Shailesh J. Mehta School of Management Indian Institute of Technology, Bombay
Finsight The Fortnightly Newsletter
Issue: Aug 5, 2012
Inside this Issue
Rising Inflation in India & its
The Economic Times
News of last 2 weeks
Check your Fin Quotient
MoneyControl.com Business Standard Deccan Herald Hindustan Times Investopedia.com
F I N S I G H T
Rising Inflation in India & its Ramifications...1 Inflation in India – Nature and Magnitude If it all there is a dream in the minds of India's policy makers and RBI, it is to conquer the unflinching inflation. Of course in a candid tone we can say that it is a pipe dream at least in the context of current times. Inflation needs no introduction. Inflation occurs due to a steep rise in price levels against the normal purchasing level of consumers. In the recent years, more than any issue Inflation has plagued the Indian economy and undermined its growth prospects. Due to high inflation and deteriorating depreciation of Rupee, India has become a dwindling brick among the BRICS nations and has been downgraded in its credit ratings by S&P, Moody and Fitch. India's headline inflation which is based on the Wholesale price index has lowered to 7.25% in June 2012 from 7.55% in May 2012. Though Indian government has registered a success in bringing inflation in non-food items in control, it is still grappling with soaring inflation in food, fuel and power arenas. This article contemplates and comments on the causes of inflation and effects of inflation on financial measures such as balance of payments, depreciation, FDI, FII etc.
How inflation surfaces and why RBI's measures are backfiring? Analysis Inflation generally starts as a demand-pull inflation where a colossal amount of money chases few goods. In order to curb and absorb this colossal money, RBI has been hiking the repo and reverse repo rates. In spite of such a tough stand by RBI, we have not seen a considerable decline in inflation. In fact RBI is held accountable for the dismal growth rate of 6.5% for the year 2011-2012. Most of the corpus money which RBI is targeting at is black money and the black money holders can't deposit this money in banks (despite attractive interest rates) as they get charged for disproportionate assets case. This money can neither be invested in the capital markets as Income tax department monitors their PAN transactions. So there is no reason for RBI to keep hiking interest rates when it can't nip the real culprits. Here we can safely conclude that black money holders are contributing majorly to demand-pull inflation. Other reasons for demand-pull inflation are high disposable income For obvious reasons, seeing the demand-supply imbalance, producers would like increase the supply of production to gain higher profits. The double whammy occurs when these corporate manufacturers can't access the money in banks due to higher interest rates.Even though corporate are ready to borrow at higher interest rates, government borrows this money which leads to “crowding out of private investment”.
Rising Inflation in India & its Ramifications...2(cont’d) Please note that government spending is an exogenous variable which is insensitive to inflation or depreciation. As the producers can't get loans from banks they can't expand their business and even if they get access to limited money this leads to increased cost of production. This is where the “cost-push inflation” sets in. Cost-push inflation is attributed to RBI's high interest rates, supply chain bottle-necks, increased power tariffs and increased fuel prices. So today what we are seeing is “Cost-push inflation”.
Defying the General and Entrenched Assumption Is Inflation strengthening the Rupee? The general perception is that Inflation leads to rupee appreciation. It is premised on the reason that inflation is followed by interest rate hikes by RBI. The attractive interest rates (Reverse repo at 7%) would attract the foreign investors to invest in Indian banks and government securities. As the supply of foreign currency increases Rupee automatically becomes stronger. Recently RBI has increased the interest rates on NRE, NRO, FCNR (Foreign currency non-resident) accounts to attract foreign investments. This would have worked out to a certain extent in attracting foreign currencies. But the unfavorable factors like policy paralysis, stalemate on reforms, declining growth rate, widening fiscal deficit led to the downgrading of Indian securities by S&P and Moody. Thus the foreign inflows stalled and the rate hikes have not led to rupee appreciation. Other side of the story – Inflation depreciates Rupee In fact in realistic terms, the rising inflation in India has led to Rupee depreciation. Higher cost-push inflation has led to poor IIP (Index of industrial production), low GDP (Gross domestic production), and high unemployment. Low IIP due to less production and less profits in turn affects the share prices of the corporate world. So Indian private sector bears a bearish outlook and fails to attract foreign investment in the form of FDI or FII. The foreign countries which are already grappling with sovereign debt crisis and euro zone crisis don't have money to invest in dismal state of Indian economy. Following this there will be a scarce supply of dollars, Euros, sterling pounds and this makes Indian Rupee depreciated. In the recent times we have seen the lowest levels Rupee depreciated against USD, where $1 = Rs 55and more. Effects of Inflation on GDP and ensuing “Conundrum” As aforesaid, cost-push inflation is attributed predominantly to RBI's high interest rates (due to high inflation), supply chain bottle-necks and increased power tariffs. It gradually leads to steep hike in prices as the factors of production become costly. This will lead to lesser demand and lesser consumption by final consumers. Lesser consumption will result in losses to the firms and eventually leads to cutting down on employment. Unemployment and limited production of goods & services results in lower GDP. To buttress this finding we have a concrete proof unveiling in front of us where the GDP of India has grown only by 6.5% for FY2011-12. What is the “Conundrum”? There has been a lot of hue and cry from several policy makers, economists, politicians, corporate honchos of India to welcome foreign capital inflows in order to improve India's GDP. One pitiable fact is that India's outflow of FDI is $16bn in 2011-12, which is more than the incoming FDI. We need more FDI inflows in
Rising Inflation in India & its Ramifications...3(cont’d) airlines, insurance and retail. But the foreign investors can make money in their enterprises in India only if Rupee appreciates. Let's see how they do. The most favorable factor for foreign investors in India is that the domestic consumption (79%) in India scores high over the exports (21%). Let us see the favorable/unfavorable factors to FDI in India vis-à-vis China in the following table.
So we can interpret from the above table that India can attract more FDI for improving its GDP only if Rupee emerges stronger. But currently Rupee is too weak to attract foreign inflows of capital. Besides weaker rupee, the gloomy global economic prospects may not allow foreign capital to India. Thus India is facing the conundrum that foreign capital requires stronger rupee where as stronger rupee comes only from increased foreign capital inflows. Government spending has increased by 4 times from the year 2007. As most of its spending goes to imports, it is facing fiscal deficit and is encroaching on (S-I) excess savings over investment. To increase S-I component, Investment spending I should be reduced by keeping interest rates high. Now this leads to high cost-push inflation. G (govt. spending) = (S, savings – I, Investment) + Net Taxes (T) + (M, Imports – X, exports). Though there is more liquidity in the system government is not stopping giving subsidies on crude oil and electricity (so T component is less). It is leading to more usage of them and leading to more current account deficit year after year. Please see the below table. India's current account deficit (CAD) increased to $78.2 billion (4.2 per cent of India's GDP) for the year ended March 2012, from $46 billion (2.7 per cent of GDP) last FY2010-2012. This CAD is highest ever in the history of Indian economy according to the RBI.
Conclusion 1) RBI has not shown a great success in controlling inflation as it is a cost-push inflation. This cost-push inflation can be controlled by government intervention by removing supply chain bottlenecks, increasing taxes and reducing subsidies. 2) Bring down the interest rates as they are inhibiting GDP, employment, IIP and exports and instead introduce structural reforms. By- Krishna chaitanya Yadav S, SJMSOM, M.Mgt, 2ndYear
News of last 2 weeks RBI maintains status quo on key ratesâ€ŚCuts SLR to 23% The Reserve Bank of India (RBI) on 31st July review of Monetary Policy maintained status quo on its key lending rates, keeping them unchanged, as it chooses to rein in inflation over growth. However, the apex bank has cut Statutory Lending Ratio (SLR) to 23% from 24% earlier.
decades in politics, Mukherjee took the oath of office as President, in the name of God, to "preserve, protect and defend the Constitution and law.â€? P Chidambaram: Architect of 'Dream Budget' is back P Chidambaram will move out of 'Home' and take over as the Finance Minister. This would be his third stint as Finance Minister.
On the basis of an assessment of the current macroeconomic situation, the RBI has decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8%. The CRR of scheduled banks has been left unchanged at 4.75% of their NDTL. Consequently, the reverse repo rate under the LAF will remain unchanged at 7%, and the marginal standing facility (MSF) rate and the Bank Rate at 9%.
He first held the position in 1996 in the United Front government and later became finance minister in the United Progressive Alliance (UPA) government in 2004, led by Manmohan Singh. Power minister Sushil Kumar Shinde will replace Chidambaram as Home Minister.
Pranab Mukherjee sworn in as 13th president Pranab Mukherjee, sworn in as the nation's 13th President on July 25th, called for eradicating poverty from the country's dictionary and said 'trickledown theories' will not address aspirations of the poor. At an elaborate ceremony in a packed Central Hall of Parliament, a familiar place for the 76-year-old Congress veteran who has spent over four
Govt cuts monsoon forecast towards 92% of average With the Indian monsoon showing little signs of improvement, the government said on Monday that monsoon rains are now expected to be below average, reports said. The government scaled down the India Meterological Department's (IMD) latest forecast of rains at 96% of a 50-year average towards 92% of the average.
News of last 2 weeks continued... Rainfall between 90-96% of the longterm average is considered to be "below normal", according to the classification by the IMD. Rains below 90% would be considered a drought, which the country last experienced in 2009. PM resolves major land transfer bottleneck The Prime Minister approved relaxations in the land transfer policy of the government for government owned lands so that infrastructure projects are not held up because of procedural delays. Early last year, a ban had been imposed on all transfer of government owned lands to any entity except in cases where land was to be transferred from one government department to another.
In the meanwhile, the Department of Economic Affairs was to prepare a comprehensive land transfer policy for government owned land. In case any department had to implement a project which required alienation of land either through lease, license or rent, it had to seek specific approval of the Cabinet. This was leading to long delays in awarding concessions for infrastructure projects, particularly PPP projects. Govt won't reverse stance on retail FDI, says Anand Sharma Without committing to when Foreign
Direct Investment in multibrand retail will be a reality, Trade Minister Anand Sharma affirmed that the government was committed to opening up the retail sector to foreign investment and would not reverse its stance.
Late last year, the government had to withdraw its decision on allowing 51% FDI in multi-brand retail after it was met with stiff resistance from the opposition parties. The situation is seen as vital for foreign investment, economic growth and the current account. Opening up retail is expected to enable massive inflows from foreign retailers such as Tesco and Wal-Mart. However, there is a fear that some small local stores and farmers would face losses in the bargain. Divert 40% loans to priority sector: RBI to some foreign banks Foreign banks with more than 20 branches in India will have to channel 40% of their lending to the priority sector, which includes agriculture and small and medium businesses, in five years, the Reserve Bank of India (RBI) said on July 20th. Overseas banks with more than 20 branches in India include Standard Chartered Plc, HSBC Holdings Plc and Citibank
News of last 2 weeks continued... RBI introduces new category of NBFCs RBI on July 23rd, introduced a new category of NBFCs, Non-Banking Financial Company-Factors and stipulated that every company seeking registration as NBFC-Factors would have a minimum net-owned fund (NOF) of Rs.5 crore. Factoring is a financial transaction where an entity sells its receivable to a third-party called a 'factor' at discounted prices. The RBI said that an existing NBFC registered with it and conducting factoring business that constitute less than 75 per cent of total assets / income shall have to submit to the RBI within six months from the date of this notification, a letter of its intention either to become a Factor or to unwind the business totally, and a road map to this effect. Nomura CEO quits as insider trading scandal widens Nomura Holdings Inc CEO Kenichi Watanabe resigned on July 26th over a widening insider trading scandal and will be replaced by company veteran Koji Nagai, as Japan's top investment bank warned additional cases could come to light.
Watanabe is the second global bank boss to resign this month â€” Barclays chief Bob Diamond stood down over the Libor rate-rigging scandal on July 3 â€” as the industry finds itself under huge political and regulatory pressure.
India's manufacturing growth falls in July; weakest since Nov India's manufacturing sector witnessed a slowdown in July - the weakest growth rate since November - because of moderation in domestic and export orders amid sagging global economy, an HSBC survey said. The HSBC India Manufacturing Purchasing Managers' Index (PMI) - a measure of factory production declined to 52.9 in July, from 55 in June. Reserve Bank of India eases hedging rules to aid volumes The Reserve Bank of India liberalised hedging norms to boost trading volumes in the over-the-counter market. The RBI had imposed these restrictions to curb speculation in the foreign exchange market after the rupee weakened by over 18% between August and December 2011. Exporters can now credit 100% of their foreign exchange earnings to the EEFC (exchange earners' foreign currency account) without having to convert 50% of it in rupee terms. Indian elite have stashed at least $72.7 b in havens, says report At least $72.7 billion (Rs 4,06,900 crore) of wealth has moved from India to secretive offshore jurisdictions between 1976 and 2010, according to research conducted by campaign group Tax Justice Network.
Markets The market rose on bargain hunting last week after declining in past three consecutive weeks. Data showing resumption of buying of Indian stocks by foreign funds underpinned sentiment. The BSE Sensex rose 358.74 points or 2.13% to 17,197.93. The 50-unit S&P CNX Nifty rose 115.85 points or 2.27% to settle at 5,215.70. Previous week ended 27th July saw Sensex declined by 319.25 points or 1.86% to settle at 16,839.19 and Nifty by 105.25 points or 2.02% to settle at 5,099.85.
The India Meteorological Department (IMD) on Thursday, 2 August 2012, said the El Nino weather pattern is likely to reduce rains again in the second half of the June to September monsoon season. The IMD said rains over the entire June to September season are now expected to be less than 90% of long-term average. This is lower than IMD's previous forecast of 96%. State-run NTPC was the top Sensex gainer last week. It jumped 8.66% to Rs 166.30. NTPC's management said at a conference call held in Mumbai on Thursday, 2 August 2012, that the company has targeted capacity addition of 14,038 MW during the 12th Plan Five year plan. Key Highlights: :Muthoot Finance Q1 Net Profit up 29% at Rs. 2.46 bn:
Muthoot Finance Ltd., the nation's largest Gold Loan Company has in the first quarter of the Financial Year 201213 registered net profit growth of 29% at Rs.2.46bn, total income grew by 41% at Rs. 12.94bn, Retail Loan Assets under Management decreased by Rs. 13.37bn to Rs. 233.36bn, a decline of 5%. Company plan to enter into a
consolidation phase during the year focusing on improving its customer service, training to staff and internal controls. HDFC Q1 cons net profit up 25% Housing Development Finance Corporation Ltd has posted a profit after tax attribute to the Corporation and its subsidiaries of Rs. 12758.60 mn for the quarter ended June 30, 2012 as compared to Rs. 10200.60 million for the quarter ended June 30, 2011.
Markets continued.... SpiceJet returned to profitability after five successive quarters of losses. SpiceJet saw growth in passenger traffic and a further increase in market share to 18.6% by June 30, 2012. Revenue for the first quarter ended June 30, 2012 increased by 51% to Rs. 1407 crore as compared to Rs. 931 crore of the quarter ended June 30, 2011.
SpiceJet has also returned to profitability after five successive quarters of losses. SpiceJet posted a Profit Before Tax (PBT) of Rs. 624.4mn for the quarter ended June 30, 2012 as against a loss of Rs. 719.6mn for the comparable period last fiscal year. Moody's cuts outlook on Germany, 2 others to negative Moody's Investors Service has revised to negative from stable the outlooks on the Aaa sovereign ratings of Germany, the Netherlands and Luxembourg. In addition, Moody's has also affirmed Finland's Aaa rating and stable outlook. Manappuram Finance's profit dips 15% at `158 cr
Gold loan NBFC Manappuram Finance's loan disbursement during the quarter ended June 30, dropped 42 per cent against the same period last year.
After the RBI enforced regulations on gold loan companies, net profit dropped by 15 per cent from Rs 186.95 crore in March, to Rs 157.77 crore in June this year. The revenue from operations also dropped by 10 per cent to Rs 711 crore, against Rs 790 crore during the above mentioned comparable periods. The total loan assets under management declined by seven per cent to Rs 10739 crore from Rs 11630 crore in the March quarter Educomp raises US$155mn from global funds, promoters Educomp Solutions Ltd. India's largest Education Company announced that it has received the disbursement of USD 155 million as part of the financing package that was announced on June 19th 2012.
The long-term nature of the debt improves the asset-liability profile of Educomp's balance sheet and will help Educomp realize significant value from its investments in its core businesses such as K12 among others.
Markets continued.... Currencies: A late recovery helped the rupee gain on Friday, as demand for global risk assets recovered after the euro extended gains on the back of falling yields for Italian and Spanish debt. However, the currency still posted its third straight weekly decline as concerns about the global economy continue to weigh, especially after the Federal Reserve and the European Central Bank refrained from immediate action this week. The rupee still fell 0.8 percent for the week, as initial hopes for global monetary stimulus action were later dashed by the lack of concrete steps from either the Fed or the ECB. The USDINR rate ended at 55.75 on 3rd Aug. Expectations for week ahead Investors' focus remains on Q1 June 2012 earnings. DLF and Steel Authority of India will unveil Q1 results on Monday, 6 August 2012. Mahindra & Mahindra and Bharti Airtel will unveil Q1 results on Wednesday, 8 August 2012. Tata Motors and Ranbaxy Laboratories unveil quarterly results on Thursday, 9 August 2012. State Bank of India, Sun Pharmaceuticals Industries, Siemens and BPCL announce quarterly results on Friday, 10 August 2012. After the Reserve Bank of India (RBI) kept repo rate unchanged last month, the spotlight will shift to the newly appointed Finance Minister, P Chidambaram, who is anticipated to announce few reforms and policy changes against a backdrop of slowing growth and a weak monsoon. Marketmen are widely expecting that the government will announce few reforms after the election of new vice president next week. Election to the post of vice president will be held on 7 August 2012 and the results would be out on the same day.Investors will also closely watch how the monsoon progresses.
Campus Buzz- Finance Continuum 2012 The Finance Continuum, 2012, a part of the rolling seminar series –Continuums at Shailesh J. Mehta School of Management, flagged off on an exultant note.Continuum is the flagship event of the industry interaction sessions at SJMSOM which is held across various domains of management like Finance, Marketing, Human Resources, Consulting, Operations and Systems.This event aims to cover the latest trends in management by inviting eminent speakers from industry and academia. The event was based on the theme “Financial innovations for sustainable growth” and it was held on 28th July. An introductory address by the student representative, Mr. Rajat Sharma, set the stage for our distinguished speakers from the Industry to discuss burning issues and challenges of the Managerial World.Embarking on the theme, our honorary Professor, Prof. S.V.D Nageswara Rao, shared his words of wisdom with the audience. He talked about how critics across the world blamed innovations in US and other countries for the Global Economic Crisis. He also talked about how the regulatory bodies in India were instrumental in mitigating the impact of the global economic turmoil in India.
His speech was followed by a talk by the first speaker for the day, Dr. Prabhakar Patil, Joint Director at the Securities and Exchange Board of India. He briefed the aspiring young minds about the 'Market Micro Structure of Equity Derivatives in India'. He stressed the need for improving market breadth and the fact that rigid mentality was a great threat to stock markets. Our next dignitary for the day, Mr. G. Chockalingam, Executive Director of Centrum Capital, touched upon various Macroeconomic issues through some very interesting facts. He proposed investment in rural, education, research and exploration infrastructure. He stressed the need for 'unbalanced' growth. 'Go investing and growing' was the success mantra he suggested for emerging economies like India. Our third speaker for the day was Mr. Anup Bagchi, MD & CEO, ICICI Securities. He began with the thought that innovation was synonymous with 'Drug discovery' and that it had its pros and cons. He proclaimed technical infrastructure and social architecture were the most crucial driving factors of innovation. He also gave us an insight about Risk Management and Risk Products and proposed hedging the risk of commodity prices and many other innovative solutions to most pressing economic concerns.
Campus Buzz- Finance Continuum 2012 (contâ€™d) Panel Discussion on the topic 'Financial Innovation - A double edged sword?' had the audience engaged as three eminent speakers- Mr Rajesh Mokashi, Deputy Managing Director ,CARE Ratings, Dr Ramachandran, Head, Global Research ,ICICI Bank and Mr Jacob Mathew, MD, MAPE Advisory, moderated by Prof. S.V.D Nageswara Rao dissected their insights and experiences for an enriching discussion. The discussion brought out insights like 'Innovation is a constant way of life' and that ramifications of financial innovation have affected the economy as a whole.
Our fourth speaker for the day, Mr. Manishi Raychaudhuri, Managing Director, BNP Paribas, talked about Indian equity markets and gave reasons as to why it was at crossroads. He pointed out how the unpredictability of global markets and policy paralysis had almost stalled growth. However, he also brought out the positive signs like declining commodity prices and gold imports in the economy. He also believed that lack of Infrastructure was the biggest bottleneck for our Economy. Our fifth speaker, Mr. Harsh Nanda, Executive Director at Goldman Sachs, gave us an overview about Private equity and its scope in India. He believed that India was relatively a difficult market to penetrate. He briefed us on various challenges faced during the establishment and expansion of Goldman Sachs Private Equity extension in India. Our final speaker for the day, Mr Vivek Joshi, Associate Director, Kotak Investment Advisory, talked about Private Equity firms from an Indian firm's perspective. He discussed about the various types of equity, setting up of Private Equity and Exit options. He also talked about the various roles in PE and the skills required for excelling in the PE domain. Finance continuum, 2012, proved to be a great learning experience for all the students of Shailesh J. Mehta school of Management. The perfect blend of Industry and academia made it a huge success and it earned healthy response from both the spheres. -Archana Chaudhary, SJMSOM
Knowledge Section Relative Strength Index - RSI A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued.
Check your fin quotient Last Issueâ€™s correct Answers: 1. British Bankers Association 2. Cox and Kings 3. Bob Diamond has already resigned after revelations of his involvement in rate rigging scandal where Barclays traders attempted to manipulate key inter-bank lending rates 4. The 11 cement companies formed a cartel among themselves and colluded to charge higher cement prices from consumers 5. The Hong Kong Exchange Last issueâ€™s correct entries were from: Mohamed Ibrahim Gani, BIM Trichy, MBA Dinesh Kumar Nut, SJMSOM, M.Mgt, 1st year Hamdan Ali, SJMSOM, M.Mgt, 1st year
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