Arbitrage Magazine - October 2022 - Finance & Investment Club | IIM Rohtak

INDEX

S. No. Article Page No.

1 NFTs: Finance as an Aesthetic Medium for the 21st Century 3

2 Yet Again, Hedge Funds Fail to Beat The S&P 500 And Why That Matters 7

3 Economies Involved in The Recruitment Process 10

4 Depreciating Indian Rupee: A blessing in disguise or impending doom 15

5 The HOW’s and WHY’s of India’s Resilience: Impact of Global Recession on the Indian economy 19

6 Buy Now and Pay later: Flourish with Gen Z demand or fade under RBI scrutiny 23

7 The 3S & 3R for Success Personal Finance 27

NFTs: Finance as an Aesthetic Medium for the 21st Century

By Chirag Goel & Harshit Mishra (XIMB)

I know what you are wondering. What is a digital art token doing in a financial setting? Well, for you, I have an answer: The future looks non-fungible NFTs & Open-finance. NFT technology is poised to revolutionise the concept of digital ownership forever, from the art world to huge corporations (and even high profile celebrity items!)

Have you ever considered owning a Monet or a Pollock, or other era defining works of art? As collectors that evolve with the ages, you can now get a piece of long coveted digital masterpieces like the famed Shiba Inu 'doge' meme (worth around $175 million) or modern absurdist works like 'The Last Shawarma', that recreates 'The Last Supper' with characters from Marvel's Avengers series, for as little as $1 (and as much as millions and millions of dollars).

With Non Fungible Tokens, or NFTs, all of this is really a drop in the bucket. There is a digital assets revolution underway, with proponents claiming that it will transform the world as we know it, from decentralised finance to NFTs and the growing concept of the metaverse.

But first, what are Non-Fungible Tokens?

"Fungibility" in economics refers to a characteristic of goods or commodities where each individual unit is interchangeable and indistinguishable from each other. "Non fungible," in contrast to this idea, denotes the quality of being unique or one of a kind. For instance, a bitcoin is fungible, which means you may swap one for another and obtain the exact same thing. On the other side, a unique trade card cannot be duplicated. A card with one player has a different value than a card with some other player. Furthermore, even when comparing two identical cards, characteristics like the year of manufacturing or even how the card may be stored makes a significant impact.

So, How do NFT’s and Finance Work Together?

NFTs are the ultimate marriage of art and finance. Similar to how financial deals can be fractionally resold via derivative "strips" or "tranches" that cut across entire asset classes, large groupings of NFT artworks and permissions may be securitized and recirculated, establishing something like shadow banking for art

NFT’s Role in the Economic and Financial Space

NFT’s were relatively unknown at the beginning of 2021, but by the conclusion of the year, over 24 billion dollars had been invested in them. It’s a crazy, possibly profitable market. But this raises the question of whether or not anyone would shell out millions of dollars for a jpeg and a hyperlink. People are concerned about missing out.

The most significant factor driving that growth was COVID 19, one of several contributing factors. Many people in the experimental financial markets were tempted by the lockdown boredom or stimulus pay outs. Both Bitcoin and Ethereum saw increment, as Crypto wealth grew, the supply of NFT’s grew with it.

NFT’s and Decentralized Finance (DeFi)

The two most well known applications of blockchain technology today are decentralised finance and NFTs. Asset tokenization is made possible by NFTs, whereas DeFi offers decentralised access to financial services. However, it is crucial to take into account the potential benefits of employing the NFT DeFi combination for enterprises.

It's legitimate to speculate about the future of NFTs like a DeFi instrument. NFTs are frequently misunderstood as just digital artworks or collectibles that, due to the hype, sell for astronomically high sums at auction. Non fungible coins, on the other hand, can make significant contributions to the long-term growth of decentralised finance.

The NFT decentralised finance combination is made immediately practicable by NFTs' capacity to reflect the monetization of digital commodities and services. One of the most promising DeFi applications today is NFTs. For instance, Ethereum created ERC 20 tokens to offer identity for digital assets. NFTs might so readily be used as proof of the ownership rights to digital art.

One of the most well liked venues for artists to display their work and engage with a thriving community of collectors has swiftly emerged is Ethereum. Due to their adaptability in proving ownership, NFTs could offer extraordinary value benefits in the DeFi space.

Collateralization: A Problem to be Solved

NFTs maybe used in DeFi to help the lender determine the collateralization amount. The borrower could request aloanamount from theNFTto serve as security.Thelenderwould consideravariety of factors when assessing the loan amount and the collateralized NFT, including the owner's price, a subsequent market value, as well as certain computations. The collateralization problem might be simpler to resolve if NFT and DeFi are used in tandem.

The Impact of NFT Ownership on DeFi

The adoption of DeFi platforms alongwith NFTs in the music industryclearlysignals a significant change in the art world. NFTs have also been crucial in assisting real creators in keeping their ownership rights and income. Owners of NFTs might get an ongoing commission on the sale or resale price of their works. Additionally, using NFTs to keep traceable income is a great way to use collateral. Additionally, it might make it easier to get under collateralized loans, which would be hard to get without using NFT in DeFi. An essential component of the NFT hype tale now centres on the use of NFTs to monetize collectibles and works of art. However, NFTs maydevelop into more useful instruments for addressing problems like revenue sharing, licencing, and copyright ownership.

Another key element of combining NFT DeFi is the concept of fractional ownership. The formationofNFTsharesisalsomademoreflexiblebyNFTs.Asaresult,NFTproducers'investors and supporters might be able to own NFT without having to purchase the full NFT. On the other hand, the implementation of NFT fractional ownership within the DeFi domain is still in its infancy.

Way Forward

It is apparent that investors want to conflate financial value and creative expression. However, a fundamental rethinking of DeFi will be required to move from blockchain as merely a storage of assets to an inventive platform. The veracity of ownership is a crucial consideration when using NFT+DeFi.

Owners of NFTs can now obtain loans using NFTs as collateral thanks to the expansion of the DeFi sector and the ease with which theycan establish ownership. The most crucial thingto realise is that NFT is able to give value to almost everything. DeFi, on the other hand, assists in revealing an asset's value. The popularity of NFT backed loans is growing, and the overall growth of NFT DeFi heralds greater innovation. As the number and depth of users increase, DeFi and NFTs may alter the way we think about assets, tokens, and financial services.

The fundamental technology and ideas are already in place, but more work needs to be done to create more intricate rails for moving these assets and create new rules to ensure their application across the system.

Yet Again, Hedge Funds Fail to Beat the S&P 500 and Why that Matters

By Navneet Kulkarni, DoMS, KLS Gogte Institute of Technology

The hedge fund industry is a multi billion dollar one in the United States alone. There are around 7,000 of them with $3.2T under management (total net assets) with the goal of being hyper active traders who generate higher returns than what the index provides.

The industry has underperformed the S&P 500 for 9 years in a row now. In other words, if you invested $100K into an S&P 500 index fund 9 years ago, it would be worth over $400K today. If you put that same $100K into a hedge fund, it would only be worth $260K today. That’s a 60% difference!

And yet, despite all of this data, investors still continue to pour money into hedge funds. In 2018 alone, investors put $38B into hedge funds even though the industry was down 3%. The reason is simple: most investors don’t understand how badly the industry has performed and they mistakenly believe that hedge funds are necessary to generate higher returns.

The fact of the matter is that hedge funds are not only failing to beat the market, but they’re also charging exorbitant fees for the privilege of losing money. The average hedge fund charges 2% of assets annually plus 20% of profits. So, if a hedge fund generates 10% return in a year, the manager walks away with 6% of the assets while the investors are left with 4%. And remember, these are just the

To Hedge or Not to Hedge, That is the Question

The definition of a hedge fund has been a topic of debate for some time. The traditional definition of a hedge fund is a private investment partnership that uses aggressive investment strategies to make money for its partners. However, there are many different types of hedge funds nowadays, and the term has become somewhat ambiguous.

There are two main types of hedge funds: those that are regulated and those that are not. Regulated hedge funds must comply with securities laws and regulations, while non regulated hedge funds do not. Both types of hedge funds can use various investment strategies to make money, but unregulated hedge funds have more freedom in how they operate.

Hedge funds typically charge high fees, which can eat into returns. They also often use leverage, which can magnify both profits and losses. And finally, they are not required to disclose their holdings or their investment strategies publicly, so it can be difficult to know what exactly you're investing in when you put your money into a hedge fund.

Despite all of these drawbacks, many investors still flock to hedge funds because they have the potential to generate high returns. But as we've seen time and time again, these returns often fail to materialize, and investors end up losing money.

So, DO hedge funds beat the market?

There's been a lot of talk lately about hedge funds and whether or not they can really deliver on their promise to beat the market.

The short answer is no, they cannot. And that's because hedge funds are nothing more than glorified mutual funds with high fees. Don't get me wrong, there are some very talented people running hedge funds. But the fact is that the vast majority of hedge fund managers simply cannot outperform the market after fees.

So why does this matter?

Well, it matters because if you're investing in a hedge fund, you're likely paying much higher fees than you would for a traditional mutual fund. And those higher fees can eat into your returns over time.

It also matters because many investors believe that hedge funds are some magical investment vehicle that can consistently beat the market. But the reality is that they cannot.

Summary of the results (i.e. 85% of hedge funds fail to traditionally outperform the S&P 500 Index)

As measured by the HFRI Fund Weighted Composite Index, hedge funds are up a mere 3.6% this year while the S&P 500 is up 5.8%. This performance gap is even wider when we compare the two indices over longer time periods.

For example, over the last five years, the HFRI index has gained an annualized return of 6.5% while the S&P 500 has gained an annualized return of 9.7%.

And over the last ten years, the HFRI index has gained an annualized return of 4.9% while the S&P 500 has gained an annualized return of 6.8%.

In other words, hedge funds have underperformed the stock market by a wide margin in recent years.

here are a number of reasons why this is so but, ultimately, it comes down to one simple fact: most hedge funds are not able to generate alpha (i.e. outperformance). In fact, as my colleague Ben Carlson pointed out recently, 85% of hedge funds fail to traditionally outperform the S&P 500 Index after fees. This means that if you had invested $100 in a randomly selected hedge fund 10 years ago, you would only have $59 today (after fees), whereas if you had invested in the S&P 500 index you would have $68 today.

Of course, there will always be some hedge funds that outperform the market in any given year.

However, the vast majority of hedge funds will underperform over the long term due to their high fees and lack of alpha generation.

Revenue potential and limitations (i.e., 5% lower returns on investments)

There are a number of reasons why hedge funds have been struggling to beat the market in recent years. One key reason is that they often charge higher fees than traditional investments, which can eat into returns. Additionally, many hedge funds use leverage, or borrowed money, to amplify their bets. This can lead to higher returns in good times, but also magnify losses when markets turn south.

Interestingly, a recent study by S&P Dow Jones Indices found that the vast majority of large hedge fund managers failed to beat the market in 2015. In fact, 64% of them posted returns that were below the S&P 500 Index. This is yet another example of how difficult it can be for even the most sophisticated investors to achieve consistent outperformance.

Investors should be aware of these challenges when considering whether or not to allocate capital to hedge funds. While there are some exceptional managers who have generated strong long term results, it’s important to remember that past performance is no guarantee of future success. Additionally, most investors would be better off simply investing in a low cost index fund that tracks the broader market.

A new study by hedge fund research firm HFR shows that hedge funds underperformed the S&P 500 index in the first quarter of 2016. This is significant because it marks the sixth consecutive quarter in which hedge funds have failed to beat the market. There are a number of reasons why this is happening, but one of the most important is that many hedge fund managers are simply not very good at what they do. In fact, a large majority of them actually tend to underperform the market after fees are taken into account.

This is not to say that there are no good hedge fund managers out there. There certainly are, but they are becoming increasingly rare. And even the best ones have trouble consistently outperforming the market over long periods of time. So why does this matter? it's simple: if you're investing in a hedge fund, you're likely doing so because you believe that the manager can generate superior returns for you. But if these managers can't even beat the market on a regular basis, then you might as well just invest in an index fund and save yourself some money.

Case study example illustrating investment theory correlating with projected outcomes

Important points to consider in regards to hedge fund performance

When it comes to performance, hedge funds have a lot to answer for. In recent years, they have consistently underperformed the stock market, and this has led many investors to question whether they are worth the high fees charged by managers. There are a number of important points to consider in regards to hedge fund performance.

Firstly, it is important to remember that hedge funds are designed to provide a higher level of return than traditional investments such as stocks and bonds. While they may not always achieve this goal, it is important to remember that their primary aim is not simply to outperform the stock market.

Secondly, it is also worth noting that there is a great deal of variation in the performance of different hedge funds. Some funds will outperform the market in any given year, while others will lag behind. This means that it is important to diversify your investment portfolio across a number of different funds in order to maximise your chances of achieving superior returns.

Thirdly, it should be remembered that past performance is not necessarily indicative of future results. Just because a fund has performed well in the past does not mean that it will continue to do so in the future. This is why it is important to research any fund you are considering investing in diligently before making a commitment.

Finally, although hedge funds can be a useful addition to an investment portfolio, they should not be seen as a panacea for all ills. They come with risks as well as rewards. Diversification is the key, was and always shall be. Happy Investing!

Economies Involved In The Recruitment Process

By Gavini Lokesh DoMS, IISc Bangalore

Introduction:

Selection and recruitment processes can be challenging! The value of the hiring process is understood by human resources departments that are successful. The long term performance and goals of the organization depend so greatly on hiring people.

Companies with extensive hiring procedures typically have lower turnover rates. A company that invests the time will almost always be able to locate a candidate that is a good fit for the role and the workplace culture. It's crucial to have a good recruitment strategy!

It is essential to invest in human resources and the hiring process. However, selecting someone who doesn't meet the requirements could significantly raise the company's recruitment costs. A subpar hiring approach is a time and money consuming process. Not to add, hiring the incorrect person puts the company's production in danger. Hence economies of recruitment are an important metric to be considered and studied by companies.

The Cost of Recruitment & Selection:

The cost of recruitment contains two components, Direct Costs and Indirect Costs.

Direct costs for recruitment:

These costs are the ones which can directly be related to the recruitment and are accountable. In many cases, these costs remain constant, no matter the number of candidates selected.

Examples:

1) Rent of the place where interviews have taken place.

2) Costs involved while writing and designing the ad.

3) Costs involved advertising the vacancy by publishing in journals and newspapers.

Indirect costs for recruitment:

These costs can't be directly attributed to the recruitment process. These costs increase with time. Longer the process of recruitment, higher the indirect costs.

Examples:

1) Costs for papers, stationary, internet etc.

2) Cost of electricity, security and other essentials for the recruitment process.

3) Managerial costs occurring for recruitment.

Cost-per-hire:

After understanding what is included in recruitment cost, one has to know that this may not give all dimensions of recruitment process to make strategic decisions. To find how much to spend for different kind of roles i.e., to increase the cost to attract better talent or to decrease the cost where ROI is low, cost per hire is the most helpful metric.

Cost per hire is defined as all kinds of costs incurred by the company on recruitment of one employee from outside (fresh recruitment) or inside(promotion) the organisation, to fill a position.

Cost per hire involves two types of costs, internal and external.

Examples of Internal costs are:





Reference incentives are given to employees.

Costs of software used during the recruitment process.

Cost of the team involved in recruitment.

 Managerial costs involved to conduct recruitment etc.

Examples of External costs are:







Costs of advertisements.

Travel and lodging expenses of the recruitment team etc.

Cost towards an external agency (if any) which facilitates the recruitment.

 Equipment used for recruitment.

Calculation of cost-per-hire:

To calculate cost per hire, you are to gather data about different internal costs and external costs that occurred, and the total number of personnel hired. This would give you granular insight into where the money is going and where to put more or less of it.

And Cost per hire would be (Total cost incurred) ÷ (total number of hires)

Benchmark for cost-per-hire:

Cost per hire changes along with the type and importance of post for which recruitment is being done, size of the company, experience level of the job, level of talent required etc. Thus, a good benchmark is required to check if the cost being incurred is justified, after which the cost optimisation process may start.

This benchmark for various roles is found by taking the average cost per hire of many firms for similar roles.

The average cost per hire for overall recruitment is around 4000 dollars according to a recent survey by the Society of Human Resource Management (SHRM).

Why do we need to know the benchmark cost-per-hire for recruitment?

Let's say a wrong candidate gets recruited due to a lack of time and resources invested and gets fired after three months. The cost incurred is:



3 months’ salary, social funds and other salary related costs

 20% of the supervisor fully loaded costs for training and management

 50% of the successors fully loaded costs for low productivity during the training period.





Cover up costs in terms of overtime by the other employees in the company to cover for the none performing colleague.

Lost business opportunities, customer complaints, lost businesses and other no performance related business damages.

As a rule of thumb, you can saythat the cost of wrong hiring is seven times the employee’s salary.

Hiring the right candidate, on the other side, can also be quite expensive, but the main reason why companies are hiring is missing resources where workloads are huge. Managers are forced to survive with too few resources, which in fact blocks the main recruiting resource for interviewing candidates.

And the larger the resource gap is, the sloppier the hiring process gets. Instead of looking for a great candidate, managers are ready to accept the second best to reduce the resource gaps and the related pain, causing a cyclic effect until the firm is saturated with a considerable portion of bad employees.

Summarising, the fully loaded cost of recruitment is around 2 3 monthlysalaries, whereas the cost of failure is around 21 24 monthly. Companies that refuse to invest in professional recruitment have a minor short term gain but a 50% likelihood of a significant loss.

This is the reason why great companies are constantly investing heavily in extraordinary recruitment processes that always run independently of short term resource needs.

What Is the Average Cost of Recruitment?

The average cost of recruitment in 2022 /23:

Recruitment Activity Average Cost

Job Board Fees £207

Advertising costs £200

Recruitment Agency Fees £6,000

Internal Recruitment Expense £3,000

Invisible Business Costs £10,000

Hiring The Wrong Person £18,500

Recruitment Activity Average Cost

Average Cost per hire £15,095

How can we reduce the cost of recruitment without affecting its Quality?

Outsourcing of recruitment:

Recruitment is a complex process for organisations, and when companies don’t want to spend their already strained resources on hiring, it is a viable and optimal option to contract a Recruitment Process Outsourcing (RPO) provider.

Advantages:

1. Recruitment Stability and Flexibility: Most firms' employment requirements change yearly based on established targets and goals. It is difficult to determine the number of workers necessary for maximum workplace efficiency. A competent RPO firm will anticipate and manage this with ease.

2. Faster and Efficient Hiring Process: Firms must swiftly adapt to the ever-changing business landscape to succeed in the long term. When there are delays in recruiting the qualified and imaginative individuals required to drive goals, keeping up with competitive enterprises becomes an issue.

3. Access to an Exclusive Talent Pool: Sourcing the much needed workforce to accomplish company goals and objectives maybecome a nightmare. An RPO solution can provide a regulated approach with assured high quality partnering service.

4. Cost-cutting: Applicant sourcing, recruitment technology, exams, and referral programs are all recruiting expenditures. These are reduced or removed.

References:

1. https://www.testcandidates.com/magazine/the real cost of recruitment/

2. https://www.tutorialspoint.com/recruitment_and_selection/types_of_recruitment.ht m

3. https://resources.workable.com/tutorial/faq recruitment budget metrics

4. https://factorialhr.com/blog/recruitment and selection/

5. https://www.mightyrecruiter.com/recruiter guide/hiring glossary a to z/indirect costs/

6. https://www.berkshireassociates.com/blog/the direct and indirect costs of poor recruiting practices

- By Aniket Singh and Yashi Jain Great Lakes Institute of Management, Gurgaon

Introduction

The depreciation in a country’s currency means a fall in the value of a currency in terms of its exchange rate versus other currencies. Depreciation discourages imports because imported goods become more expensive due to a reduction in the value of the rupee. The history of falling of the Indian rupee could be dated back to the following:

1.) 1949 which happened because of the devaluation in the Pound sterling

2.) 1966, occurred due to running trade deficits and bonds issued by the government, which increased the money supply leading to inflation

3.) 2013, the most relevant example of rupee depreciation The rupee increased to 69 from 60 in comparison to the dollar due to poor reforms, and falling foreign investment.

Post 1991, India shifted the fixed exchange rate (set up by the Reserve Bank of India) to a flexible exchange rate (determined by market forces). Since then the rupee has been depreciating at a rate of 3.74% on CAGR (Compound Annual Growth Rate) against the US dollar.

Present situation-India

At present, India is standing at a crossroads where it wants to realize a goal of resilient economic growth also termed ‘Amrit Kaal’ in the next 25 years and the macro economic environment is not currently supporting that. The rupee going to 83 has even taken away the comfort the government has been providing that it’s not falling as much as other countries.

Depreciating Indian Rupee: A blessing in disguise or impending doom

The major reason given is the imported inflation because of the strengthening of the US dollar (as said by our finance minister Nirmala Sitharaman) but the rise was the least against the Emerging market and developing economies (EMDEs) which includes India also. On top of that peer countries like Brazil and Mexico saw their currencies appreciate.

Strengthening of dollar

The strengthening happened because of two reasons:

1. Rising US Interest rates

2. Opportunity for the US because of the energy crisis in Europe

The US economy as perceived by some as going towards a recession is coping very well. The fiscal budget deficit of the US halved to $1.375 trillion in 2022 from a $ 2.8 trillion deficit in 2021 because of an increase in receipts to $4.896 trillion, an $850 billion up or 21% increase from fiscal 2021.

Consequences of the fall

As a consequence of the rising interest rates by the federal reserve affecting the global economy and in turn, India is leading the inflation up. The core inflation which doesn’t include changes in prices of food(seasonal) and energy sector (controlled by forces of demand & supply) is 6.26% (RBI targeted 4% with 2% flexibility up-down) and is expected to stay around that in FY23.

Relationship between Gross Domestic Product (GDP) and Inflation

If inflation keeps on rising in India, then foreign products will look more attractive to people, and they will prefer them leading to a decrease in demand in India itself, and decreasing the trade deficit.

The month of September witnessed a five month high of 7.41% retail inflation because of surging food prices, giving a perception the prices could rise more. This will give a counter effect on the economy as people will increase their demand in the fear of rising prices.

Increasing inflation also eats up on the GDP. Inflation and GDP have a negative relation. With an increase in inflation and a revision of interest rates from RBI to 6.15%, there will be less circulation of money in the economy. Less supply will induce less demand and less unemployment leading to a decrease in GDP. This has been substantiated by the IMF (International Monetary Fund) reducing the forecasted growth rate of India to 6.8% from 7.4%.

The effects of inflation are not linear as 10% of inflation won’t be just twice as powerful as 5% inflation, it will be more than that. So, a forward marching inflation rate won’t be good for the economy.

Does the US benefit from their dear currency (Dollar) appreciating?

When a decline in Indian currency is taken as a negative sign then by contradiction effect an appreciation of currency should be good. The dollar a currency that is a king of the world currency is often always appreciating in comparison to other currencies.

So, the ultimate idea should be that this is so beneficial to the US that their currency is highly valued, but the reality is quite different. The reason for this can be first understood by simple theories of currency appreciation

 The increased dollar value reduces the net exports of the US and therefore decreases aggregate demand for the domestic products

 An appreciation of the dollar makes imported products cheaper resulting in an increased aggregate supply which thereby pushes American prices down.

This explains why China 1994 devaluated its currency by 30% in relation to the US dollar because it doesn’t want its exports to get restricted. Similarly, if the imported goods keep on increasing, the domestic products will not find a place in the US market, curbing the level of production.

When production gets attacked the GDP is on the obvious side to be brought down and a country like America can’t afford a reduction in its GDP. The final effect of the appreciating dollar is not beneficial for the US economy as it surely doesn’t want a trade deficit and a stagnant economy that is lost in the trap of reducing costs and production.

What to make of exports?

Everything comes with its advantages and disadvantages. The other side of the coin in the case of the Indian rupee depreciation is the increasing competitiveness of our exports. Exports become cheaper. Average fall in home currency results in an increase in exports of the country since it increases the global competitiveness of the goods that foreign countries can

purchase more quantity of goods and services with the same amount of foreign currency from the domestic country. But this picture looks blurry right now because the competing country's currency in comparison has fallen even more than the rupee.

Conclusion

With all the economic factors working simultaneously, the RBI should let the exchange price settle while using monetary policy to keep a check on inflation. The increased price of imported goods will reduce the imports but would also reduce the external debt. Inflation should be countered by tighter monetary policy as inflation is driven by supply side factors.

Anchoring of inflation is necessary if inflation has remained high for a long time. Increasing inflation would hurt poor people the most as they are more exposed to the inflationary pressures of the market. The opportunity of increasing exports is there but that depends on whether companies are ready to serve that sudden rise in demand from outside. To meet that demand adequate infrastructure creation is required.

For formulating policies to counter, models of other countries should not be followed as we can’t compare Our Indian economy with the US, Singapore, or China as India differs in terms of population or the level of control government has over its citizens.

References

1. https://timesofindia.indiatimes.com/blogs/voices/us india interests and interest rates/?source=app&frmapp=yes

2. https://www.fortuneindia.com/opinion/rupees fall to 83 what does it say about indias fundamentals/110151

3. https://www.moneycontrol.com/news/opinion/rising-inflation-manufacturing-slowdownposes new challenge for india 9353491.html

4. https://www.thebalancemoney.com/why is inflation good 4065995

5. https://capital.com/india inflation rate persistent inflation rbi

6. https://economictimes.indiatimes.com/markets/forex/the indian currency might slide further in the coming months experts/articleshow/95175661.cms

The HOW’s and WHY’s of India’s Resilience: Impact of Global Recession on the Indian economy

By C. Sowmya Jesus and Mary College, DU

Despite the Russia Ukraine war, huge wave of foreign selling, monetary tightening, high valuations, energy crisis, supply chain disruptions, Inflation, rise in gas price and rise in oil price, the Indian market is just a few points away from its all time high. The Indian investors resilience is remarkable. Despite everything thrown at it, the strong core foundation of the Indian market remains intact.

As we all are aware, the Nifty 50 index in the Indian stock market represents the 50 blue chip companies of India. In the Covid struck pandemic year 2020, Nifty earnings were up by nearly 18 19%. In 2021 2022, the nifty earnings were up by 48 49%. This shows that the Indian market is very structured and rational.

Figure 1 shows us the returns of Nifty 50 over the years. The Nifty 50 returns has increased with a significant percentage over the past years as depicted in the graph.

Even though India is currently witnessing inflation, there are still various factors to keep in mind before coming to any conclusion. The factors that supported and strengthened the Indian market

‘AATMNIRBHAR BHARAT’

Figure 1(Source:NSE,BSE)

despite global meltdowns and uncertainties are mostly the role of the government on major policies and reforms. These direct incentives from the government favored the GDP and economic growth. This has imposed positive sentiments on the domestic as well as international investors.

Figure 2 below shows the GDP growth of India over the years. You can see that even though the GDP went down during the pandemic lockdown year, it bounced back exemplarily. It is almost at its all time high now.

Figure 2 (Source: Worldbank)

In the past, foreign investors were seen as the only drivers of any rally in the Indian stock market. It is now noticed that the Indian stock market has also become ‘Aatmanirbhar’. The domestic and the retail investors are resilient enough and they are 100% capable of running a bull run without the support of the foreign investors and institutions. Due to the recent weak global cues, many foreign investors and institutions have offloaded shares in extremely massive quantities. Despite that, the Indian markets have stayed resilient.

A report by Morgan Stanley stated that India is most likely to be the fastest growing Asian economy in the coming years. Another big reason for India’s resilience is that India has much lower debt in the economy as compared to the rest of the world. India’s population is a lot and while this factor has many negatives it also has positives. More population means more workforce. More workforce means more efficiency. More efficiency means more economic growth and advancement. Indian equities were among the biggest recipients of abroad flows over

past year.

Figure 3(RBI)

The figure 3 shows us the domestic as well as the imported inflation. Even if economic slowdown takes place globally, India’s economy might not be affected much due to the policymaking in place to control the inflation. The government has taken countless measures to control the inflation in India, that is one of the main reasons why our economy is in a better condition as compared to many of the other economies.

The Indian government is also continuously making remarkable efforts to control the corruption in India, this is also another reason for the growth of the Indian economy. India is extremely robust and resilient. The privatization of various goods and the introduction Goods and services tax has made the economy grow on an even larger pace. Ending of work from home policy in India and lifting pandemic curbs contributed to the momentum. There has also been a record of jump in exports this year. Also, India has taken over the UK’s position in the list of the world’s largest economies.

If we look into the historical records, we will notice that India had bounced back pretty well after every US recession. Despite major concerns regarding rising inflation all over the world, Indian citizens especially jobseekers state that they have not faced any negative consequences of the same. Infact, the labour market in India is showing a growth opportunity. According to the manpower group employment outlook, survey, India has the strongest net employment outlook. Even during the pandemic, Indian markets were bullish on pharmaceutical companies, IT companies and chemical industry. Hence, we must not be scared or worried about the volatility that is going on in the Indian markets currently. All of the above factors prove that India’s macroeconomic fundamentals are nearly perfect.

Global cues are currently negative and the indicators presently show that there might be a downfall for a bit in the Indian economy and the stock market. The global recession concerns

and the inflation hikes abroad might affect the Indian stock market. But that would just be a short term temporary setback because the core strength of the Indian economy is remarkable. The Indian stock market always has and always will recover and bounce back better than ever before and continue to reach greater heights creating newer all-time highs.

References:

1. Worldbank.org

RBI.org

3. www.nse.com (national stock exchange)

www.bse.com (Bombay stock exchange)

www.morganstanley.com

www.deloitte.com

7. www.manpowergroup.com

www.dowjones.com

United nations

By Pallavi Immadi & Gajji Mohan Kumar IIFT Delhi

ItisevidentthatthesituationofBuyNowandPayLater(BNPL)israpidlychanginginthecountry. With the leading BNPL players like Slice and Lazy Pay modifying their business models to accommodate the change in RBI regulations, we can see a transitory trend in the system.

Nevertheless, with the low credit card penetration rate in India (which is around 5%) and an increase in the number of millennials opting for BNPL by 2X, Genz by 3X in the post-pandemic area, there is significant opportunity for all the BNPL players to grow.

BNPL current scenario

With 600 million smartphone users and 100 million daily online consumers, India is one of the most digitally savvy markets in the world. By 2025, this figure is anticipated to reach 300 million users.

Aspirational customers may grow even more as a result of the fast expanding smartphone market and the rollout of 5G technology. Given the enormous possibilities in a market like India, cooperation between financial institutions and FinTech’s is the only viable strategy.

A change in the landscape of digital payments in India brought about by Covid 19 has sparked the growth of Buy Now Pay Later (BNPL) firms. These provide short-term financing, allowing customers to buy and postpone paying by 30 to 60 days or paying in instalments.

Instalment payments are not a novel concept, but what is revolutionary is how modern technology has enabled unprecedented levels of speed, scalability, and seamless integration into consumer platforms.

Rapid growth is beingdriven bythis technology.TheBNPLmarket in Indiais predictedto develop at a rate of 400% by GMV by 2026, representing a CAGR of whopping 300% by GMV in the current fiscal year.

The primary age group for BNPL consumers is 26 35 years old, which accounts for almost 40% of the entire Gross Merchandise Value (GMV). The main drivers behind users' adoption of pay later practices include thriving e commerce and the convenience provided by BNPL services.

Buy Now and Pay later: Flourish with Gen-Z demand or fade under RBI scrutiny

Flipkart Pay Later and Ola Money. BNPL to capture 9% of the total e commerce market share in India by 2024.

RBI regulations and the evolution in the industry

BNPL, in comparison with a credit card, improved the customer experience primarily by eliminating the tedious application process and enabling simplicity in obtaining a credit line. They had a different mode of underwriting where they considered all the aspects of the customer profile and not just their credit scores.

According to the new RBI regulations, non banks cannot load any of the pre paid instruments using a credit line. This ban immediatelyaffected millions of users and toppled the business model of leading BNPL players in the market who were forced to explore alternatives.

One of the options to move forward was to partner with banks as RBI confined the ban to non banking institutions. But this would entail greater scrutiny and the banks wouldn’t want to extend the services to people having bad credit scores which would then defeat the whole purpose of BNPL.

However, the notification left enough room to assume that loans could be disbursed using PPI. Recently, Slice changed its core offering of providing credit lines and is instead disbursing credit through term loans. For every transaction, the borrower’s credit worthiness will be computed and a loan amount is approved according to his/her profile. This is a paradigm shift to conventional lending mechanism.

Additionally, RBI is considering other options such as issuing special licenses to BNPL players and strengthening the regulations on digital lending.

BNPL in B2B growth of MSMEs

By 2024, it is anticipated that B2B trade in India would total $1.1 trillion as more small firms switch to digital transactions. SMEs are concentrating on cost reduction through process optimization in light of the recent inflationary climate.

In orderto meet their immediateworkingcapital needs, morethan 93percent of IndianSMEs must borrow money at high interest rates from the unregulated informal sector. Sadly, this debt unfortunately becomes a never ending cycle that makes a firm unsustainable more often than not. The next step in resolving this issue, for both sellers and purchasers, is credit embedded invoices at the point of sale (origination).

By customarily distributing funds for upfront purchases based on a company's financial standing, credit lines are traditionally offered to businesses. A B2B BNPL solution, on the other hand, is ideal for small firms with constrained working capital, cyclical demand, and tighter cash flows.

For instance, a small merchant regularly purchases high end cosmetics from a wholesaler or B2B marketplace once each week. Here, a B2B BNPL product can offer a line of credit with a flexible repayment option that is large enough to cover 15 days of inventory. In this method, the seller is guaranteed payment for their invoices, and the merchant does not struggle to find cash for order purchases.

Businesses are allowed to manage their cashflows because of the flexible nature, which ensures that they only pay their dues when it is convenient for them and that they are thus charged interest accordingly. Businesses that might otherwise lack access to working capital and purchase financing now have a level playing field thanks to the B2B BNPL, allowing them to concentrate more on other facets of their operations. With its transaction and cashflow based underwriting for small enterprises, the solution is simple to implement.

Conclusion - BNPL on a path of poised growth

If BNPL players, when collaborating with banks or licensed lenders, can explain the rationale behind the process of their underwriting and the norms used for calculating risk, the banks might be willing to shoulder additional risk despite a relatively low credit score.

Furthermore, India has a low household debt to GDP ratio which points to a short supply of credit. Considering the alternative avenues available and the growing demand, despite the strict regulations imposed, BNPL is set to have a high growth rate in the next few years.

The 3S & 3R for Success-Personal Finance

By Rony George Verghese

Human emotions are driven by two things: Fear & Greed. And in today’s materialistic world the driving factor is money. Money controls almost everything and is the most desired thing on this planet. Understanding money & the economics associated with it, is very important. Finance is the branch of economics that studies the management of money & other assets. Finance deals with the creation & study of money, credit, investment, assets, liabilities etc. Finance is broadly classified into:

A. Personal

B. Corporate

C. Public

“If you want to change the world, start with yourself first.” Undoubtedly, change or improvement begins from within (self) or the personal level. We all desire to achieve success or try hard to make more money. But this desire alone cannot help to realize our goals. Discipline is a quality that every individual needs in all walks of life to attain success. Our fate is decided by discipline rather than desire.

There are different types of asset classes, say, debt, equity, gold, real estate, crypto currencies etc. All assets have cycles and different risk reward ratios. However, only discipline can help to cut the clutter and achieve good returns. And here is a basic 3S financial mantra that can help to attain personal financial discipline and success:

1. Systematic Investment Plan (SIP) or Systematic Deposit Plan (SDP):

The old adage says, “Little drops of water make a mighty ocean”. Regular investments in any good asset class offers an optimal balance for the investor. Unnecessary panic/excitement during the fall/rise of the cycle can be avoided & timing of any asset cycle is rarely effective.

Disciplined investors achieve a good balance and reap better returns by what is called “Cost Averaging”. These small deposits or SIPs help one to achieve compounding gains if held for long periods with discipline.

2. Systematic Transfer Plan (STP):

Often when money is moved from one asset class to another, lump sum or mass switching invite taxes and various other hassles. Practicing STP will help to reduce taxes by booking profits at planned intervals.

This technique is called “tax harvesting”. The government offers tax relief up to one lakh/year on capital gains through equity which can be intelligently harvested by systematic transfer. Apart from this, the investor can also ensure a decent “cost average” in the new asset cycle too. Hence, with lower taxes & higher stability in terms of pricing, any investor can gain higher returns with this technique.

And for new players too, the bulk of money can be parked in liquid/debt funds which offer slightly better returns instead of savings bank accounts. STP into the new mutual fund or scheme can be done from the liquid fund.

3. Systematic Withdrawal Plan (SWP):

Upon achieving the goal for the planned investment, a smooth exit or SWP can help to enjoy the fruits in a systematic way. While the required money is taken out safely to complete the target/goal, the rest of the money (capital) continues to grow in the existing asset cycle. Tax benefits are an added advantage too

While disciplined methods like SIP, STP and SWP are practiced, the yardstick for gain/rewards are also to be calculated accordingly. The next important personal finance concept that every individual needs to learn is using the right method for measuring performance. There are three different return methods (3R) that one needs to learn:

1. Absolute Returns:

Let’s say I invested 5 Lakhs in an asset class 3 years ago and today its value has turned into 7.5 Lakh. And to calculate returns, using the high school Math formula, we say absolute returns of 2.5 Lakhs (7.5 5 = 2.5) or 50%.

2. Compounded Annual Growth Returns (CAGR):

Now suppose the same 5 lakhs turned into 7.5 lakhs in 3 years and we would like to know the yearly return.

One must learn the CAGR formula which is {[End Value/Start Value]^(1/n)} 1 where n is number of years.

Coming back to the example: {[7.5/5]^(1/3)} 1 = 14.47%

3. XIRR (Extended Internal Rate of Return):

And now, what if this 5 Lakh was done as a monthly SIP of Rs.13,890/ over a period of 3 years? Here is where we use an MS Excel formula =XIRR (list of invested amounts, list of dates of respective investments) * 100

In the example that we considered if 5 lakhs is spread over 36 months of SIPs, the SIP based return would be a little over 25%

Based on all these, it is very clear that a disciplined investor who understands the 3Rs and uses the 3Ss (SIPs, STPs & SWPs) patiently would achieve financial freedom in a faster and easier way ! So, why wait…let’s invest with discipline and patiently grow

References:

1. Systematic Investment Planning by Surekha Shetty

https://medium.com/@surekhashetty658/systematic investment plan sip dd0f5b898185

2. Difference between SIP, STP & SWP

https://www.tarrakki.com/blog/what is the difference between sip stp and swp

3. SIP Systematic Investment Plan

https://groww.in/p/sip systematic investment plan

4. STP Systematic Transfer Plan

https://groww.in/p/systematic transfer plan

5. SWP Systematic Withdrawal Plan

https://groww.in/p/systematic withdrawal plan

6. XIRR in Mutual Funds

https://groww.in/p/xirr in mutual funds

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