk exposure, eventually improving valuations & attracting greater capital. As a central banker & a member of Monetary Policy Committee, Mr. Acharya believes that the primary focus of RBI should be on what is the likelihood of occurrence of a stress scenario, check whether we are adequately provisioned for that as a central bank and have prepared the banks to provision for the stress scenario. This probably explains why RBI is more focused on building a war chest full of ammunitions flooded with foreign reserves & forcing the banks to stay in government bonds by virtue of high SLR rates. But the entire gamut of a strong war chest is to use it as & when required to scare off the crisis; in-spite of such weapons in the armory the question remains as to why RBI is so enamored by the idea of high-interest rates at the cost of credit growth in the country. Much like his general, the new lieutenant is a firm preacher of fiscal prudence, so while the industry waits in anticipation of increase government spending to let the economy fly high, Mr. Acharya & his team mates would be busy cutting down the wings. Mr. Acharya in one of his speeches remarked that Indian banking sector needs to be careful so as not repeat the mistakes of lost decade of Japan & as a conclusion to his paper co-written in association with Richardson on causes of the financial crisis he mentions “the severity of US financial crisis & it’s worldwide scope has been magnified by the decline in lending by the commercial banks which eventually slackened the pace of NPA recovery”. Probably, this where

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of India serving on multiple under the Ministry of Finance. Publishing over two dozen papers on the issues ranging from bank liquidity management to international finance; his contribution to the world of finance has been immense.

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few of his stringent comments in support of monetary policy as inflation targeting & a high real interest rate regime set by RBI baffles the critics. In some of his researches, Mr. Acharya talked at length about his observations on the P J Nayak committee & about the competencies & risk averse appetite of governing of many Public Sector banks. It would be interesting to see what he has to propose as a solution to this issue. In the end, I would like to leave the readers with

a few lighter aspects of his persona. Music has always been very close to his heart. While a doctoral student at NYU he set up his own band Surbahar. The Nongovernment organization Pratham provides education to under privileged children, has been close to his heart & till 2008 he used to devote the majority of his time for the spread & the success of the NGO. As a music composer, he has written lyrics & composed the album “Yaadoon ke silsile – An ode to Friends & some romantic moods.” Hope his melodious journey keeps churning out new parables for the Indian economy & keeps it high & healthy.

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Is the world moving towards deglobalization? Om Duseja

SIMSREE INTRODUCTION â&#x20AC;&#x153;When the social mood is good people say WE and when the social mood is bad people say THEYâ&#x20AC;?. This has been the statement which the world is using for globalisation and deglobalization now a day. After the financial crisis, the economies in China Exports as a percentage of GDP

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the world are implementing the protectionist measures to protect the domestic industries from global headwinds. Even International Monetary fund (IMF) says that world faces significant uncertainty and downside growth risks from any tightening in global financial conditions or rise in protectionist trade policies. As per Global Trade Alert (GTA) report, restrictive trade measures grew by 50 percent in 2015 compared to the previous year. In the first four months of 2016, protectionist measures increased by between one-and-ahalf and three times compared to the same period each year since 2010. Many companies like GE announced a shift in strategy that emphasises greater reliance on localisation.

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Similarly, Trump has also said that he will bring back all the jobs to the US by putting a stop to all the outsourcing activities. But this short-term view will not work looking at the past trends of US. Outsourcing to labour intensive countries will help America to keep the prices of products down and hence inflation under control. Globalization suffered a setback during the great depression in 1930â&#x20AC;&#x2122;s, but after World War II the pace of globalisation picked up.

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ROOT CAUSE OF DE GLOBALISATION 1. Financial Crisis 2008: Before the crisis, China was considered as one of the miracle economy showing a double-digit growth rate for close to two decades. As China has adopted an export-led growth model to grow at such a high rate, it was exporting tremendously to the world and especially to the US. Hence if we see the proportion of exports in GDP before the crisis, China was able to achieve such a growth majorly due to exports. Post financial crisis the US economy stop consuming and importing the way in which it uses to before crisis. Obviously, people stopped spending due to a complete crash of the economic stability. Hence after the crisis the exports of China starts tumbling and are struggling today as well. From the figure, it can be seen that before crisis exports were close to 37% of GDP but after the crisis it slowed down and its 22% of GDP in the year 2016. Exports as a percentage of GDP almost halved after the crisis in 2016.

TRENDS OF DE GLOBALISATION 1. World Trade as percentage of GDP It can be seen from the figure that the trade as a percentage of GDP has declined sharply from 60% in 2008 to 47% in 2016. With most of the countries adopting protectionist measures for trade, like US talking about moving out of the NAFTA agreement and rise in tariffs on imports, are other measures taken to avoid trade and support the domestic industries? Like India also increased the import duty on sugar to support the domestic sugar industries. Before the crisis as said most of the economies were dependent on trade for growth in GDP as the percentage was 60% but after the crisis, the trading methodology starts collapsing and the economies started showing the impact for the same by shifting towards domestic consumptionled growth strategy. 2. Global capital flows as percentage of GDP The global capital flows as a percentage of GDP

From above explanations, it can be assumed that the US was forced to stop the imports from China and from that point itself a kind of trend of deglobalization begins. One can say that the decrease in trade was started after the financial crisis. However, an increase in protectionist measures was due to weak global demand and world growth rate. 2. Rising Income Inequality: The other major reason which is pushing the deglobalization trend is the rising income inequality. After the financial crisis, the income growth has been concentrated mostly at the very top. A recent report from Oxfam said that just eight men from the industrialised world had more wealth than half of the global population. Hence rising income inequality between rich and middle class and the perception that immigrants are taking away all the jobs led to Brexit in 2016.

has also declined even sharply after the crisis from 16% in 2007 to 2% in 2016. If we see the FDI and FII have not dropped that significantly, however, the cross-border bank lending has dropped significantly. Banks in western economies like the US, Eurozone, are much more reluctant to lend across their borders in the post-crisis world. Hence emerging economies depending heavily on foreign flows to fulfil their current account deficit

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will struggle in this de globalised era. Especially after the crisis, the banking sector in US economy collapsed and hence impacted flows to other countries. 3. Migration from poor to rich countries: With most of the countries getting inward, the migration of people has also affected significantly. It can be seen from the figure that the migration from poor to rich countries has decreased from close to 20 million in 2005-10 to 12 million in 201115, almost a decline of 30-40% from the peak. The major reason being environment has become less hostile to immigrants being welcomed in western societies. As this trend is expected to continue going further the business of outsourcing is seriously threatened, it will not show an immediate effect, but slowly it will effect. 4. Protectionist measures were taken The figure shows the number of protectionist measures taken by different countries after the global financial crisis. India tops the list with around 500 protectionist measures taken and followed by USA, China, UK and South Korea. It can be probably due to global headwinds that India is trying to protect the economy but taking such a huge number of protectionist measures will not

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ELLIOTT WAVE THEORY ON OF DE GLOBALISATION The very famous Elliott theory which is considered to be applicable to every market like commodities, stock, currency and others find its application in the trend of deglobalization as well. Elliott theory has predicted most of the previous crisis in the charts by satisfying certain patterns. As can be seen from the figure that the 3rd wave; which is most of the times an extended wave has completed the fifth sub-wave and is ready for correction to form the 4th wave of an impulse pattern. So even the charts on the Elliott wave shows that the world is about to enter in a deep era of deglobalization. It can be seen that the world exports and imports as a percentage of GDP will fall close to 35% from 60% in 2011. And in the figure, we saw that the trade as a percentage of GDP has fallen to 47% from 60% in 2010 and as per this chart, it is expected to decline further to 35% in coming years. As per this, we can say that after the 4th wave is completed the world GDP rate will improve by increasing the trade as a percentage of GDP as the impulse pattern will form the 5th wave in the bullish direction. Hence maybe after 2022, we can see an improvement in global trade.

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fetch the solution to the problem, rather the government should allow the market to solve the issue. According to the WTO since 2008, G20 economies have introduced 1,583 new trade restricting measures and removed just 387. Between mid-October of 2015 and mid-May of this year, they introduced 145 new protectionist measures, showing a monthly average of just under 21, the worst seen since the WTO began monitoring G20 economies in 2009.

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FINAL THOUGHT From the above analysis, we can say that the world is entering into a de-globalised era at least regarding trade, capital flows and immigration. However, the world is still interlinked with the help of social media and tourism. It is wise not to adopt protectionist measures as at the time of great depression as well the same strategy was applied and it had not worked. Let every economy do what best it can do and outsource the other work. In this way, every economy will end up doing work by achieving economies of scale. In worst times when the economy suffers from the crisis, some protectionist measures can be taken to avoid a complete collapse of the domestic industry. But those protectionist measures should be removed within a specified time frame, and in that time

frame, the industry should mould to formulate a strategy to be able to compete with global headwinds. India, on the other hand, is also facing the pressure of deglobalization as the major terms have shown a slowdown. But as the economy is not dependent heavily on export for their growth it will be affected less as compare to others. Hence growth rate may slow down to 6-6.5% as compared to 8-9% in financial boom times. However, this growth rate even seems reasonable comparatively considering the world is growing at the rate of 2-2.5%. It can be considered over all that the old model of growth on which economies like Brazil, Russia and China prospered no longer holds good.

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1. There are various types of fixed income instruments prevalent in almost all the other major economies like deep discount bonds, reverse floater bonds, indexed bonds, currency bonds, etc. However, the Indian bond market is primarily dominated by fixed rate coupon bonds. What are the primary reasons for lack of a vibrant Bond Market in India?

the market is dominated by shorter tenors of 5 yr and below. This could be because the interest of other major buyer segments- mutual funds, Foreign Portfolio Investors and Insurance companies are in the shorter tenor as their schemes generally invest in such tenors. Also rates are more attractive in the shorter tenor for issuers as well with tighter spreads.

I would not say itâ&#x20AC;&#x2122;s entirely true. We have seen the issuance of many innovative and unique types of debt instruments. Some of these include Floating rate bonds (linked to MIBOR or Base Rate or Equity linked), Securitized debt with amortization of interest and principal, step up coupon bonds (lower coupon in initial years and step up later), CMBS (Commercial Mortgage backed securities), pooled CBO NCDs, etc. Further while bonds may have a fixed coupon, it can still be structured and packaged in different ways with covenants, partial or full guarantees, secured by a variety of collateral including equity shares or receivables, credit enhancements, in form of strips, and so on.

3. Another point of concern is to get liquidity across the yield curve. Former RBI governor Raghuram Rajan tried to use the primary dealers to play the role of market makers by giving twoway quotes for securities but that experiment has not been a success. What can be the possible ways to attract more retail investors and in turn add liquidity in the markets? I think focus should be to get institutional buyers of debt to trade more in the secondary market. For retail participants the standard lot size in debt market (i.e. Rs 5 cr and more) maybe a deterrant anyways and it maybe a bit complex for them. One key measure which can help the institutional market is to have a standardized corporate bond repo market with a central counterparty like CCIL. And NBFCs and broking companies should also be allowed to access this repo market. This can enable them to be market makers.

2. The average age of the bonds issued by Indian corporations is only 5 to 7 years. This is way below the average age of bonds in other emerging markets. What are the main reasons for the same? Are the issuers not willing to issue bonds for longer maturities or there is lack of confidence in investors as far as investment in bonds with longer maturities is concerned? There are pockets of interest in the debt market for longer tenor bonds. The market for Basel III linked AT1 perpetual bonds is growing. Some of the PSU companies do regularly issue 10 yr debt. Pension funds and EPFO/LIC do regularly buy longer dated debt. However its is true that

4. There have been lot of developments in the bond market space in the last couple of years. The Green and Municipal Bonds have seen considerable increase. Also, there have been considerable increase in the number of issues of Masala Bonds. What is the future of these unconventional forms of bonds in the future of going forward? Masala bonds is definitely popular and this category should keep growing. Given that its

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A graduate of Indian Institute of Management Bangalore, Ms. Bekxy Kuriakose has a professional career in Asset management field spanning over 15 years. She began her career as a Fund manager for SBI funds management Company. She is currently engaged with Principal PNB asset management company & serves the firm as Head- Fixed Income department.

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rupee denominated debt issuers donâ&#x20AC;&#x2122;t take currency risk and for foreign investors ease of buying such securities overseas is an attractive feature. Municipal Bond issuances have been relatively few. There are only a few municipalities which have investment grade rating available. Few months back Pune Municipal Corporation issued 10 yr bonds which showed a good response. The reason being it was rated AA+ and had a structured payment mechanism in place for the timely servicing of both the interest and principal. The mechanism includes an escrow account where property tax (includes water tax) collections will be parked, a debt service reserve account (DSRA), an interest payment account (IPA) and a sinking fund account (SFA), which will be managed and monitored by the debenture trustees. Few more are in the pipeline is what we have heard. Apart from rating, one of the key challenges as far as investors are concerned is that for most of the municipal corporations the financial data is not available in a timely standardized manner as one would get for most corporates. This makes it difficult to do any analysis or evaluate the credit risk properly. Green bonds are also expected to

increase going forward however in India presently we donâ&#x20AC;&#x2122;t have any green mandated bond funds unlike overseas. 5. Although there have been some contagious issues like stiff stamp duty and high transaction costs in the bond markets, both the SEBI and RBI have maintained a favourable stance towards the market in general. With improvements in Macroeconomic environment and a stable domestic currency, the stage is now set for development of the bond market in India. What are the steps required on the regulatory front to ensure that this development is accelerated in the near future? Regulators have been trying to take big and small steps to develop the corporate bond market. In this respect the HR Khan Committee report which came last year was a detailed incisive report which gave action points to various regulatory agencies. While stamp duty remains an irritant, the development of a corporate bond repo market with access to NBFCs and broking companies to facilitate market making in the secondary market and removal of restrictions on investments for pension funds and insurance companies would help to improve volumes and generate higher appetite too.

Disclaimer: The views expressed and information herein are independent views of the interviewee and for informative purpose only and under no circumstances should be construed as an opinion or Investment advice. The information contained herein is not intended to be an offer to seek solicitation for purchase or sale of any financial product or instrument. Investment involves risk. As an investor you are advised to conduct your own verification and consult your own financial and tax advisor before investing. The Sponsor, Trustee, AMC, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained herein.

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CLASSROOM FinFunda of the Month

Big Mac Index Finance Club IIM Shillong

Yo Fin! recently I was going through an article in a newspaper and found something called “Big Mac Index”. What is Big Mac Index? THE Big Mac record was imagined by The Economist in 1986 as a manual to know whether money related structures are at their “right” level. It is used to measure the getting power equity (PPP) between nations, using the cost of a Big Mac as the benchmark. Oh! I see. Can you give an example of Big Mac Index to have a clear concept? For example, if the price of a Big Mac is $4.00 in the U.S. as compared to 2.5 pounds sterling in Britain, we would expect that the exchange rate would be 1.60 (4/2.5 = 1.60). If the exchange rate of dollars to pounds is any greater, the Big Mac Index would state that the pound was over-valued, any lower and it would be under-valued. That’s great. How does PPP help in the Big Mac Index? Utilizing the possibility of PPP from financial aspects, any adjustments in return rates between countries would be found in the adjustment in cost of a crate of products which stays consistent crosswise over value that purchasers pay for a Big Mac in a specific country, replacing the “basket” with the famous hamburger.

Any final words or recommendations on the topic Big Mac Index? Obtaining power equality, i.e. the PPP is best idea of as a long run hypothesis of conversion scale assurance. The Big Mac isn’t a tradable decent and

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its cost varies between areas in any given nation. This implies the Big Mac Index is probably going to demonstrate a blemished marker of future swapping scale developments. Regardless of this, it will enthusiasm for you to take after the trade rates in your file in coming a very long time to check whether over-esteemed monetary forms do in fact devalue and underestimated monetary forms appreciate. Maybe whenever you arrange a Big Mac you should offer to pay in Chinese yuan! Thank you so much.

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