bluechip_mdi finance magzine
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Quarterly Magazine by Finance club of MDI GurgaonTRANSCRIPT
Dear Reader,
Welcome to the special issue of Blue Chip!
At a time when few of us have joined our dream col-
leges while others complete a year of MBA, Blue Chip
proudly celebrates its first anniversary and presents its
special issue from a new editorial team. Taking the ba-
ton forward from the progenitors of Blue Chip, we look
forward to the coming year with hope and optimism.
To make the anniversary issue of Blue Chip special, we
introduce a new section wherein our team members
share their summer internship experiences across vari-
ous companies and functions in finance and economics.
This issue’s cover article is about the current situation
of the insurance sector in India, and prescribes a dosage
of bancassurance, increased FDI and micro-insurance
to help this sector pick up speed and reach the next
stage of growth.
Retaining popular sections from the last issue, this time
we talk about Current Account Deficit in the Beginners’
Section and present a review of the movie Too Big To
Fail. For the inquisitive minds, a tutorial on Inflation
Indexed Bonds is included, and to exercise your grey
cells, we offer you a crossword.
From the entire Blue Chip team, here’s wishing all our
readers all the best for their new phase of life.
Be happy. Do good. Stay sane.
And most importantly, Keep reading.
~ Editors for Blue Chip
BLUE CHIP
ISSUE 4
All images, artwork and design
are copyright of Monetrix,
The Finance and
Economics Club of
MDI, Gurgaon
The Team
Cover Page photo
Source: ibnlive.in.com
For any information or feedback,
please feel free to write in to us at
OR visit our Facebook page
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From the Editor’s Desk
Editorial Team
Ashish Gupta
Nidhi Soni
Content Creators
Amit Agarwalla
Daman Aggarwal
Karan Jaidka
Radhika Bhattar
Rishabh Gupta
Rishi Maheshwari
Rohit Agarwal
Sankalp Raghuvanshi
Saurabh Saxena
Saurav Singh
Shaunak Laad
Swapnil Sheth
Vibhav Srivastava
Tutorial ( 12
Inflation Indexed bonds
Capital Account Convertibility ( 27
Capital Account Converti-
bility of China by 2015
Business Quiz ( 33
Crossword
P.E. in India 8
A perspective on P.E. in India
Market Update ( 36
Stock Market Update
In the News
Beginners’ Corner ( 20
Current Account Deficit
A radical solution to a
rational problem ( 4
Through the eyes of
finance students
Wipro Limited | Goldman Sachs
Axis Bank | HSBC Bank
Summer Internship Ex-periences ( 23
Cover Article ( 14
Insuring India
The way forward
Movie Review ( 35
Too Big To Fail Rupee ( 30
Rupee on a Wheel Chair
Contents
4
© Monetrix, Finance & Economics Club of MDI, Gurgaon
The Indian Banking Sector that was considered
sufficiently robust to cushion the challenges
posted by the global meltdown has been wit-
nessing some problems of its own lately. The
rising NPA’s and Cost of Funds/Deposits are a
matter of concern. This shifts focus on how to
reduce the two. Here, I am concerned with the
latter.
Banks accept deposits in form of Demand De-
posits and Term Deposits. Current Account and
Savings Account Deposits (CASA) are a part of
Demand Deposits.
CASA deposits, also known as low cost deposits
are considered to be the cheapest source of
funds available to banks. They refer to deposits
made in Savings (SB) and Current (CD) Ac-
counts. In CASA deposits, the banks pay interest
on Savings Accounts but not on funds main-
tained with Current Accounts (So ideally they
should try to have more and more funds in the
Current Accounts).
Banks borrow money from various sources at
some interest and lend that money at higher
rates to book profits. The sources of funds being
- RBI (borrowed at prevalent repo rates), short
term call money market, CASA deposits and
term deposits among others. CASA deposits are
the traditional source of income for the banks.
These Deposits help bank to generate low cost
funds which are then used for advances/
investments or to maintain liquidity for day-to-
day operations.
Also, absence of these low-cost funds in consid-
erable amounts will not allow the banks to lower
interest rates for the end-user because if a bank
starts with a high cost deposit base then to earn
a profit you have to lend at high rates, effectively
taking on more risks. High cost of deposits
reduces the profit margins for the bank and
increases reliance on short term borrowings.
The banks which have been performing rela-
tively better have a larger share of CASA de-
posits in total deposits and within CASA also,
the share of Current Account deposits is of
considerable percentage. For example, for the
Fiscal Year 2012-13 HDFC Bank had a CA
Deposits share of 37.23% of the total CASA
deposits, while Central Bank of India has a CA
Deposits share of only 20.37% which is among
the lowest in the industry, hence, it is of no
surprise that the cost of deposits for it is
among the highest in the Indian Banking sector
(7.42%).
For Central Bank of India the Cost of Deposits
have been rising steadily over the past few
years while the CASA share of Total Deposits
has been decreasing. By analyzing and plotting
some graphs for past few years we can arrive at
some conclusions. Firstly, it points to an in-
verse relationship between the CASA share of
Total Deposits and Cost of Deposits. Also the
share of Term Deposits in total deposits has
been increasing over the years.
As bank pays more interest on Term deposits
than CASA deposits, it leads to considerable
expenditure. Hence, there is a direct relation-
ship between the Term Deposits share of total
deposits and cost of Deposits.
So the aim is to find out ways by which the
cost of deposits and funds can be reduced. Af-
ter RBI de-regulated interest rate payment on
Savings Accounts many banks like Kotak
Mahindra, Yes Bank etc. started offering higher
interest rates on Savings Accounts with an aim
A RADICAL SOLUTION TO A RATIONAL PROBLEM
A Radical Solution to a Rational Problem
PGDM (2012-14)-2nd Year
IMI, New Delhi Soumya Sharma
5
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
of increasing their CASA deposits as they recog-
nize the cost benefits associated with it. The
schemes have helped these banks gain a lot of
mileage and they are still gaining traction from
them. As a matter of fact Yes Bank registered a
growth rate of 206.4% in its savings account port-
folio in the Fiscal Year 2011-12 (the scheme offer-
ing higher interest rates was launched in October,
2011). These banks could offer the differentiated
rates because their Savings Bank Balance as of to-
day is low as compared to older, more estab-
lished banks. The older banks have a very
large Savings Account base so the cost of
offering higher interest rates is huge for
them. The increment required in the savings
account balance to offset the increased ex-
penditure if the higher rates were to be of-
fered will be very unrealistic. (Banks will gain
interest by investing or lending out addi-
tional funds which will help in negating the
Figure 2: Growth Rate of Term deposits and Cost of deposits, Cost of Funds over the past four
years for Central Bank of India
Figure 1: Growth Rate of CASA Deposits and Cost of Deposits over the past four years for
Central Bank of India.
The CASA
share of total
Deposits is
decreasing.
Cost of Funds
as well as
Cost of De-
posits has
been increas-
ing.
The Term De-
posit share of
total Deposits
has been in-
creasing.
Cost of Depos-
its and Cost of
Funds has been
increasing.
A RADICAL SOLUTION TO A RATIONAL PROBLEM
6
© Monetrix, Finance & Economics Club of MDI, Gurgaon
Money from these mutual funds can be re-
deemed within 24 hours. The mutual funds
lend this money to the short term Call Money
Market, from where the banks borrow to
maintain their liquidity requirements at very
high interest rates. Hence, the money which
could have been deposited in the Current Ac-
counts if they were to offer even a customary
rate has come back to the bank but at a much
higher cost.
The impact that this proposal might have on
the bottom-line of the bank can be offset by
interest income that the bank will receive
once it invests or lends out the additional
money that is attracted through the scheme at
higher rates. Also, banks should be allowed to
decide the interest rates that they want to of-
fer, on the basis of, the perceived impact on
their financials, and the estimated growth
prospects by launching of the scheme.
For certain banks like Central Bank of India
which have a low Current Account Balance,
the proposal to offer interest rates on these
accounts means maximum benefit. In fact
their situation can well be termed as a bless-
ing in disguise.
The fact that it has only 20% of its CASA
funds as Current Account Balances means
that it will have considerable advantage with
respect to other banks if we assume all were
to offer interest on Current Accounts.
As mentioned above, the expenditure in-
curred due to this scheme can be offset by
deploying the additional funds generated in
form of advances. Also the bank does not
have to pay interest on whole of its Current
Account Portfolio, some riders like the mini-
mum monthly balance requirement to be eli-
gible for the scheme will lower the number of
expenditure)
The problem is more pronounced in case of Pub-
lic Sector Banks-CASA as a share of Total De-
posits has been decreasing and so is the share of
Current Accounts in CASA. These banks are
mostly left with the customers who are very loyal
to them while others(savings and current account
customers) are being poached by private sector
banks by providing better services and in some
cases higher interest rates.
So the solution. RBI should allow banks to offer
interest on Current Accounts as well. Currently
no interest is paid on Current Account deposits
which has not only deprived banks of deposits at
cheaper rates but has also resulted in money from
current accounts flowing into other markets and
mutual funds. Banks like State Bank of India are
in talks with RBI for de-regulation of interest
rates on Current Accounts.
Infact, Mr Pradip Chaudhuri (Chairman, State
Bank of India) has advocated for a 2% interest on
Current Accounts to attract cash lying in the
hands of businesses.
As of now, Banks cannot accept term deposits
for periods that are less than seven days, hence
the corporates instead of depositing their excess
money in the current accounts which bear them
no interest, prefer investing with mutual funds.
A RADICAL SOLUTION TO A RATIONAL PROBLEM
Figure 3: Current & Savings Account as a Share
of Total Deposits for select commercial banks
Cost Benefit Analysis for a PSU bank
if 2% Interest Rate were to be offered
7
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
accounts eligible for interest payments, but not
the incentive to park the money with the bank.
Here I have assumed that interest will be paid to
only those accounts which maintain a monthly
balance of Rs 5 Lacs and such accounts corre-
spond to around 40 % of total Current Account
Balances. Also 100% of Current Account Bal-
ances are not available for investment for the
bank, so I have assumed 90% are available for
investments/further advances.
The interest that bank receives by investing is
taken as the 5 year average of Yield on Advances.
The bank would want to grow at a rate so that it
negates the extra expenses due to scheme and
also achieve its historical growth rate. Hence the
growth required for the bank in its Current Ac-
count portfolio to negate the impact of giving
interest on Current Accounts is 16.19% (Rs
1331.89 Crores) which is achievable if the bank is
as aggressive as the newer banks were, with re-
spect to launching their schemes.
With the muted growth rates in the Bank Depos-
its, this scheme can offer promising results.
CASA growth rate has been lagging behind
the term deposit growth rate for most of the
banks. This measure can act as a silver bullet
to the flagging CASA share.
Some people might feel that offering interest
rates on the Current Accounts will have a
negative impact on the health of Indian Bank-
ing Industry as it will put additional pressure
on their liquidity position, but the fact is, that
there are a number of checks put in place by
RBI which a bank has to pass before it
launches a scheme so that the asset-liability
mismatch and stability of a bank is never
compromised.
This idea might appear as a radical solution to
some, but the pros and cons of it need to be
discussed with utmost sincerity by all the
stakeholders as it has the potential to increase
the profitability of the banks by providing a
tangible benefit to the customers as well. It
can very well be a win-win situation for both
the bank and the customer.
A RADICAL SOLUTION TO A RATIONAL PROBLEM
Figure 4: Cost Benefit Analysis
8
© Monetrix, Finance & Economics Club of MDI, Gurgaon
The Indian corporate scene has witnessed a dra-
matic transformation in the past decade. Private
equity was a niche domain in India, a relatively
unheard term till 2004. But there has been a
complete overhaul in the story ever since 2007,
with the emergence of companies owned and
supported by Private Equity and a number of
global Private Equity firms flush with funds set
up business in India.
Lerner (1999) defined Private Equity organiza-
tions as partnerships specializing in venture capi-
tal, leveraged buyouts (LBOs), mezzanine invest-
ments, build-ups, distressed debt and other re-
lated investments. Today, the Indian industry
covers the entire spectrum of private equity
products including seed funding, expansion capi-
tal, buyout financing, financing restructuring of
companies and providing mezzanine capital
across a variety of sectors.
Cumming and Walz (2007) analysed the drivers
behind institutional investors investment in pri-
vate equity firms. They conclude that institu-
tional investors are inclined to invest in PE firms
in economies which have strong disclosure stan-
dards, congenial legal environment, stable econ-
omy and robust financial markets.
Private equity funds attract huge amounts of
capital from investors, including pension funds,
insurance funds, universities, foundations and
individuals who are looking for new investment
avenues. The allure of rapid growth has attracted
more and more foreign investors to India. This
has been strengthened by liberalisation of For-
eign Direct Investment norms. This segment has
now reached significant scale. Till date there are
2000 companies in which Private Equity firms
have invested and this amount ranges in ex-
cess of $ 65 billion over the past eight years.
Private Equity has proved to be beneficial for
small and medium enterprises (SMEs) in India
looking for alternative methods of fundraising.
They get much needed resources for opera-
tional expansion and are enabled to access
global markets. Entrepreneurs also get a boost
and private equity funding in their businesses
adds to India Inc’s growth story.
E-commerce emerged as an attractive sector
for Private Equity investment in 2012 owing
to the ever increasing internet accessibility and
percolation in Tier II and Tier III cities in In-
dia. Investment in sectors such as healthcare,
FMCG, food, agriculture, dairy products and
other consumer focused businesses are also
being viewed as attractive.
In this article we take stock of the state of pri-
vate equity in India including the prospects
and implications and what the future holds for
PE investments in India Inc.
Top Deals of 2012
While the PE boom witnessed in 2007 and
2008 is yet to be seen again, the private equity
scenario in India showed sustained momen-
tum and clocked a total of 400 deals in 2012
amounting to USD 7.35 billion. The top sec-
tors that attracted the most amount of PE
investment in 2012 were IT and ITes, Pharma,
Healthcare and Biotech, Banking and Finan-
cial Services Industries, Real Estate and Power
and Energy.
A PERSPECTIVE ON P.E. IN INDIA
A Perspective on P.E. in India
PGDM, 2013-15 XIMB
Tanvi Randhar Soveet Gupta
9
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
The top private equity investments of 2012 were
seen in the BPO sector with Bain investing in
Genpact and Morgan Stanley investing in the Sin-
gapore based Continuum which is developing
wind assets in Kutch, Gujarat. E-commerce and
healthcare industries also attracted major invest-
ments. This was seen in
the case of Accel’s $50 million investment in Flip-
kart as well as a combined total of $ 100 million
in the four deals that took place in the hospital
segment as well as a total of $1,225 million across
48 deals in the healthcare and life sciences indus-
try. Banking and Financial services industry ac-
counted for $ 890 million across 43 deals fol-
lowed by energy companies that attracted invest-
ments worth $478 million across 20 investments.
Thus it was observed that the trend that was seen
in 2011 with respect to investment in the IT sec-
tor continued in 2012 as well with the sector ac-
counting for 28% and 35% in terms of value and
volume respectively, thereby becoming the most
preferred sector for private equity investment.
Demographically speaking, companies in
South India attracted the most number of
investments by way of 162 deals amounting
to $2,460 million while companies in Western
India attracted the maximum capital amount-
ing to $3,799 million across 126 deals.
Impact of various Governmental Policies
2012 has been a volatile year for markets
worldwide. With Europe reeling under the
Eurozone crisis and the countries unable to
come up with a consensus with respect to
developing a coherent fiscal policy and the
US averting the fiscal cliff, Asia still showed a
positive growth story especially with respect
to Indian and Chinese markets vis a vis
Europe and America but this does not dis-
count the fact that China reported only a 7%
increase in GDP and India saw a drop to ap-
proximately 5% GDP growth.
It has been a tough year for the PE sector in
India. Unrest on the political and economic
fronts has contributed to the woes. Several
A PERSPECTIVE ON P.E. IN INDIA
Acquirer Target Company Sector Stake
Valuation
( US $ mn)
Bain Capital Genpact Ltd IT and ITes 30% 1000
Morgan Stanley Continuum Wind
Energy
Power and
energy 210
Blackstone Embassy Property
Developments Real estate 50% 200
Accel Partners and Global
Management LLC
Flipkart Online
Services IT and ITes 150
Macquarie SBI Infrastruc-
ture Fund, SBI Macquarie
Infrastructure Trust
Ashoka Conces-
sions Ltd.
Infrastructure
Management 150
Figure 1: Top PE Deals in 2012
10
© Monetrix, Finance & Economics Club of MDI, Gurgaon
controversies ranging from protests against cor-
ruption and the various scandals as well as the
the debate over Foreign Direct Investment (FDI)
in the retail and aviation sectors hampered the
market sentiments at the outset of the year.
Furthermore, the Vodafone controversy brought
a lot of uncertainty in the minds of the investors
and they became wary with respect to the Indian
government’s tough stance with respect to retro-
spective taxation policies. This was harmful for
the investment climate in the country.
The union budget for the year 2013-2014 was a
cause for disappointment for the PE industry
since it did not accord the pass through status to
all funds registered under the Alternative Invest-
ment Fund (AIF) regulations ignoring SME
funds, social venture funds and infrastructure
funds.
One of the major amendments in the budget was
the change of taxability in relation to buyback of
shares. The liability to pay tax at the rate of 20%
on the consideration paid for buy-back of
unlisted shares in excess of the issue price of
such shares will now be of the company. This
amendment was introduced so that unlisted
companies that had been resorting to buyback of
shares instead of payment of dividend in order to
avoid incidence of dividend distribution tax, es-
pecially wherein capital gains to shareholders on
account of such buyback were either not charge-
able to tax such as in case of investments routed
from DTAA territories such as Mauritius or
were taxable at a lower rate.
Furthermore, there was a deferment in imple-
mentation of GAAR to 2016-17, thereby giving
enough time to investors to adapt to the new
regulations. It is also hoped that by then there
will be clarity on what certain ambiguous terms
in the provisions imply.
In addition to this the government also im-
posed a higher tax surcharge of 10% on indi-
viduals whose income exceeded INR 10 million
and corporates whose taxable income exceeded
INR 100 million. Overall, there were concerns
in the minds of investors with respect to India’s
feasibility as an investment destination.
Trends
The Indian private equity sector witnessed a
downfall in investment during 2012. One of the
primary reasons for this decline was that the
LPs have been getting increasingly cautious
with fund allocation, doing their due diligence
with tremendous care before committing funds.
A total of $7.4 billion were allocated, represent-
ing a 16% decline as compared to the $8.8 bil-
lion invested in 2011.
Deal flow was restrained by high inflation that
spilled over from 2011 and continued for most
of the year, ending at an average of 7.5%.
Weakening rupee and low Index of Industrial
Production growth, which was negative in some
months (0.1% in April, -1.8% in June, -0.2% in
July), also affected investor confidence.
On the brighter side, the number of deals actu-
ally rose from 373 deals in 2011 to 400 deals in
2012. The shrinking size of the deals meant that
the value of funds put to work over the year
dropped.
Overall, 2012 could be viewed as a year of cau-
tion for the Indian PE industry. The market
seems to be moving towards maturity, with PE
A PERSPECTIVE ON P.E. IN INDIA
Figure 2: Total PE investments (value, 2005-12)
11
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
being favourably viewed as a credible source of
capital by promoters and PE firms growing in-
creasingly careful about the deals they make.
Exits
On a brighter note, 2012 turned out to be a good
year in terms of exits. Their number rose consid-
erably - 115 (valued at about $7 billion) vs. 88 in
2011 (valued at about $4.1 billion). PE firms con-
tinued to prefer public market sales, including
IPOs, as the exit route. Additionally, the financial
sector accounted for 35% of the total number of
exits, including the major ones as listed in
Figure 3.
Going Forward
The year 2012 has been one of turbulence for the
PE sector. But there is much to look forward to
in 2013. Despite a slower growth of the econ-
omy, GDP continues to rise, paving way for an
increased trade flow, industrial production and
consumer spending. And with the economy
opening up to FDI in the retail sector, invest-
ments are expected to get a boost. Sectors which
support retail back end, including logistics and
warehousing, food processing and more, will
become more attractive.
Further, Indian promoters are adopting a more
pragmatic viewpoint, which creates an oppor-
tunity for PE funds to target companies with a
healthy operating model, but have been the
victim of unrealistic expansion plans or medio-
cre capital structures. Investing aside, PE firms
will also be looking forward to raising more
funds from the global community, which will
serve as a good indicator of India Inc.’s image
as an investment ground.
However, concerns about returns, especially
the ones made during the boom years of 2004
to 2007 remain. There is a mounting pressure
on exits since a number of investments have
exceeded their 5 year holding period. PE firms
will have to devise appropriate strategies to
overcome these challenges and more in the
coming years.
But we should not forget that India today has
amplitude of entrepreneurial talent, the largest
English speaking population with a high num-
ber of university graduates and a rising middle
class that is rapidly developing an appetite for
western lifestyle. Private Equity is just the cata-
lyst that such a potentially explosive combina-
tion needs for a frantic span of economic
activity.
A PERSPECTIVE ON P.E. IN INDIA
Target Seller Exit Type of Exit Value (US $
mn)
HDFC Carlyle Asia Partners II Open Market 841
Genpact Ltd. General Atlantic, Oak Hill
Capital Partners Secondary Sale 1000
Kotak Mahindra Bank
Ltd. Warburg Pincus India Open Market 272
ICICI Bank Ltd. Temasek Holdings Advisors
India Open Market 298
HDFC Carlyle Asia Partners II Open Market 270
Figure 3: Top PE Exits in 2012
12
© Monetrix, Finance & Economics Club of MDI, Gurgaon
have historically shown low correlations with commodities, equities and other assets and hence help in diversifying a portfolio and in turn improve risk-adjusted returns.
One main disadvantage of IIBs is the liquidity concern as not all the countries have deep and liquid IIB market.
Key terms
Real yield: The real yield of an inflation-linked bond represents the annualized growth rate of purchasing power earned by holding the secu-rity to maturity.
Nominal Yield: The nominal yield realized by holding an inflation linked bond to maturity depends on the average level and trajectory of inflation over the bond’s lifetime. The realized nominal yield can be approximated, by ignoring the trajectory of the inflation rate.
Break-Even Inflation Rate: It is the rate that results in the holder of an IIB bond to break even with the holder of a nominal bond. Inves-tors would earn a higher return holding IIBs with lower inflation risk if the actual inflation rate over the term of the bond is higher than the break-even inflation rate.
Break-Even Inflation Rate tells us about the market participants’ average inflation expecta-tions over the rest of the term of the bonds used in calculating BIER. However, since infla-tion-indexed bond markets are not as liquid as nominal bond market it may lead to a higher liquidity premium in the yields of IIBs which, probably, will tend to bias the BIER downwards.
Inflation is the key driver of investment per-formance. It can erode common man’s purchas-ing power. Inflation reduces the real return gen-erated by any asset. Inflation Indexed Bonds (IIBs) are financial instrument to protect inves-tors from inflation. The principal and interest payments of IIBs rise and fall with inflation as these payments are based on Consumer Price Index (CPI), Wholesale Price Index (WPI) or any other inflation index.
IIBs popularity amongst investors has been ris-ing over the years as investments in money mar-ket, savings account or nominal bonds expose investors to inflation risk and may lead to lower or even negative real return.
IIBs can be of various types depending on the fact if only the principal or both principal and coupon payments are linked to inflation. IIBs’ prices are inversely related to real yield. There-fore, in deflationary scenario, the principal amount could decline below the par value. How-ever, many governments pay the greater of the initial par value or the inflation adjusted princi-pal. This provision provided to the investors is known as deflation floor at maturity.
Potential advantages of IIBs
IIBs are a good hedge against inflation. Apart from protecting against inflation risk, IIBs are less volatile and enhance diversification. IIBs
TUTORIAL
Inflation Indexed Bonds
Figure 1: Barclays Universal Government In-
flation-Linked All Maturities Bond Index as
of December 2011
13
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
will take some time to stabilize and monetary policy has been targeting WPI for achieving price stability.
IIBs issued by RBI will not have any special tax treatment. FIIs are allowed to invest in IIBs but subject to the overall cap for their investment in G-Secs, which is currently $25 billion. IIBs are G-Sec and therefore would be eligible for short-sale and repo transactions.
Illustration
A 10 year IIB with coupon of 2% was issued on Mar 15, 2010, with the first coupon payment due on Sep 15, 2010. The reference WPI on issue date was 125 and the reference WPI on coupon due date was 140. For a face amount of Rs 1,000 the inflation adjusted principal on Sep 15, 2010 would be:
Rs 1,000 * (140/120) = Rs 1,166.67
The coupon payment on Sep 15, 2010, would be calculated using adjusted principal amount and the applicable coupon rate as follows
Rs 1,166.67 * (0.02/2) = Rs 11.67
Moral Hazard
Some economists argue that, generally, govern-ment is both the issuer of IIBs and publisher of the inflation index. This creates a moral hazard because the government can directly influence the value of its liability. However, some econo-mists believe that such an act of distorting infla-tion index might lead to erosion of govern-ment’s credibility with long-term repercussions on future government promises. Therefore, no government would dare to do so as the long term repercussions would greatly outweigh the short term benefits.
IIBs help issuers reduce their cost of financing because investors are ready to pay a premium for protection against inflation and this pre-mium reflects in a lower yield paid by the issuer. It is also argued that issuance of IIBs have a fa-vourable impact on the issuer’s cost of financing by reducing the desired inflation risk premium from the rest of the nominal bond. However, IIBs expose issuers to the inflation risk.
IIBs in Indian context
Inflation has been consistently high in the past few years in India. Interest rate offered by banks’ products and other financial instruments were not meeting the expected return of Indians which led to a shift from financial assets to physical asset. Indians started increasing their gold holdings which to an extent deteriorated India’s CAD. The government tried various measures to curb gold import without any con-siderable success.
Ultimately in June 2013, RBI issued 10 years IIB to offer better real returns to investors. The first issuance was worth Rs 1000 crore at a real yield of 1.44% and was oversubscribed with a bid to cover ratio greater than four. The coupon rate of 1.44% will be a fixed real rate. This rate is determined through auction and remains con-stant for the bond’s tenor. The first issuance of IIB was open to institutional investors, however, exclusive series for retail investors is scheduled to launch around October 2013.
IIBs are not new to the Indian market. Capital Indexed Bonds (CIBs) were issued in 1997 but CIBs provided protection only to principal and not to the coupon payments. However, this time around RBI filled the void by providing protec-tion to both coupon payments and the principal. IIBs have a deflation floor or capital protection scheme which means that at the time of re-demption higher of the adjusted principal and face value will be paid to the investors.
RBI has linked IIBs to WPI rather than CPI which is a concern for the investors as they are primarily exposed to CPI and not WPI. As per RBI, out of WPI, CPI and GDP Deflator, WPI was most suitable for indexing. The argument given by RBI for picking WPI is that CPI, in India, is being released since January 2011 and it
TUTORIAL
RBI criteria for selecting the index to which IIBs should
be linked
The index should:
● Fulfill hedging require-
ments
● Closely track inflation
● Be a widely accepted indi-
cator of inflation
● Be available to the public
● Have a high frequency of
14
© Monetrix, Finance & Economics Club of MDI, Gurgaon
companies got merged to form LIC. It enjoyed
a monopoly for 38 long years till the former
Governor of RBI Mr R N Malhotra submitted
a Report in 1994 recommending opening of
insurance sector. Eventually, the4 Insurance
Regulatory and Development Authority was
formed in 1999 which is the main regulator for
Insurance in India. It is the main authority in
India with responsibility to protect the rights of
policyholders, make modifications, cancella-
tions renewals of all the insurance companies
registered under it. Recently, IRDA has made it
better for the companies to raise capital by al-
lowing life insurance companies which have
completed 10 years to come out with IPOs.
The empowerment and flexibility to frame
regulations will help IRD promote sustainable
growth of the insurance sector.
If we see the current situation, Insurance Pene-
tration in India is rather low. It is measured as
Ratio of Total Premium Underwritten to the
Insurance in general works on the principle that
if we collectively pool our money, we can safe-
guard ourselves in circumstances which are rare
and damaging. In simple terms, if everybody
pays a portion of the threat faced by them, the
collective pool may help them in the times of
need. For a country with a 1.2 billion population
like India, it is very critical to have such institu-
tions and markets as people face constant
threats from getting run over by a careless driver
to a fraud to natural calamities. Insurance is
mainly classified as Life Insurance and Non-Life
Insurance or General Insurance (Health, Prop-
erty & Casualty, Disability and Long-Term
Care).
Need of Insurance for an Economy
Insurance decreases the total Savings of the
Economy - It has been observed that as more
and more people get insured, they tend to save
less with themselves for precautionary measures
and hence the individual savings of the economy
reduce. This money is instead transferred to the
insurance companies which through various
channels can be utilised for investments and
other potential development projects thus in-
creasing the GDP for a country. It is worthwhile
to note that while the insurance companies have
steady, regular cash inflow in the form of pre-
mium, the cash outflow is generally deferred for
a long time. So the investment horizon is gener-
ally long term, which benefits the long term
markets and lengthy infrastructure projects.
Insurance in India
The origin of insurance in India dates as back as
1818 when Oriental Life Insurance Company
was set up in Calcutta. Over the years many
laws, policies and acts got passed and after inde-
pendence, in 1956, a total of 245 insurance
COVER ARTICLE
Insuring India - The Way Forward
In May 2013, Raghuram Rajan, the soon
to be RBI governor, pitched for the ap-
proval of increasing the FDI in insurance
limit to 49%. With this tenure set to be-
gin next month, this brings insurance
sector, the under-nourished child of the
financial services industry, in the fore-
front. This article looks at status quo of
insurance in India and ways to make this
under-nourished child a healthy one with
a prescription of bancassurance, in-
creased FDI and micro-insurance.
15
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
15
necessary product in majority of the segments.
Hence spending on insurance tend to be dis-
cretionary.
4. Complexity involved in Settlement - Al-
though increased
competition has
forced the companies
to be quick and sim-
ple in modes of set-
tlement, it is still per-
ceived by the masses
that insurance, spe-
cially general insur-
ance has complex
terms of contract and
settlement involves
lot of hassles.
5. Macroscopically, If
we see the age of India, it is reaping its demo-
graphic dividend. It is young and comparing
GDP of a country. India stands at a meagre
3.4% compared to other Asian Countries like
Taiwan, Hong Kong which have Insurance
Penetration of more than 10%. However during
the last decade the insurance Market has grown
at a staggering 25% year on year.
Challenges in Insurance Penetra-
tion
in India
1. Lack of Transparency in Insur-
ance Policies - Indian mindset is
fearful. There is a constant fear of
being cheated by Insurance Compa-
nies. Insurance is a push product
rather than a pull product. Compa-
nies have to call people, regularly
advertise, spend a lot of money to
make people aware of the risks they
face in order to get customers.
2. Perceived Lack of Short Term
benefits - The benefits of insurance
will always be felt at times of a ca-
lamity. Paying regular premium is
always seen as a burden in the eyes
of an Indian earning a meager sum.
3. Insurance is not yet deemed as
COVER ARTICLE
Figure 1: Indian Insurance Market, 2004-2015
Figure 2: Percentage of Population above 60 years for a few
countries
16
© Monetrix, Finance & Economics Club of MDI, Gurgaon
● To improve the current level of services of-
fered in the insurance sector through in-
creased competition among the existing
companies ensuring better standards
Bancassurance in the World
Banks have been in existence since as early as
1472 (Monte dei Paschi di Siena of Italy) and
the first life insurance company was Amicable
Society for a Perpetual Assurance Office which
started in 1706. In those terms, even for the
world, Bancassurance is relatively new. France
has had Bancassurance only since past 30 years.
Benefits of Bancassurance
For the Banks
Because of increasing competition, banks have
found their Net Interest Margins reducing
which is an indicator of their margins thinning
out. Not only that, but bancassurance can also
What is Bancassurance?
Bancassurance is a Portmanteau of Bank and
Insurance. In simple words, Bancassurance
means selling insurance products through banks
existing distribution channels. However it does-
n't only mean distribution through agents, but an
overall integral approach towards legal, cultural,
behavioural, fiscal aspects of Banking and
Insurance.
Referral Model
In this model the bank parts only the client data-
base to the insurance company and the insurance
company sells the insurance to the prospective
customer by itself. The bank in return gets a re-
ferral fee
Corporate Agency
In the corporate agency model, the bank staff is
trained to sell the insurance products and
charges an appropriate fee from the insurance
company
Insurance as Fully Integrated Financial
Services/Joint Ventures
Apart from the above two, a fully integrated
model is when the two entities behave as if it is
just a function of the bank, which fully under-
stands the insurance products, and customises
the products to its customers just as it would do
to its own banking products.
The development of Bancassurance in India be-
gan for the following reasons:
● To improve the channels through which insur-
ance can reach the common man in a widen-
ing Middle Class of India
● To create a wider base for the marginally
penetrated banking sector, utilizing the base of
insurance companies
COVER ARTICLE
Figure 3: Country-wise market share of
Bancassurers in Life and Non-life segment
Country Bancassurers’
Life Share
Bancassurers’
Nonlife Share
Australia 43 Very small
Belgium 48 6
Brazil 55 13
Chile 13 19
France 64 9
Italy 59 2
Malaysia 45 10
Portugal 88 10
Spain 72 7
Source: World Bank
17
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
panies. Banks are made for daily transactions
where as insurance are made for long term in-
cidents. Also, as banks do take term deposits
which are similar products as insurance pre-
mium, banks sometimes feel integrating the
two would cause a substitution effect, i.e. cus-
tomers would reduce consuming one product
for the sake of other. Another issue is that the
insurance products themselves have become
complicated over the years. Banks would have
to thoroughly understand implications and
risks involved before selling them. A possible
“Conflict of Interest” is also a threat to bancas-
surance penetration in India as Banks have a
lot of detailed information about its customers
through “KYC” norms set in place, which the
insurance company might take advantage of.
Hence regulatory policies need to be set just
right.
FDI in Insurance
India opened the insurance sector to foreign
players in 2000 with FDI limit of 26% through
automatic route. The couple of years that fol-
lowed saw an influx of many foreign players
partnering with domestic players.
13 years on, although insurance has
seen good growth, a lot of it is largely
because of domestic players. However,
the potential for growth is still tremen-
dous. However, after the initial excite-
ment, foreign players have not really
been attracted to Indian Insurance sec-
tor. On the contrary, some of them
have started pulling out of India.
The Insurance Laws Amendment Bill
seeks to raise FDI cap in the insurance
sector from 26 percent to 49 percent,
but has been pending in the Rajya Sabha since
2008. There have been recent calls from
P.Chidambaram and Raghuman Rajan for clear
the pending Parliament approval of this bill. It
has been a long wait for the Bill to get passed
help them reduce the NPA ratio of banks
through diversifying channels like insurance.
For the Insurance Companies
For the insurer, the banks customer base is a
gold mine of sorts. It not only gives them the
large pool of customers to target but also gives
them their financial profiles, their buying be-
haviour, purchasing habits an insight into their
personality. They can then target which product
to sell to which customer, customise and tailor
make their insurance according to their needs
For the Customers
For a customer to the insurance industry, trust
plays a major role in making decisions. Custom-
ers for long have had to keep trusting the gov-
ernment controlled monopolised insurance
companies for long term commitment towards
their insurance needs. The incoming plethora of
private players both in insurance and banking
sector, which a common man doesn't know
much about, from this consolidation in the
form of bancassurance he can keep the faith he
has had for a long time and avail the other ser-
vice without a heavy heart.
Challenges for Bancassurance
One of the big challenges for Bancassurance is
merging of two seemingly different working
styles and cultures of banks and insurance com-
COVER ARTICLE
Figure 4: Bancassurance Model
18
© Monetrix, Finance & Economics Club of MDI, Gurgaon
ers contributed around Rs. 21000 crore. IRDA
estimates the sector will need further invest-
ment of around Rs. 50,000 crore over the next
5 years. Considering the capital crunch faced
by domestic companies, increased FDI will go
a long way in addressing this need. The new
funds will help increase the penetration. In-
creased FDI in the sector would help more
foreign players enter the market, making the
market more competitive. It will help challenge
the monopoly of the government owned Life
Insurance Corporation. It will make insurance
and the sooner it gets passed, the better it will
be everyone involved. FDI hike in the sector
will prove beneficial for all stakeholders: do-
mestic players, foreign players, government and
customers, and boost the overall sentiment
about Indian economy.
The most obvious benefit of FDI will be the
increased investment in insurance, which is
capital intensive. Over the last decade, insur-
ance sector has seen a capital investment of
over Rs. 32,000 crores, of which domestic play-
COVER ARTICLE
Top Insurance Cos. Foreign Partner Domestic Partner Year
Bajaj Allianz Life In-
surance
Allianz AG
(26%)
Bajaj Finserv Ltd
(74%) 2001
SBI Life BNP Paribas Assurance (26%) SBI
(74%) 2001
HDFC Standard Life Standard Life
(26%)
HDFC Bank
(72.4%) 2000
Birla Sun Life Sun Life Financial Inc (26%) Aditya Birla Group
(74%) 2000
Max New York Life New York Life International
(26%)
Max India
(74%) 2000
ICICI Lombard Fairfax Financial Holdings Ltd
(26%)
ICICI Bank Ltd
(74%)
2001
Bajaj Allianz General
Insurance
Allianz AG
(26%)
Bajaj Finserv Ltd
(74%)
2001
IFFCO-Tokio General
Insurance
Tokio Marine & Nichido Fire
Iznsurance Group
(26%)
IFFCO
(74%)
2000
Reliance Life Insur-
ance
Nippon Life Insurance
(26%)
Reliance Capital
(74%)
2011
Source: Insurance Sector Report, March 2013, IBEF
Figure 5: Major Private Insurance Players in India and their Foreign Partners
19
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
But, micro-insurance is not simply offering low
premium insurance products.
It involves different distribution channels than
urban insurance to reach out to rural areas
where the people generally are illiterate, un-
known to the concept and need of insurance.
These people are more prone to risks, say ill-
ness, calamities, etc. and hence offering insur-
ance at low premiums is a challenge. And
hence, micro-insurance market is governed by
supply, not demand. Keeping distribution and
customer acquisitions costs low is key.
IRDA specifies the rural obligations to be met
by each insurance provider. However, it needs
to develop more supportive regulations to in-
crease the micro-insurance market in India.
Tata-AIG is a prime example of successful im-
plementation of micro-insurance. In the Tata-
AIG model, 4 or 5 women belonging to self-
help groups become informal brokers for mi-
cro-insurance and earn some income by selling
insurance.
Looking Ahead
Undoubtedly, the potential as well as the need
for growth of insurance in India is tremendous.
But, to fulfill this promise, all the stakeholders
- the Government, the insurance companies,
both domestic and foreign, the regulators, and
the non-insurance providing partners - all of
them need to go ahead hand in hand. Increased
FDI limit, regulations to attract the foreign
players, successful implementation of various
bancassurance models, and increased penetra-
tion of micro-insurance by more companies
will go a long way in achieving the desired in-
surance penetration in India and pave the way
for further economic growth.
policies available at lower premiums leading to
more number of people opting for insurance.
The foreign players will bring in more innova-
tive insurance products available in the devel-
oped countries. Even if these products may or
may not be foremost requirement of the Indian
insurance sector, these will be lucrative in the
urban areas. New technological capabilities
brought by the foreign players will add im-
proved efficiency throughout the value chain.
Also, with the proposed increased limit, risk-
sharing business models can be developed with
foreign and domestic players.
Thus because of all these advantages, it is im-
perative that the proposal for hiking FDI in
insurance to 49% is approved and implemented
as soon as possible.
Micro-insurance
Another key way of achieving better insurance
penetration is micro-insurance, which is spe-
cially designed for insuring low-income people
by offering them affordable insurance products.
The premium is low but regular and propor-
tionate to the risks involved.
COVER ARTICLE
Micro-insurance operates through
three regulated distribution mecha-
nisms:
1) Partnership model
2) Agency model, and
3) Micro-agent model.
Partnership model is more found and
mostly the partners are NGOs, Micro-
finance institutes and banks.
20
© Monetrix, Finance & Economics Club of MDI, Gurgaon
scope for investment and relatively lesser do-
mestic savings. In such a case, a deficit in the
current account is, to some extent, preferable
to foster swifter economic growth in a less de-
veloped economy.
Causes of a Current Account Deficit
A desire to purchase imported goods espe-
cially in times of high economic growth will
lead to depletion in the current account bal-
ance. Higher consumer spending will result in a
higher spending on imports. For instance, dur-
ing the late 1980s, the UK economy was ex-
periencing a high growth phase and a simulta-
neously widening current account deficit. On
the other hand, a recession led to an improve-
ment in the current account.
An appreciation in the exchange rate would
make the domestic currency more expensive in
terms of the foreign currency. The impact of
this would be seen in a fall in demand for ex-
ports and a rise in demand for imports given
that imports and exports are price sensitive.
This situation would deteriorate the current
The Balance of Payments of an economy is an
accounting record of all transactions of a coun-
try with the rest of the world. It has two com-
ponents: current account and capital account.
The current account is further subdivided into
three components:
1. Balance of trade which is the difference
between the value of goods and services
exported from the country and the value
of goods and services imported into the
country.
2. Transfer payments
3. Net income such as interests and divi-
dends
Of these three parts, the second and third are a
small fraction of the total.
The current account balance is one of the two
indicators of a country’s foreign trade balance.
The largest component of current account be-
ing the trade balance, a surplus in the current
account implies that the country is earning
more foreign exchange from exporting goods
and services than it is spending on importing
goods and services. Therefore, this positive net
sales abroad leads to creation of foreign assets
in the domestic economy. A current account
deficit, on the other hand, depletes the coun-
try’s foreign resource base by extracting more
foreign exchange than it injects.
The current account deficit can also be meas-
ured in terms of the difference between invest-
ments in an economy and its national savings
(both public and private). This implies that the
savings are insufficient to finance all investment
opportunities which is generally true in case of
developing countries on account of their huge
BEGINNERS’ CORNER
Current Account Deficit
Figure 1: INR vs USD
21
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
is a positive sign indicating a growing econ-
omy. If savings are lower it could be pointing
towards conspicuous consumerism or impact
of fiscal policy or a temporary shock in the
economy. However, if investments are higher it
shows that the domestic markets are prosper-
ing and hence, are attractive to foreign inves-
tors.
India: A case study
India’s current account deficit or CAD is a hot
topic of discussion in any economic or finance
related circles and rightly so since it impacts
the economy by posing risks to macroeco-
nomic stability. India has been experiencing a
consistently high CAD which is unsustainable
and unhealthy for the progress of the econ-
omy. The Finance ministry along with the apex
bank, Reserve bank of India has taken several
measures to bring down the CAD.
India’s CAD which was around 1% of the
GDP in the early 2000s, grew sharply to nearly
5% of GDP in September 2012. This was
mainly seen as a consequence of imports of
gold and crude oil in large quantities on the
one hand, and moderating exports on the
other.
India’s growth story has been majorly driven
by oil of which over two thirds are imported. It
is also the largest component of India’s import
bill followed by gold. Since oil has a variety of
uses both as an industrial input as well as a do-
mestic commodity, the only way to reduce oil
imports is to discover indigenous methods of
oil exploration and extraction to fulfil the
needs of the country. This would also protect
India from the external oil supply shocks that
can have a huge impact on foreign exchange
reserves. The government is considering op-
tions for shale gas exploration but this will take
time and till then the oil import bill will con-
tinue to be a major contributor to the deficit in
the current account.
account whereas depreciation in the exchange
rate would improve the current account bal-
ance.
Relative competitiveness of industrial pro-
duction is an important determinant of the
demand for exports of the domestic country. If
a country lags behind in terms of technological
or other efficiencies, its products become less
attractive in the international market thereby
reducing the current account balance.
A current account deficit sometimes balances
itself out. A deficit implies greater demand for
foreign currency to purchase imports and lesser
supply due to relatively lesser exports. This
makes the foreign currency more expensive in
terms of the domestic currency, in other words,
the exchange rate falls. Thus, domestic consum-
ers will start purchasing less of imported goods
and more of domestically produced goods be-
cause of the presence of a cheaper currency, as
a consequence of which the current account
deficit will reduce.
Consequences of a Current Account Deficit
A deficit in the current account is not always
bad unless it constitutes a high percentage of
GDP. In that case also it becomes imperative to
analyse the factors responsible for the deficit to
judge whether it is good or bad.
If the deficit is a result of excess of imports
over exports, it may be an indicator of the do-
mestic economy being less competitive in the
international market or a case of high economic
growth leading to consumer spending being
biased towards imports. In such a scenario, the
economy must focus on improving demand for
domestic products both internally and exter-
nally by ensuring that production technology is
more efficient and comparable to international
standards.
If, on the other hand, the deficit is a conse-
quence of excess of investment over savings, it
BEGINNERS’ CORNER
22
© Monetrix, Finance & Economics Club of MDI, Gurgaon
fibres and simultaneously improve its competi-
tiveness in manufacturing goods. This should
be backed by the government policy of
strengthening ties with global partners and im-
proving infrastructure of existing Export Proc-
essing Zones.
Implications of a large deficit
The deficit implies an excess demand for for-
eign exchange which is financed by attracting
capital inflows in terms of foreign direct invest-
ments (FDI) or foreign institutional invest-
ments (FII). If capital inflows are insufficient,
limited foreign exchange reserves of the coun-
try are used which causes a depreciation in the
exchange rate of currency. In case of India, a
large part of the current account deficit has
been financed by external debt. Coupled with a
weak currency, it can pose a huge threat to
India’s external liquidity position and credit
rating. As no major change is expected in the
current global growth or commodity price
trends in the near term, India must introduce
policy changes like further liberalization of the
economy towards foreign investments, curbing
import demand and increasing export competi-
tiveness to rein in its burgeoning current ac-
count deficit.
High demand for gold comes as a result of In-
dians’ strong affinity for the “yellow metal” as a
safe investment in a volatile market. After the
recession in the U.S. in 2008 and the EU in
2009-10, the world markets have lost investor
confidence and the only asset providing large
returns is gold. Hence, it becomes difficult to
curb gold imports. In March 2013, the Finance
Minister made an appeal to people to reduce
gold imports. The government has been taking
measures to reduce imports by increasing gold
import duty by 2% to 6% in January 2013 and
by another 2% to 8% in June 2013. In May
2013, RBI restricted the import of gold on a
consignment basis by banks.
Other imports include capital goods, transport
equipment, machinery etc which are significant
investments for building the infrastructure in
India. Domestic production to a certain extent
has reduced dependence on imports, but in ar-
eas like telecom and mining, imports still play a
crucial role. Thus it is evident that an effort to
reduce imports alone is not a sustainable solu-
tion to correct the deficit situation. Instead
there should be more focus towards increasing
demand for exports in the world markets. India
must leverage areas where it has a stronghold
like IT, pharmaceuticals, garments and natural
BEGINNERS’ CORNER
Figure 1: India’s Current Account Deficit as percentage of GDP
23
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
numerous meetings and interviews with Busi-
ness Unit heads, project owners and other
team-members associated with these projects
in order to gather first-hand information. I also
had meetings with Business Finance Mangers
(BFMs) of various BUs to gather financial data
of these projects. I was in regular contact with
Mr. Rishad Premji, Chief Strategy Officer at
Wipro, who took a key interest in my project
and its analysis.
Were there any events organized just for
interns? Were there any ice-breaking or
networking activities?
We had an exhaustive induction program, in
which many business leaders addressed us and
introduced us to the culture at Wipro. There
was a one-day training program on data analy-
sis and effective presentation techniques. There
were also two fun-filled experiential learning
sessions, in which we got to know and interact
with many fellow interns from different B-
schools. The last day witnessed a grand closing
ceremony and felicitation for the best interns.
How was the overall experience? Would
you like to work in the organization (same
profile) as a full-time employee?
I had a good two-month stint at Wipro and
had a great learning experience. I got to meet,
interview and work with many top leaders in
the industry. My work was also well appreci-
ated by my team members and the HR person-
nel. Hence, if given an opportunity, I would
gladly work with the same team in Wipro.
Title of Project:
Strategic Investment Effectiveness and Road-
map for the Future
Brief Description about the Project:
The Central Strategy Office (CSO) at Wipro
critically analyzes and subsequently funds (if
found suitable) for a period of two years, vari-
ous new initiatives and seed projects which dif-
ferent BUs across Wipro have identified as po-
tential new projects and offerings. Once the
funding ceases after two years, the initiative is
‘rolled-back’ to the respective Business Unit
(BU) and the BU takes the project forward. I
had to analyze (strategically and financially) 51
past ‘rolled-back’ projects, identify the current
state of these projects, have they grown or have
they ceased to exist, and finally provide recom-
mendations for improving the success ratio of
these CSO approved-and-funded projects and
the investment program as a whole.
How was the Internship structured?
It was a 9-week internship. The first few days
were sent in Induction activities. This was fol-
lowed by a detailed project scoping, commence-
ment of the project, a mid-term progress review
after Week 5, the final presentation during
Week 9 and a closing and felicitation ceremony
on the last day. There were regular weekly re-
views with my mentor during the entire course.
What were the roles and responsibilities you
had to take up as part of your project?
As I had to study 51 projects, I had to conduct
ISSUE SPECIAL
Summer Internship Experiences
Company: Wipro Limited
Team: Strategy and M&A
Location: Bangalore India Karan Jaidka
24
© Monetrix, Finance & Economics Club of MDI, Gurgaon
standing of the various facets of credit risk. Do
the literature survey of the existing models
which have been developed for credit risk
measurement. The based on the secondary re-
search and the best practices followed in indus-
try, develop a model for credit risk measure-
ment of different types of counterparty banks.
Were there any events organized just for
interns? Were there any ice-breaking or
networking activities?
The culture in Axis Bank is really one in which
amicable and everyone is very approachable.
So there was really no need for any such activ-
ity.
How was the overall experience? Would
you like to work in the organization (same
profile) as a full-time employee?
The overall experience was very enriching and
eye – opening. The organization helps you in
building up a holistic understanding of the
banking and is very friendly and amicable at
the same time.
I would love to go back and work in the same
profile which was offered to me as a full time
employee.
Title of Project:
Developing a Credit Risk Model for counter-
party banks
Brief Description about the Project:
Measuring the credit risk a counterpart plays an
important ole in a bank. For a counterparty
bank with a lower risk, the interest rates
charged would be low and a higher credit expo-
sure can be undertaken as a percentage of
bank’s capital and vice versa is true for a bank
with a higher counterparty risk. Here at Axis,
my internship project was to develop the credit
risk rating model for different types of banks.
How was the Internship structured?
We had induction on the first day which was
followed with our meeting with our project
guides and buddies. We had leadership talks
within the entire span of our internship in
which leaders from the different verticals of the
bank would share their rich experiences and
learning’s with us.
We also had branch visit to give us exposure to
the daily work life in a branch and understand
the various facets of it.
What were the roles and responsibilities you
had to take up as part of your project?
My job was to understand the banking industry
as a whole and alongside develop a deep under-
ISSUE SPECIAL
Summer Internship Experiences
Company: Axis Bank Ltd.
Team: GFID, Treasury
Location: Mumbai, India
Saurabh Saxena
25
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
During the internship, I had the chance to
work on the sector report which was later
released by Goldman Sachs.
Apart from this, I worked on the financial
models of the companies in the sector, up-
dating and modifying them according to re-
quirement.
Were there any events organized just for
interns? Were there any ice-breaking or
networking activities?
The guest lecture series in which several emi-
nent personalities from Goldman Sachs of-
fices worldwide came to deliver lecture and
share their experiences and career growth
opportunities was designed specifically for
intern class.
How was the overall experience? Would
you like to work in the organization
(same profile) as a full-time employee?
Overall, it was a great learning experience
which helped me to develop both financial
expertise and soft-skills.
I look forward to returning to the company
as a full-time employee.
Title of Project:
Stock Pitch and Coverage of Earnings Season
Brief Description about the Project:
It involved studying and analyzing the sector
allocated during the internship period. Based
on that, a stock was selected to ascertain pos-
sibility of investment and accordingly BUY/
SELL recommendation was given for the
stock.
Apart from this, I followed the release of
quarterly results by companies in the sector
and accordingly updated the earnings esti-
mates in the Goldman Sachs model for the
company.
How was the Internship structured?
It was an eight-week internship where the
first week involved induction into the GS
culture and imparting financial and excel
skills to be needed during the internship pe-
riod.
After this, interns were allotted different
teams spread over several geographies and
sectors for rest of the internship.
What were the roles and responsibilities
you had to take up as part of your pro-
ject?
ISSUE SPECIAL
Summer Internship Experiences
Company: Goldman Sachs
Team: Global Investment Research
Location: Bangalore, India Rishabh Gupta
26
© Monetrix, Finance & Economics Club of MDI, Gurgaon
fronts and seeks opportunities for their reduc-
tion or elimination wherever feasible.
Were there any events organized just for
interns? Were there any ice-breaking or
networking activities?
Yes, the internship started with a 3 day orienta-
tion program wherein I got to meet various
business leaders and understand the values and
processes being followed at HSBC.
It also included many ice breaking activities
and team games which gave all the interns
from schools across the country an opportu-
nity to know each other. Also, at the end of the
internship, we had a closing ceremony and a
big party.
How was the overall experience? Would
you like to work in the organization (same
profile) as a full-time employee?
Working with HSBC was a very enriching ex-
perience. I understood the corporate culture
and how a multinational bank operates. I got to
learn a lot from the experiences of senior peo-
ple in the company. Also, I got an opportunity
to meet and network with fellow interns.
Yes, I would love to join HSBC as a full time
employee in the same profile I interned for.
Title of Project:
Identification of potential initiatives for Strate-
gic Cost Management
Brief Description about the Project:
The objective of the project was to understand
various costs and expenses incurred by the
company, specifically in managing the Informa-
tion Technology (IT) infrastructure, forecast
the cost for the next three business quarters and
identify the potential initiatives that can be
taken to manage and reduce cost incurred on
the same.
How was the Internship structured?
The internship was for a period of 9 months,
which began with various orientation activities
followed by team introduction, detailing of the
project, midterm review after 4 weeks and a
final presentation in the last week.
There was a regular interaction with the project
mentor who helped a lot in understanding and
completing the project.
What were the roles and responsibilities you
had to take up as part of your project?
The most important part for me was that I was
independently working on this project, under
the aegis of my mentor. This gave me a better
sense of responsibility and accountability to-
wards the deliverables. I was responsible for
understanding and analyzing various opera-
tional costs incurred by the company on various
ISSUE SPECIAL
Summer Internship Experiences
Company: HSBC Bank
Team: Retail Banking and Wealth Management
Location: Mumbai, India Ashish Gupta
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
phenomenon called as ‘Capital Flight’ caused
major Asian crisis in 1990s following which
many countries imposed capital controls.
Why China is aiming towards CAC?
The recent global slowdown has led to de-
cline in China’s GDP growth rate to 7 % in
year 2013 from 9.2 % recorded in FY
2011.This is due to significant fall in exports by
3 % as compared to previous year. This has
made clear that China’s economy can no longer
sustain on export oriented growth model.
China’s economists had known this for long
and therefore came up with 12th Five Year Plan
which talked about new development models.
The 12th Five Year Plan which, came into ef-
fect in 2011, strengthens the commitment to
promote the “going global” policy. For a dec-
ade China has advanced mainly because of ex-
ports and high investment in production ca-
pacities. This has led to imbalance in demand
and supply. Now, resort to outward foreign
direct investment is needed to absorb excessive
production capacities. According to official
figures, China’s outward direct investment
(ODI) exceeded $77 billion in 2012, an in-
crease of 12.6% on the previous year, even as
inflows of FDI fell for the first time since the
height of the global financial crisis. This indi-
cates that many Chinese investors are looking
for opportunities outside their home country .
A recent report from the think tank Global
Financial Integrity (GFI) identifies China as the
largest source of illicit financial flows in the
developing world. $ 3.1 trillion of reserves
were illegally moved out of China into real es-
What is Full Capital Account Convertibility?
CAC was first coined as a theory by the Reserve
Bank of India in 1997 by the Tarapore Com-
mittee, in an effort to find fiscal and economic
policies that would enable Third World coun-
tries transition to globalized market econo-
mies However, it had been practiced, although
without formal thought or organization of pol-
icy or restriction, since the very early 90's..
Capital Account Convertibility means freedom
of currency conversion in relation to capital
transactions in terms of inflows and outflows.
In layman’s term CAC would mean easing of
norms in transactions which leads to creation of
an asset or liability in any foreign country or
freedom in converting local financial asset into
foreign financial asset and vice versa.
Till 20th century there were no restrictions on
movement of capital across transnational
boundaries. But later on many countries started
imposing capital controls to retain their domes-
tic reserves. Following the end of Second
World War; US, Switzerland and Canada were
the only countries to have open regimes. In
1980s and early 1990s when these economies
started booming, this trend of open regime was
adopted by several developed economies. Free
capital flows enabled financiers to invest in
other nations as well. It helped them diversify
their portfolio and share risk.
Many Asian economies imitated the trend and
opened their borders to free capital flows .But
absence of adequate safeguards and proper
structure led to diminished local reserves. This
CAPITAL ACCOUNT CONVERTIBILITY OF CHINA BY 2015
Capital Account Convertibility of
China by 2015 PGDM 2012-14
Fore School of Management Prachi Aggarwal
28
© Monetrix, Finance & Economics Club of MDI, Gurgaon
ily tradable across different nations and will
reduce dollar hegemony that China has been
aiming for years. At a time when factory costs
are rising and manufacturing growth has
slowed China believes that more capital inflows
will help in domestic financing and spur the
growth. It will help China to come out of
shackles of economic downturn
that all emerging nations are facing
in current fiscal.
Also, it will enable financiers to
invest in different nations and di-
versify their portfolio. This will
lead to risk sharing and will expand
capital markets of China.
Risks that China may face due
to Full CAC
Dutch Disease
Dutch Disease is a term that was
coined after Netherland crisis
erupted in year 1959.The discovery
of large reserves of natural gas field
shifted the focus from manufactur-
ing sector to mining sector. This
caused downfall of Netherland’s
manufacturing sector and led to
economic crisis. China is seen as
the most favorable destination of trade by
WTO. Several top notch companies have es-
tablished their manufacturing units in China.
Trade policy of free movement of capital will
encourage many foreign investors to invest in
China considering the country’s large reserves
of unexploited resources. This may lead to ap-
preciation in currency and make manufacturing
sector less competitive. This can cause abrupt
downfall in exports and the affect may be huge
enough to shake the foundations of a strong
economy.
Rise in inflation
Huge inflow of capital may cause trigger in
spending power of consumers. Central bank
tate in the US, Australia etc, Swiss and Singa-
pore bank accounts, often ill-gotten gains laun-
dered through Macau gambling tables. By
adopting a fair policy of capital flows in and out
of country, China would not only be able to
spread its global presence but also be able to
keep track of illicit outward flows.
China is one country that holds largest amount
of US bonds. It has foreign exchange reserves
of USD 3.4 trillion. This means that large part
of China’s economy is relying on US currency.
The volatility and unpredictability of US mar-
kets has made China rethink about its trade pol-
icy. By adopting full capital account convertibil-
ity, it aims to reduce its reliance on US dollar.
Also, Full CAC is a step towards making Ren-
minbi a global currency. It is well known that in
year 2011 China surpassed US to become the
top manufacturing country by output. This suc-
cess had already marked the beginning of domi-
nance of China in global markets. Full capital
account convertibility will make Renminbi eas-
CAPITAL ACCOUNT CONVERTIBILITY OF CHINA BY 2015
Figure 1: Top Destinations for China’s Outward Investment
29
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
29
research units close to production units. This
highlights the fact that China continues to re-
tain market confidence in spite of downward
trend in world economy.
Also, China has large amount of foreign re-
serves. So, even if free capital flows result in
large amount of outbound capital, China will
be able to face its repercussions due to pres-
ence of excessive trade surplus.
All the above facts lead to the conclusion that
China should go ahead with its policy of Full
capital account convertibility. More impor-
tantly, China should ensure the presence of
adequate safeguards, rules and regulations in
place before looking forward to this step. It
should implement this policy in a phased man-
ner .
Conclusion
Implementation of policy of full capital ac-
count convertibility is no doubt a major step in
China’s long history of restricted trade prac-
tices and fixed exchange rate. It will bring
China closer to world market and help in inte-
gration of world’s resources. At a time when
major economies are facing crisis , the need of
the hour is inclusive growth. Open trade prac-
tices will enable China to build its competitive
strengths and compete with other economies
in a fair and transparent manner.
may intervene and may raise the interest rates to
sterilize the economy. Rise in interest rates will
attract more foreign capital and hence may give
rise to vicious cycle.
Currency depreciation
Domestic investors may start pulling out the
assets or money to foreign nations in lookout
for more attractive investment opportunities.
This may cause rapid drain of domestic cur-
rency and may lead to its depreciation. This
leads to dramatic decrease in purchasing power
and increases the prices of imports significantly.
Financial Disintermediation
Huge inflow of capital may cause rise in avail-
ability of assets with banks. They may start in-
vesting in capital markets which is highly vola-
tile. This may undermine the faith of people in
nation’s banking system.
Implications on Global Markets
Currency Appreciation- For years there has
been a conflict between the US and China over
actual value of Yuan.US has always argued that
Yuan’s real value is much higher than quoted
one. China maintained a fixed exchange rate to
ensure its competitiveness in foreign trade.
Once full capital account convertibility is mid-
dle class is the main reason, why China is still a
favorite investment hub among foreign players.
More number of companies is moving their
CAPITAL ACCOUNT CONVERTIBILITY OF CHINA BY 2015
Figure 2: USD - Chinese RMB Exchange Rate
30
© Monetrix, Finance & Economics Club of MDI, Gurgaon
investments in India started increasing. As per
the Reserve Bank of India , the total net for-
eign investment inflows to India ballooned up
to 50 billion dollars in 2009-10 after dipping
sharply in 2008-09 & kept its pace in 2010-
11.This in turn helped the rupee appreciate.
However, lack of financial reforms started hav-
ing its affect on the state of Indian economy.
The net foreign inflows, still being high, started
decreasing. A slew of high profile corruption
allegations did put a dent on the India Story.
Investor confidence was hit hard because of
the perceived policy paralysis. FII outflows
increased and the rupee depreciated from
45Rs/$ to 55Rs/$ in the month July 2012. The
QE3 although did give a temporary reprieve,
the net inflow of dollar in the Indian Economy
had was not growing.
Panic on the Streets
On June 19, 2013, Ben S. Bernanke, the chair-
man of the Federal Reserve announced a policy
shift to "taper" some of its QE policies contin-
gent upon continued positive economic data.
He said, the Fed might decide to scale back its
bond purchases from $85 billion a month to
If we consider a 100$ bill, it’s nothing on its
own. It’s a legal tender issued by the US Federal
Reserve. The only thing that determines the
value of a dollar is – How much is in circula-
tion? The more dollars in circulation, the less
will be its value. The Bretton Woods systems
established the dollar as the currency to which
all other currencies are pegged against. Any
change in the dollar supply to the market has a
cascading impact on every other currency in the
world, with the rupee being no exception.
The dollar bazaar
In November 2008, in order to shore up the
badly hit credit market, the US Federal Reserve
started buying billions of dollars worth of the
dreaded Mortgage Backed Securities and Treas-
ury Bonds or Securities. This process is called
Quantitative Easing (QE1). Where did Federal
Reserve get the money for this buying spree?
Every central bank can print its currency notes
depending on the requirements of the econ-
omy. So essentially, the Federal Reserve printed
dollars “out of thin air” and pumped it into the
market. The QE1 was followed by a QE2 in
November 2010 and QE3 in September 2012.
So now, people had more dollars in their hands.
The expectation was, extra dollars will increase
investments in US economy and helped it to get
back on its feet.
The Federal Reserve had given an indication
that the stimulus policy will continue, till the
employment figures improved. Zero interest
rate policies gave an impetus to market forces
to look elsewhere for further investments. In-
vestors started looking towards emerging
economies like China, India, Brazil, etc. Foreign
RUPEE ON A WHEEL CHAIR
Rupee on a Wheel Chair
MBA (2013-15)
NMIMS, Mumbai Ravi Singh
Figure 1: INR - USD Exchange Rate
31
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
31
RBI Foreign Exchange Reserves –
April End - 296 billion $
June End - 284 billion $
RBI has interfered in the market in a limited
way to keep the rupee below the psychological
mark of 60Rs/$.
The Federal Re-
serve currently
has about 3.41
trillion $ of debt
on its balance
sheet, which is
unprecedented
in its history.
The tapering of
the QE is just a
start. The Na-
tional Debt of
America has
already crossed 100% of GDP mark. Inspite of
Ben S. Bernake being no longer favourable
entity in the White House, the Federal Reserve
policy is going to get stringent. The central
bank would like to “taper” the credit on its
books fast. This means that QE’s will be faced
out sooner than later, inspite of political pres-
sure or any temporary respite that the Feds
might give. With no support of the easy dollar,
emerging economies will be more so on their
own. Wooing foreign investors would require
major changes in the economic policies.
Where to now
The Current Account Deficit (CAD) of the
Indian economy was around 4.8% of GDP for
the year 2012-13. To fund this big deficit, India
is heavily dependent on inflows. A week rupee
has exposed the country to external shocks.
Trade deficit will widen as major imports like
gold & oil will become costlier, further worsen-
ing the CAD. In case of petroleum & fertiliser
industry, the subsidy bill is expected to bloat
$65 billion a month during the upcoming Sep-
tember 2013 policy meeting. The announce-
ment was enough to spook the market. The
prospect of losing the easy dollar supply hit the
market hard, the Dow Jones dropping 659
points between Wednesday, June 19 and Mon-
day, June 24, closing at 14,660.
Foreign Investors in India started pulling out
money from emerging markets by selling off
equities & debt instruments. The rupee logged
its all-time low of 59.93 against a dollar. On the
same day – June 20th , Sensex shredded 526
points, nose-diving by the highest single-day
loss in last 2 years. It was almost 2-year single-
day loss. Since then, the rupee has crossed the
60 Rs/dollar many a times and the 61 Rs/dollar
on July 8th. Although no QE easing has actu-
ally happened and that Ben Bernake has stated
that, the curbs to bond buying hinge on gains in
the labour market and a pickup in growth, the
expected increase in currency value was big
enough to catch everyone’s attention.
The “tapering” growth in the Indian economy,
the policy paralysis and an already faltering in-
vestor sentiment compounded the impact on
the Rupee. Increasing cost of Gold, Oil im-
ports, Inflation are some of the issues that the
Indian Economy is facing. And the RBI can do
little with its limited foreign reserves, Indian
Rupee being openly floated in the market.
Figure 2: Rupee Movement against USD in one year
32
© Monetrix, Finance & Economics Club of MDI, Gurgaon
tide over future shockwaves.
The Government of India had earlier consti-
tuted a 4 – member committee headed by the
Economic Affairs Secretary Mr. Arvind Ma-
yaram [7]. The committee had come up with
recommendations to increase FDI in India like,
hiking FDI caps in various sectors, including in
defence to 49% from 26% and in telecommu-
nications to 100% from 74%. The panel had
also suggested increasing FDI limit in insur-
ance 74% from the current level of 26% and in
multi-brand retail from 51% to 74%. However,
implementing many of these recommendations
will require Parliamentary approvals.
Inspite of the fact that opening up of some
sectors will not bring in foreign currency im-
mediately, the change in investor sentiment
because of the economic reforms will provide
the necessary breather space to the trio of RBI,
Finance ministry & Regulators to come up
with solutions to stem the tide of the falling
rupee. Ultimately, rupee’s future hinges on the
strength of the Indian economy and vice versa.
up. As FII outflows have increased in the
month of June, foreign exchange reserves of
India are facing downward pressure. Companies
with foreign debt in dollars will come under
stress and so will the financial calculations of
Indian’s studying abroad. Add to that, a fiscally
expensive Food Security Bill ready to be passed
by the Parliament. Politically, this hasn’t been
good for the incumbent government, which has
already been plagued by a number of scams and
accusations of policy paralysis in the Parlia-
ment. Increase in import duty on Gold from
6% to 8% in June and the limited decontrolling
of fuel prices are perceived as a piece meal ap-
proach to a complex and long term issue. With
rumours of an election around the corner, the
stability of the government is under question
too. All this doesn’t instil confidence in your
average investor.
The problems within the economy are multi-
dimensional. A co-ordinated approach like the
one seen during the 2008 crisis, by the Finance
ministry, RBI & market regulators is the need
of the hour. A single policy framework and a
special task force might be needed [6]. As fur-
ther tightening of dollar is expected in the fu-
ture and pre-emptive measures are required to
RUPEE ON A WHEEL CHAIR
Figure 3: INR - USD Exchange Rate movement in the last five years
34
© Monetrix, Finance & Economics Club of MDI, Gurgaon
3. Connect 1982 Asiad Games and Vidyasagar Setu in Calcutta by a company name. 4. Which Indian wine company’s name is derived from the founder’s mother’s name? 9. Connect Louis Vuitton, Pizza Hut and Nobel Peace Prize. (2 words) 13. William X launched the laundry soap, Sunlight in 1884 to popularise a sense of hygiene in
Victorian England. What is the company named after X known as today? 15. Company X got its name from a painting of Nipper, a Jack Russell terrier, listening to a
cylinder phonograph. Name X. 16. Name of joint initiative between Europay, Mastercard and Visa? 18. X bought Businessweek from McGraw-Hill. Give the surname of X. 19. Its first global balance sheet in 1854 had the bank’s name as “X bank of India, Australia &
China”. What is the current name of the bank? (2 words)
1. This Japanese vehicle is named after the bird with fastest speed of around 180-200 miles per hour. Name the automobile.
2. X is known as father of Pentium chip. X worked on the board of ISB, Hyderabad and Satyam. Who is X? (2 words)
4. Which sport connects Morgan Stanley, Agnelli family and Sheikh Bin Zayed? 5. It was result of an agreement between PAL and Fiat. It is named after legendary queen of
Chittor. (2 Words) 6. Japan:Samurai, US:Yankee, UK: X. What is X? 7. Connect “Fifty Shades of Grey” and “Punar Milan” 8. X was earlier proposed to be named as Pequod. What is X? 10. Though more than a dozen woman claimed to be the “one”, identity was never conclusively
determined. In 2001, Chicago Sun Times named a local woman as “the one”. Give the moniker (2 words)
11. This character was conceptualized in 1928. It has appeared in over 130 films. It is also the most famously featured character on merchandise across globe. Identify. (2 words)
12. Connect Haliod Company and 1964 Olympic winter games. 14. Which company is the line related to: “we have heard you”? (2 words) 17. We have just lost 200,000 sales. PR director of which company said this even before the new
car was launched?
Across
Down
BUSINESS QUIZ
Answers for the quiz would be shared on our Facebook pages:
www.facebook.com/Monetrix.MDI
www.facebook.com/BlueChip.MDI
35
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
35
have any car chasing scenes or ultimate action,
still it can be counted as a thriller movie. With
phrases like “If we don’t do this now, we won’t
have an economy on Monday.” audience are
bound to get thrilled and get excited for what
is going to happen next.
This movie would have been more enjoyable
to watch, if viewer knows beforehand the rea-
sons for the crisis, because nowhere in the
movie causes for the crisis are explained like it
has been done in the documentary ‘Inside Job’.
But this movie for sure clearly depicts the steps
taken by the government to stabilize the econ-
omy in the most interesting manner possible.
Hollywood would be more than happy to cre-
ate the sequel of the movie but for larger good
we all hope it never happens.
‘Too big to fail’ is a financial thriller which
chronicles the 2008 financial crisis. It shows
how government tried to prevent the financial
crisis with the help of private players and what
all problems were faced by the Secretary of the
Treasury Henry Paulson in doing so. This
movie has made a successful attempt in explor-
ing the meaning of ‘Too Big to Fail’ and its
ramifications.
Movie starts with the CEO of Lehman Broth-
ers, Dick Fuld seeking external investment to
bail the company out as Treasury is opposed to
offering any bailout as they did in case of Bear
Stearns. Instead Treasurer Henry Paulson is
trying to arrange for private solution to Leh-
man’s problem. Two banks Bank of America
and Barclays shows interest in Lehman Broth-
ers, but both of them were not able to material-
ize the deal. Bank of America purchased Merrill
Lynch instead and Barclays were declined per-
mission by British banking regulators. With no
option left Lehman Brothers file for Bank-
ruptcy.
In between, another crisis is also shown when
AIG begins to collapse. Realizing that if AIG
fails then whole insurance sector will collapse
and financial markets will suffer massive fall
down, Treasury takes over the AIG. To prevent
further meltdown of market, Treasury pumps in
money to Banks to get credit moving again. But
Banks do not lent out the money as intended
and the government could do nothing about it.
The movie revolves around the idea that the
problematic banks can be saved by merging
them with healthy banks, thus creating entities
which are greater than the banks government is
trying to rescue because those banks were too
big to fail. Even though the movie does not
MOVIE REVIEW
Movie Review: Too Big to Fail
36
© Monetrix, Finance & Economics Club of MDI, Gurgaon
normal profits. However, with the incoming
macroeconomic numbers things started to stir
a bit, people speculating Indian economy to be
in the 8+ growth rates started to recede stead-
ily.
Trigger to the change was US Fed’s decision to
roll back QE program next year, it accelerated
the flight of capital to developed economies.
Indian currency already bleeding due to the
Balance of Payments crises was caught in the
quagmire. Rupee has never witnessed such a
steep fall, breaking its life time lows every
other day. FIIs who are the primary participant
in any significant movement in Indian stock
market have seen their returns plummet due to
in domestic currency terms. Along with it the
Stock Market Review
Indian stock is going through a very typical
phase, though it has seen worse even in the past
this one looks quite grave than anything seen in
past few years. There is a sense of uncertainty
from all corners of the country; high CAD to
ailing industrial output numbers, huge loan de-
faults to food inflation, unsustainable fiscal
spending to next year’s elections. And lot more,
Asia’s third largest economy has been in news
for quite some time now, amongst all the
emerging economies it is slated to be the most
affected by the current world economic envi-
ronment. Year started with strong inflows from
foreign investors irrespective of all the con-
cerns, majorly due to the soaring global liquidity
& Indian stock market’s ability to provide ab-
MARKET UPDATE
Market Update
Figure 1: Sensex Movement (1st April to 30 June)
37
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
37
mettle time and again due to much stable
earnings & rising Indian rural consumption
story.
Indian stock market was trading in a stable
range for some period before plunging to a
four month low very recently. At present,
investors are quite wary of Indian stock mar-
ket and any negative trigger causes a panic
selling in the market. Going ahead, outlook
is very bleak on account of further tighten-
ing by RBI & unavailability of solution in the
near horizon for Indian import export mis-
match. Also, it will take much more than
words to pacify the Institutional investors
who are still waiting for signs to suggest that
“alas it is the turning point”.
stance by RBI for introducing new ways of capi-
tal controls & tightened domestic liquidity mar-
ket will worsen the environment even further.
Our finance minister has tried to ease the envi-
ronment a bit by introducing many new investor
friendly policies & increasing the FDI limits in
many sectors but this might not prove to be suf-
ficient any time in the near future.
Amongst sector performance, cyclical sectors
have been bleeding heavily with Infra, Power,
Auto, Banking etc. being the largest losers. Sec-
tors which are particularly more dependent on
financing & industrial sectors were worst af-
fected with midcap stocks losing much more
than their large cap counterparts. On the other
hand FMCG, Pharma etc. have proved their
MARKET UPDATE
1st October 31st December Quarterly returns
CNX NIFTY 5697.35 5842.2 2.54
CNX MIDCAP 7430.95 7342.4 -1.19
BANK NIFTY 11414.95 11617.25 1.77
CNX AUTO 4215.1 4539.45 7.69
CNX ENERGY 7593.65 7998.5 5.33
CNX IT 7230.65 6634.15 -8.25
CNX METAL 2242.05 1969.2 -12.17
CNX PHARMA 5976.05 6756.3 13.06
CNX FMCG 15310.3 16688.2 9.00
CNX REALTY 224.45 192.25 -14.35
Figure 2: Sector Wise Market Performance
38
© Monetrix, Finance & Economics Club of MDI, Gurgaon
MARKET UPDATE
Country Index 1stApril 30thJune Quarterly Returns
Brazil Bovespa 56,348.0 47,457.0 -15.8
Russia RTSI 1,460.0 1,275.4 -12.6
India Nifty 5,697.4 5,842.2 2.5
China SSE Composite 2,234.4 1,979.2 -11.4
Japan Nikkei 225 12,371.3 13,677.3 10.6
USA NASDAQ 3,230.6 3,403.3 5.3
Germany DAX 7,795.3 7,959.2 2.1
Figure 4: Performance of World Market Indices
Repo Rate 7.25% Decreased from 7.5 on 3rd May
Reverse Repo 6.25% Decreased from 6.5 on 3rd May
CRR 4%
SLR 23%
Bank Rate 8.25% Decreased from 8.5 on 3rd May
Figure 5: Policy Rates
and Reserve Ratios
Currency Exchange Rate (in INR)
Dollar 59.55
Euro 77.50
Pound 90.55
Yen .60
Figure 6: Currency Rates
(as on 30th June)
39
JUNE—AUGUST ’13 | BLUE CHIP ISSUE 4
Guidelines for telecom mergers and ac-quisitions by month-end
July 10, 2013 The Hindu
It will pave the way for consolidation in the telecom sector, The Indian telecom sector has at present around 13 mobile phone service pro-viders with some of them expected to go for consolidation once the final guidelines are in place. Though the Telecom Ministry had an-nounced broad guidelines for mergers and ac-quisition in February last year, the detailed guidelines are yet to be unveiled.
RBI tightens gold import norms to squeeze CAD
July 23, 2013 Business Standard
This move is aimed at helping manage the country’s precarious current account deficit situation and improve gold availability for ex-porters, domestic prices of the yellow metal might rise. The revision has been done in con-sultation with the government and will be appli-cable to gold imports in any form, including gold coins
Jet-Etihad deal hits Sebi, DIPP road-blocks
July 26, 2013 Business Standards
The Department of Industrial Policy & Promo-tion, as well as the Securities & Exchange Board of India have raised concerns on effec-tive control being given to the Abu Dhabi-based airline. Following earlier concerns, Jet and Etihad filed a revised shareholders’ agree-ment (SHA) with DIPP and FIPB. This, too, doesn’t seem to have gone down well with DIPP, which has found the tone and language is similar to what it had submitted earlier
Govt enhances interest subsidy to push exports
July 31, 2013 The Economic TImes
Faced with sagging exports and rising trade deficit, the government raised rate of interest subsidy for exporters to 3 per cent and prom-ised to clear pending claims expeditiously, en-tailing an additional burden of Rs 2,000 crore to the exchequer
India eases FDI policy for retail, telecom (Roundup)
Aug 1, 2013 Business Standard
Govt. decided to hike the foreign direct invest-ment limits in a host of sectors, notably tele-com, oil refineries, commodity bourses, power exchanges and stock exchanges and relaxed the policy for retail, giving clear signal to overseas investors that the economic reforms were on track. The decisions were taken by the federal cabinet chaired by Prime Minister Manmohan Singh. The foreign direct investment limit for telecom sector has been increased from 74 per-cent to 100 percent.
Raghuram Rajan to replace Subbarao as next RBI governor
Aug 6, 2013 Reuters
The government has appointed Raghuram Ra-jan, the chief economic adviser in the finance ministry, to be the next governor of the Reserve Bank of India for a three year term. He has rightly predicted the 2008 crisis His Profile: IIT-Delhi (B.Tech), IIM-A(MBA), MIT(PhD), Chief Economist at IMF SEBI notifies buyback norms; cos must repurchase at least 50%
Aug 8, 2013 The Hindu
Sebi notified buyback norms under which it will be mandatory for companies to repurchase at least 50 per cent of their offers. The norms aim at safeguarding the interest of public sharehold-ers. The companies will now have to complete their buyback offers within six months, from 12 months currently
Market mayhem: Sensex crashes 769 points; biggest fall in 4 years
Aug 8, 2013 The Economic TImes
It was bloodbath in markets with Sensex crash-ing 769.41 points, the biggest fall in 4 years, to end at 18,598 on fresh concerns about US stimulus withdrawal and rupee plunging to re-cord low of 62, draining investor wealth by Rs 2 lakh crore.
MARKET UPDATE
In the News
40
© Monetrix, Finance & Economics Club of MDI, Gurgaon
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TEAM MONETRIX (2013-14)
From top left: Ashish Gupta, Karan Jaidka, Daman Aggarwal, Saurav Singh, Rishabh Gupta,
Amit Agarwalla, Rishi Maheshwari, Sankalp Raghuvanshi, Swapnil Sheth, Nidhi Soni,
Radhika Bhattar, Rohit Agarwal, Vibhav Srivastava, Saurabh Saxena
Not in photograph: Shaunak Laad