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THE FINANCIAL BULLETIN

FROM THE EDITOR

Money Matters Club IBS, Hyderabad Established—2005

Dear Readers, Editorial Enquiries Money Matters Contact Club Contact No +919948564613, +917842772646 Advisor Dr. S Vijayalaxmi Faculty Co-ordinator Dr. Amlan Ghosh Student Co-ordinator Kanchan Kumar Roy Editor Devika Barua +917842772646 Advertising Contacts Sahil Kakwani +918187896351

It gives us the immense pleasure to come up with August Issue of 2013 successfully. We are happy to announce the winner of the “Article of the month” award, AMAN VIJ and SAURABH JAIN from

IIM,RANCHI

for

their

outstanding

write-up

on

“DECOUPLING OF INDIAN ECONOMY”.

This issue reflects on the continuing of unemployment problems and its effect on our economy. A wide range of articles casing from the depreciation on rupee to hike in gold prices with its probable measures. And an unfathomable thoughtful question on every Indian

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mind “Will Raghu Ram Rajan assistance get India’s charisma back?” whose insights were contributed by Munnangi Siva Krishna Manoj and Sonali Pahwa. We have discussed about the steepest decline in real GDP of US History and its impact on nationwide. A

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Pallabi Dutta and ROOHI Juneja which will force you to think All rights reserved. about how manage funds on time. along with many other thought Money Matters Club, The official provoking headings. Finance Club of IBS Hyderabad. Visit us at for further Happy Reading! information.

DEVIKA BARUA

2


CONTENTS 4

Decoupling of Indian Economy of Indian

8

Will Raghu ram Rajan assistance get India’s charisma

12

Great depression is it a Black Swan

15

Unemployment Crisis: THERE ARE MILLIONS IN G20 NATIONS

18

THE DECLINE OF RUPEE AGAINST DOLLAR

20

HOW 40-SOMETHINGS SHOULD MANAGE THEIR DEBTS

23

New banks for the under banked economy

27

Shale Gas - The Global Energy Game Changer

31

IS GERMANY CAPABLE OF HANDLING THE STORM?

35

STABILIZING THE VOLATILITY IN INDIAN RUPEE

39

Indian stock market & Indian Rupee

42

The Indian Gold Rush

46

QUIZ

3


Decoupling of Indian Economy and economy should have enough strength so that they don’t require support of developed counries like US and European countries for their growth The Problem Indian Economy is the 3rd largest economy by GDP (PPP) and is expected to overtake US as the 2nd largest economy by 2030.It is a mixed economy which is a mixture of socialist and capitalist economy

wherein

privately

owned business and public sector business (owned by government) plays a vital role in the running of the

economy.

In

a

mixed

economy both consumers and producers have right to consume and produce the things they want with government taking the role of a moderator to remove harmful goods from the economy.

Looking back in history ,the 1991 globalisation reforms in India had given the Indian economy a tremendous boost in terms of growth due to increase in trade and competition. The Sensex had rallied from below 1000 levels to 20000 just in the space of 16 years. So why the need of decoupling of economies? The main problem was that countries like India via IT exports and China via exports of manufactured goods had synchronized their

business

cycles with developed economies to such a large extent that even if there was a hiccup in those economies, there was a strong wave of uncertainty in developing

What is Decoupling?

economies markets.

Decoupling is the ability of country to be self-sustaining or selfsufficient.

With

respect

to

developing economies like India it can be said that for decoupling to take place its financial markets 4

But there was a depression in the U.S economy. The housing bubble which was being built since the 2000 suddenly blew out and the DJI came crashing down and so


FIGURE 1

started

did Sensex (Figure 1) which fell

selling

shares

to

make up for the losses in-

from 20000 levels to the 8000

curred in America which led

levels.

to decline in the value of the

The decline of America was

rupee and crash in our stock

being transmitted to India in these

markets.

two ways 1.

2.

The cost of production of

Even if you look the recent trend

goods in America was high

even after our government had

compared

to

developing

taken a number of steps to revive

countries

so

companies

our

economy

like

reducing

were closing its plants in

government spending, allowing

America

increasing

FDI in number of sectors like

production in its plants in

aviation and communication, and

India and China. Due to this

deregulation of the fuel pricing,

America’s

disposable

but the rupee had a fall of around

income decreased which led

8.5% and reached an all-time low

to less consumption of In-

of 60 compared to Dollar just be-

dian goods and our exports

cause of Ben Bernanke’s (Fed’s

declined.

Chairman) comment on tapering

and

Due to weak U.S. economy, investors were unwilling to take risks of investing in

on

the need for dian economy.

emerging markets like that of

India.

Instead, 5

they

Quantitative Easing. Thus

.

decoupling on In-


India’s

The Solutions In order to be truly decoupled we

Manufacturing Sector

contributes to only 15% of GDP (Figure 2). The gap between

need to focus on three things Increasing domestic consumption Reviving the manufacturing sector

India’s domestic production and needs of its 1.2 billion population

is therefore met by imports. To Reducing our dependence on the reduce the dependence on other economies for energy. imported goods, India needs to have a sustainable, self-sufficient

st

For tackling the 1 problem we

manufacturing sector. To revive

can take the help of china model

the

wherein

Government of India needs to

China

in

order

to

overcome the impact of fall in ex-

manufacturing

sector,

provide incentives for enhancing

ports because of reduced demand

the private investment in the

from developed economies moved

sector. The incentives could be in

onto increasing the investment on

the form of tax breaks on

infrastructure which ultimately led

investment, lesser restrictions on

to higher domestic demand. We

opening of a new business, lower

should provide better business

interest rate loans.

starting environment by removing policy paralysis. Other than that our priority should also be to clear the 215 odd projects worth Rs 7 L crore stuck in red tape. This will lead to greater job opportunities which in turn lead to greater incomes and thus greater demand and

our

consumption

will

increase. Thus our Indian business houses

which

goes

outside

because of better support will stay in India itself and thus we would reduce our dependence on FDI and FII.

6


AUTHOR: FIGURE 2

For overcoming the 3rd problem entering into long term contracts we

need

to

encourage

oil with oil rich countries to reduce

companies to invest more on R&D the effect of volatile pricing of and explore more sources like the spot markets. AMAN VIJ IIM, RANCHI

underwater reserves, new basins. In spite of the fact that India has huge coal reserves, we are still importing coal. Also we have a huge

gap

production SAURABH JAIN IIM, RANCHI

between and

our

oil

consumption

(Figure 3) which is adding to our trade and current account deficit. We should also invest more in

To

globalised

in

world

today’s complete

decoupling is only a myth but we can

always

reducing

work

Indian

towards economy’s

dependence on outside world so that our economic policies are not ruined by outside turbulences .

renewable sources of energy like solar, wind and hydro. Other than that we should also focus on

FIGURE 3

7

summarize


Will Raghu ram Rajan assistance get India’s charisma back? In his first 3 years term as governor he accomplished all challenges so; Government of India has increased his term for 2 more years. The extension came out when the whole world is still in crisis, Mr. Pranab has told that he has played a key role in steering On September 5

th

2008 Dr.

the country form the worldwide

nd

financial meltdown resulting in

Governor of the RBI for a three

the fall of America’s epochal

year term. He joined RBI when

Investment

there is a recession all over the

Brothers in September 2008.

world. But India is in a pace of

Subsequently in 2008 CAD

7.4% GDP in 2008 reduced

issue is deteriorating but it

from 9.5% in 2007 where the

became more worse in 2011 as

GDP

the Imports in India has started

Subbarao appointed as 22

of

other

biggest

Banker

Lehman

economies like USA it’s GDP

increasing

has shrink to negative and

Demand for Crude oil started

China’s GDP has shorten to

increasing besides Gold im-

6.2% in a quarter from 13%

ports surged from USD 16 Bil-

which is a drastic change.

lion in 2008 to merely USD 49

Exhibit 1: GDP of India from 2008-13 8

significantly,


in 2012 which has become second Mr. Chidambaram like relaxing the largest contributor to total imports FDI norms in several sectors, after Crude oil.

increasing the Import duty on Gold

Items/Year

2007

2008

2009

2010

2011

Current Account Deficit

-15.7

-27.9

-38.2 -46.0

(US $ billion) Current Account Balance

-1.3

-2.3

-2.8

-2.7

78.2 -4.2

Gold Imports (in $ bil-

16.7

20.7

28.6

40.5

56.2

Gold Exports* (in $ bil-

3.0

4.2

4.3

6.1

7.0

Gold Imports

13.7

16.5

24.3

34.4

49.2

(Net Value in $ billion :) Gold Imports as % of

1.3

1.7

2.1

2.4

3.0

GDP Net Gold Imports as % of

1.1

1.3

1.8

2.0

2.7

GDP Gold Imports as a ratio of

106.

74.2

74.9

88.0

71.9

Net Gold Imports as ratio

87.3

59.1

63.6

74.8

62.9

-

of CAB Source: RBI *: Imputed Figure consists of 15% of exports of ‘Gems and Jewelry’

After LPG, in 1991 it is eminent To 10% from 2% in different that

the

factors

which

are intervals and etc. He worked as a

elsewhere are also effecting the true Professional by not getting situation

in

India.

CAD

is influenced by any higher authority.

worsening as there is no demand In the span of 2011-13 there are lot for exports because all developed of and

emerging

economies

conflicts

between

Mr.

are Chidambaram and Dr. Subbarao

adversely affected by the crisis and which at last ensuing in a fag end of there is no drop in imports, this has his career. worsen the situation which resulted After

Dr.

Subbarao,

the

in bringing forward the reforms by Government of India has appointed 9


23rd RBI governor on 6th of the major problems that the Indian August 2013 Mr. Raghu ram Go- economy is facing. vinda Rajan, for a term of three years and will take over Dr. Subbarao

from

4th

September

2013. He is an economist and earlier served as the president of American Finance Association and was also the chief economist of the International

Monetary

Fund

(IMF). He is the same person who

For Mr. Rajan now the situation is like travelling in a car without lights at night, there are many challenges he has to face to overcome with the financial crisis of India. But he is really an ambitious individual. 1.

First

challenge

is

to

in the year 2005 had predicted the

stabilize the condition of

renowned financial crisis that had

Indian rupee which has

hit the developed countries in

been dropped by 11% in

2008.

2013.

He is the second youngest RBI

2.

He should give stimulus

governor after Manmohan Singh

to

and his appointment by the

economy; the growth has

government came when the rupee

been declined to 5% low

had hit an all-time low of Rs.

last year that has led to

th

growth

of

Indian

61.81 on August 6 2013. He will

the stress in corporate and

be having a tough time ahead

huge

because of the slow growth of

losses.

economy and the

continuous

3.

amount

of

job

CPI inflation is 9.64% in

decline of Rupee. The current

July even though it is

financial situation of India is in a

reduced from 9.87% in

wretched state. The Rupee got

June and the difference

depreci ated

in

between WPI and CPI is

November 2012 to 61.81 in August

huge as WPI in June is

6th 2013 has become a nightmare

just 4.86% , it is a

for the Indian government.

gigantic issue for RBI

from

54.9

they have to keep an eye The CAD of India has touched a

on it.

record high of 4.8% of GDP in 2012-13 due to the imports of crude oil and gold, this is one of

4.

New RBI governor has to repair

the

ministry ties. 10

RBI-finance


5. He has to work on the new he is ambitious, passionate and banking licenses, as the stress highly knowledgeable person. If he in the banking industry is being shows same dedication then, we increasing. The recent reforms can expect good result from him. taken by RBI is also a great It’s time for him to bring stability in blow like minimum daily CRR the economy rather than just forebalance of 90% and limit for casting for future so access to LAF is set to 0.5% THAT HE CAN BRING BACK etc.,

THE LOST CHARISMA OF INDIA.

Author:

6. Lastly to bridge the gap of current account deficit which is somewhat critical as from the June

beginning

FIIs

have

pulled out USD 11 Billion. Munnangi Siva Krishna Manoj

We must not forget that he excelled pretty well at every job;

Sonali Pahwa

Exhibit 3: Performance of Indian Rupee SOURCE: RBI

11


Great depression is it a Black Swan As per the theory of author Nasim the US history which will confirm Taleb Black Swan is an event great which is characterized by three properties. 1.

Occurrence of this event is extremely rare.

2.

They create extreme impact.

3.

Human nature makes us fabricate

explanations

for their occurrence after the event has occurred in order to make them seem predictable. In this write up I will try to test great depression over these three properties in order to prove it to be a Black Swan event.

depression as a rare event.

Now the focus shifts toward whether great depression created extreme impact or not. One of the major

causes

for

the

great

depression was overproduction and the impact which it created was huge decline in prices and income by 20-50%. As the unemployment rose to about 25%

many people

become homeless as they couldn’t pay their rent.The people who were hit hardest by this depression were on the bottom of the economic ladder. The homeless built shacks out of tar paper, cardboard, and/or scrap material.

As per the theory one of the most s h a c k s

These towns of

became

known

as

critical properties of a Black Swan Hoovervilles. This was the time is that it is an extremely rare event. when hopes of owning a house was This was the period in the US completely shattered since people history when they saw the steepest don’t have the means to pay the decline in real GDP from 104.6 rent. Starvation and illness was a billion dollars in1929 to 57.2 common sight throughout the billion dollars in 1933. During country because of malnutrition and great depression unemployment unhealthy living conditions. This touched

25%

and

industrial shows the impact great depression

production fall down to about 46 had on human life, on the basis of %. These evidences show that this which we can deduce that great phenomenon was unprecedented in depression fulfills the second condition of Black Swan. 12


Here comes the third and the final per different theories but none part where we discuss the theories could point out the exact cause that make us believe that this event responsible for the great depression. was predictable. Two of the major Because if the exact cause for great factors responsible for the great depression is known then recession depression overproduction construction

were and

t h e of 2007 could have been avoided,

boom

industry.

in this shows that these events are

This extremely difficult to predict which

becomes a vicious cycle when makes it qualify as a black swan. unemployed workers consume less Question which arises now is how due to

which industries are great depression can be useful to us

reluctant to produce goods and as a Black Swan. In order to answer thus industries cut production this question I would like to take which results in more layoffs. This the example of turkey from Taleb’s cycle could be reversed with the “Black Swan”, it tells the story of help of

government spending the turkey who is fed and cared for

which could create more demand. a prolonged period, as a result of Federal bank could have cut taxes which turkey is convinced that this and increased spending but gov- treatment will continue in future ernment does the opposite by also but one day, however, the raising the interest rates which turkey is not fed, and butchered at discouraged business spending and the hands of the same people who borrowing. Problem was further had cared for it. This story aggravated when FED refused to illustrates the drawbacks of looking support banks in 1930 which to the past in order to predict the forced them in bankruptcy. This future. This story tells us if we shows that great depression was a analyze the situation on the basis of result of various factors occurring past events then it is highly simultaneously. It is explain

which

overproduction,

difficult to probable we are going to draw f a c t o r wrong conclusions, this is where boom

i n we can use the concept

of

construction sector or inefficient “Antilibrary”from the book “Black policies followed by government Swan” which states that

unread

triggered great depreciation or it books in one’s library are more was a result of combined effects. important than the books which has There are different explanations as been already read, in laymen terms 13


it can be stated as “what we don’t know is more important than what we know” this simply means when any analysis is done on crisis situation that analysis should not be based on some pre conceived notions but it should focus on the issues which are not discussed till now. By doing that we will be able to better prepare ourselves against any future crisis situation because AUTHOR:

future crisis situation will not happen in the same way as the old one.

Sagar Choudhary Institute For Financial Management and Research

14


Unemployment Crisis: THERE ARE MILLIONS IN G20 NATIONS Unemployment

is

in

current isn’t a huge mystery, as to why

parlance only associated with the there is such a huge problem with United States of America; in unemployment. Let’s consider a effect, the other countries of the giant corporation, why will it hire world

are

either

ignored

or workers that cost the firm more

forgotten. Did we know, the total than 10 times as much as other number of unemployed in the G-20 workers. nations

is

approximately

100 there

Over the past decade, have

been

massive

million and the same increases movements of jobs to continue, every passing day?

where

labor

is

cheap.

Large

Therefore, are we now seeing the corporations are also planning to truth of a systemic unemployment and terminating labor, to replace crisis, which is not only restricted them by use of technology. If a to America but also faced by many particular work can be undertaken other economies of the world?

by machine with precise output,

The question arises, what is really why would companies miss the causing this crisis and secondly, is opportunity to lower their cost and there trust that the same will be gain maximum benefit out of the turned around? To our fate, which same? is unfortunate, several long-term All this considerations, there has trends have been formulating since been an overall weakening in the years and have paved way for western world and as long-term bringing us to the point we are trends intensify, the unemployment today.

worldwide would get worse. The

The fundamental to this was the International Labour Organization dominant

nature

of

big too is convinced about the growing

corporations in the global econ- unemployment in G-20 countries, omy, and there stance of replacing and has been exclusively put in the worker that live in major words by the Director General to industrialised nation with workers CNBC. that live in countries which have a When individuals in the G-20 low labor wage restriction. This nations lose their jobs, they have 15


,observed

to stay out of work for Mainstream media trying to con-

quite a considerable amount of vince residents that everything is time. In fact, CNBC claims that 30 fine, by throwing the standard item, percent

of

the workers who

lost

their jobs in

Unemplo yNation South Af-

Unemployment CondiAbove 25 percent

ment rate has been down,

going but

G20 nations France have been Italy

Has Hit a 15 Year High 12.2 percent, highest in 35

when we look

out of job

years 13.2 percent 13.6 percent 17.7 percent 26.9 percent 27.2 percent

calculations,

Poland since a year Ireland or longer. Portugal M a j o r Greece Spain nations,

deep into the the statement does not seem accurate. Recently New

which are industrialized, too are no York Times reported that the longer producing enough jobs for decline in unemployment rate in their people.

recent times could entirely be

Unfortunately, it seems, things ain’t going to get better any time soon. Since last recession, the global confidence is the lowest today.

accounted for by a decline in the participation rate. To get an accurate depiction of employment position in United States, we need to look at the employment-population

The United States of America, what is their part of the story? The official numbers do not look quite bad, as much as that of the rest; the official unemployment rate has been hovering at 7.5 percent, since 54 months now, which is the longest stretch in history. It is atleast not double digit, but things could get worse and which in no way means that it is doing better. 16

ratio,

which is a measurement of the working age population that is actually working. We observe that the percentage of working age Americans that actually have a job has been declining in recent decade. This clearly shows the honesty of the mainstream media, when it tells us about the employment numbers of June 2013. The truth as such is, the unemployment rate has risen in 28 American States, and there has


been things are not getting better in t he

sm al l

sp an

Unemployment

of

time.

problems

in

Europe and America are likely going to continue to get worse in the years ahead. This is in a way a bad news for most of us, the only thing that we have to offer is our labour in the market place, and the value of the same AUTHOR:

has

been

continually

declining, which increases the very difficult current position. The current situation can be compared with game of twisted musical chairs. We have been drafted to play and each time the music stops, more chairs (jobs) are being taken out of the game. There always exists something,

Prakarsh Jain (Chartered

which you might want to start thinking about and the time is now

Accountant) S P Jain School of Global Management,

17


THE DECLINE OF RUPEE AGAINST DOLLAR Recently, Mr. Narendra modi at around 3.5% from 1950s to highlighted

the

issue

o f 1980s, while per capita income

depreciation in the value of money growth averaged extremely low and in an attempt to politicize the 1.3% a year. In 1991 there was issue blamed the current govt. for another economic crisis when India this state of our economy which is borrowed money from IMF which more or less correct. But, keeping stated certain norms for india to everything aside what we need to f o l l o w

among

which

was

focus on is how to rebuild the liberalization of foreign trade and value which our currency has lost. 1 rupee was equal to 1$ at the time of independence but now it has weakened by a great extend standing at a staggering value around

60

per

us

$.

After

not to forget that the finance minister of that time was our current prime minister a giant in the field of economics .In the period of 2000-2007 rupee stopped declining and

started

rs.39 per US

economic 1960's

when

$ because of continuous inflow

govt.of India

cash

had a budget

of from

foreign

d e f i c i t problem

a

record high

India faced an in

value

reaching

independence

crisis

regaining

companies.

and

could not borrow from abroad, there was intense pressure for liberalization which was not enforced in to act for some reasons . The "Nehruvian Socialist rate of growth" is used to refer to the low annual growth rate of the economy of India before 1991. It stagnated 18

The current position of the rupee is more alarming as it has weakened by 7.5% against the dollar since may of this year, companies have started taking their money out of Indian market due to its fragile conditions.


CAUSES : -

RUMAN RAHAMTULLAH NATIONAL INSTITUTE OF TECHNOOGY, ROURKELA

The current condition of rupee is due to a cascade of events, according to me the cynosure of them is lack of industrial power to provide sufficient goods for consumption and export, which could be due to the guidelines set by environment ministry and political pressure and taunt on the illiterate and poor people of rural areas which are haven for different minerals. People are deceived to protest against mining and construction of industries which would have been a boon to them. Increasing lust for gold in our country especially for following certain old dated traditions and heavy demand for fuel puts intense pressure on the government to import gold and other precious metals and fuel from gulf countries which increases the market deficit which in turn weakens money a clear cut implication for foreign investors to pull out their money from the indian market. Change in lifestyle of the educated population further pushes for import of goods from foreign market. The result is that rupee stands at a staggering rs.60 per us $. EFFECTS : Effects are widespread and not just confined to only big businessmen but also hits the common people where it hurts the most the pocket. The government has to pay extra money for import of crude oil which increases the deficit even more. Import costs have increased which means companies have to shed more money for raw materials and technology which 19

increases the cost of production implicating an imminent price rise of products and services, cut in remuneration and companies refraining to recruit more employees in such hazardous environment which in turn leads to unemployment and acute pressure on money earned by an individual at high inflation rate. The depreciation of rupee has impacted the automobile sector in three ways. First, input costs have risen as these companies use imported components. Second, some companies will have to pay higher royalty to foreign parent firms. Third, many have foreign currency loans in the form of external commercial borrowings and foreign currency convertible bonds. MEASURES TAKEN : We have with us the most intellectual bureaucrats handling the most important portfolios of the government. Graduates from harvard and cambridge are known to turn fortunes. Currently, MR. P. Chidambaram has raised import duty on gold to reduce its demand and plans to bring down the amount of import significantly in the next fiscal year, encouraging forei gn investments in India and FDI in retail. RBI has increased the interest rates to reduce the supply of rupee to the market. This will ensure that inflation is kept under check.


HOW 40-SOMETHINGS SHOULD MANAGE THEIR DEBTS Handling debt is a challenge for dle the most important expenses those of all ages, and the troubles you face. Also vital maintaining start early in our adult lives. It's the ability to repay your debts only likely to incur some heavy while simultaneously ramping up debts in our 20s and 30s, as we are savings dealing

with

the

for

your

longer-term

imbalance goals.

between our relatively scarce financial resources and the sizable To deal with all those issues, here expenses of getting started with are four things that 40-somethings careers and families.

should keep in mind in dealing with their debt.

By the time one hit your 40s, they might hope to have moved past

Anticipate

that phase. But even though many

E x p e n s e s

people in their 40s have wellestablished careers that produce considerable incomes, they also often

face

growing financial

commitments, both to themselves and to family members. That is a big reason why 40-somethings have the highest levels of debt of any age group, and not like younger groups, they've seen their debt levels increase slightly since 2005, according to statistics from the FICO Banking Analytics Blog.

Dealing

with

Big-Ticket unanticipated

expenses can break the budgets of young adults. But by the time one hits 40, they have plenty of life experience behind them and can predict what sorts of financial demands

will

particular,

come

most

up.

In

important

expenses like putting children through college or replacing a vehicle are fairly easy to forecast. The smarter one can be about planning for them beforehand, the better they will be positioned to

Debt management in your 40s isn't just about paying down debt. It is also about making sure you're using the right kind of debt to han20

minimize how much debt they have to take on to pay for those expenses later.


Having an emergency fund with following an accident or poor three to six months' worth of health. Working with an insurance income is out of reach for many company

to

craft

the

right

young adults, but by their 40s, it protection package for you could becomes more realistic. Having mean

the

difference

between

that fund available can keep them beating debt and suffering a big from incurring debt and provide a financial setback. cushion them can tap later for college

expenses

and

other Put Your Best Debt-Foot For-

big-ticket items.

ward

Get The Right Protection For Your Family

levels of their lifetimes, they're most vulnerable to unexpected tragedies like a death or major illness in the family. Between lost earnings and enlarged expenses, such events can crush even a financial

plan.

Having the right insurance policies in place to protect against tragic events can ensure your family's financial endurance. A simple term -life insurance policy usually costs relatively little but can provide enough death benefits to pay off a home mortgage and other debt while

adults

tend

to

take

advantage of credit wherever they

As 40-somethings hit the peak debt

well-crafted

Young

potentially

leaving

additional savings available for future needs. Disability insurance can replace lost income and cover qualifying expenses if you're unable to work 21

can get it. But as one gets older, their access to better credit should increase, allowing them to skip expensive forms of debt like credit cards and payday loans and instead get low-rate loans that are much easier to pay off. Even though low-rate specials on car loans and credit cards can make their interest costs

attractive,

the

most

consistently economical financing usually comes from a home equity loan or home mortgage, with government-subsidized

student

loans also offering reasonable rates for many students. If they have to have debt, look to consolidate it into these favorable areas, then avoid taking out additional highcost debt in the future.


Set the Stage For Your Own Future

As important as debt reduction is, 40-somethings also have to face the inescapability of their own future financial needs. One big reason why it is so important to get rid of bad debt and focus on concentrating outstanding balances in inexpensive forms of credit is to give oneself the flexibility to save more for retirement. As their salary increases, the potential matching contributions from their employer also rise, and they won't want to miss out on the opportunity to collect more free money to put PALLABI DUTTA IBS– HYD

t oward their retirement savings. The hallmark of one's 40s is that debt stops being a necessary evil and starts becoming more of a potentially

ROOHI JUNEJA IBS-HYD

helpful

tool.

By

focusing on the positive aspects of debt in helping one balance competing financial needs while avoiding the downsides with which they are already familiar, they can put debt on their side and manage it effectively.

22


New banks for the under banked economy After more than a decade now, Un d e r

b an k ed

E con o my -

Reserve Bank of India (RBI) is all Untapped Potential set to issue new bank licenses A look at the banking penetration in which was long awaited ever since India tells that it needs hundreds of the

former

finance

minister, banks to be at par with other major

Pranab Mukherjee, announced in e c o n o m i e s . his

FY2010/11

The

banking

(April-March) penetration depends on the loan-to-

budget speech that the RBI was GDP (gross domestic product) ramulling over the issuance of tio. It is measured by the amount of additional bank permits. To delve domestic bank loans made as a ratio deeper into the rarity of such of GDP of the economy. issuance, the central bank has According to media reports, India's licensed just 12 banks (10 in 1993 loan-to-GDP ratio was 75% in and 2 in 2001) over the past twenty 2011, while China's was 146%. The years. That issuance witnessed the US has a ratio of 233%, with the emergence of Kotak Mahindra UK close behind at 214%. Bank

whose

founder

Uday

Kotak went on to become India’s f i r s t

Overall, India remains relatively underbanked by regional standards,

billionaire banker. On 1st July, 2013,

26

candidates consisting of

Non-

Banking

SIGNIFICANTLY UNDERBANKED

Finance Companies

Asia - Banking Sector Total Assets, % of GDP

(NBFCs), corporate house, government entities and broking companies have applied for banking licences. 23

with the banking industry's total assets equivalent to just around 80% of GDP as of end-2012. In contrast, the figure for the regional


average (example-Hong Kong) extension, the increase in private stands at about 140%.

sector participation in the industry

However, on the second thoughts, looking at the positive side of the things, this represents an untapped potential and an attractive long-run trajectory especially in view of low

overall - remains critically low given the still-heavy presence of state institutions, and the resulting economic inefficiencies they pour into the economy.

-growth developed markets and a Disparate Return on Assets and prolonged structural downturn in NPA China.

Let’s compare the performance of

More specifically, this attractive the private sector banks and their opportunity exists more in the state counterparts basis their return consumer banking space owing to on assets. The return on assets the favored long term outlook of (ROA) of private banks has risen to India's demographics. Existing 1.53% as of Financial Year 2011banks and the ones waiting for new 12 from 1.13% in Financial Year licenses are the ones who would be 2007-08, while that of state banks benefitting from this untapped has fallen from 1.00% to 0.88% potential.

through the same period.

The heavy footed state: According to the RBI's latest annual

profile of commercial

banks for Financial Year 2011-12, India's

26

public

sector

commercial banks, which include the State Bank of India (SBI) and its associates and nationalised banks, approximately account for a mind-boggling

75%

of

the

industry's outstanding loans. However, the 20 private sector and 40 foreign banks roughly account for the remaining 20% and 5% respectively. Essentially, the arrival of new private sector banks - and by 24

Ironically with regards to net nonperforming assets (NPAs), the former has seen their ratio fall to 0.46% according to the latest data, which is way below the latter's 1.53%. This

disparate

performance

between these banks and their stateowned counterparts in recent years obviates the need for greater private sector participation to extract the gains for the entire economy.


STATE DOMINANCE India - Breakdown of Outstanding Loans as of end-FY2011/12, INR million (Left Hand Side) & Banks' Return on Assets, % (Right Hand Side)

Financial

I n c l u s i o n ? that they will reach out to the rural

Looking at the World Bank's latest and unbanked areas and focus on data on financial inclusion (see inclusion objective and also expand chart), it is quite clear that Indians credit to the small and medium over the age of 15, on average, enterprises. However, the truth is remain considerably underbanked that the private sector and the forcompared to their global peers. For eign banks see this lending compulexample, the global average for the sion

as

an

attack

on

their

percentage of 15 and over's with profitability. an account at a formal institution It’s easy to see that they are stands at 50%, 15 percentage focusing on the creamy layers of points above India's 35% figure. the premium banking and high net The same global average metric worth individuals to extract the for the bottom 40% of the income maximum profits. distribution is 41%, while for In- So, one way to look at the dia; only 27% of its bottom 40% enthusiasm with which RBI has has an account at a financial come up with new licenses is just to institution. And we talk about show some action in the financial financial inclusion.

sector in the bleak economic

We know that there exists a growth scenario. priority sector lending obligation of 40 per cent. The justification provided for new bank licenses is 25


to more financial inclusion. Our

Forward Steps:

From State control to Freer economy should be able to leverage their proven entrepreneurial talent

Markets

Essentially, a level playing field and management expertise through cannot be there when state banks, letting them enter into the banking implicitly and essentially backed territory. by the government's coffers, can afford to take more risk as compared to their private domestic and foreign peers. Even though the looming entry of new private banks is a positive step forward for the industry as a whole, we believe that the full AUTHOR:

potential of India's commercial banking

sector

can

only

be

unlocked via a marked reduction, if not complete eradication, of state -run entities in the system. Indian private sector has been innovative in penetrating into the frontier and RITU AGGARWAL

expectations are that the same spirit will be shown and it will lead

Source: BMI, World Bank Global Laggard Financial Inclusion Data, % age 15+ 26


Shale Gas - The Global Energy Game Changer and continents are staring at

Abstract:

This article explores the game renewable energy technologies changing potential of shale gas in which are not progressing at an reshuffling the global energy map economically scalable level, shale and how several nations are finan- gas is gearing up with rapid cially and technically stretching developments to take over a themselves to surface on this dominating share in the pie of restructured global energy map. It future energy mix. briefl y

discusses

how

the T h i s

ga m e

changing

gas,

developments in shale gas are progressing to tilt the political, changing

the

political

economic

affiliations

and economic

and

environmental

among dependencies among countries, is

different countries and the major currently stretching several nations issues

challenging

t h e s e financially and technically to

developments. While stressing on surface on the restructured global the prospects of this energy, it also energy map. As its production is emphasis the need for economies transforming

from

financially

to re-evaluate their trade-offs unviable to viable, let us examine between increasing energy security the global reserves of technically versus environmental scrutiny.

recoverable global shale gas from and its trend across continents.

Shale Gas - The Global Energy United States, currently a net

Game Changer

Shale gas - the cheap, the clean importer of natural gas, with an and the abundant fuel is beginning identified shale gas reserves of 862 to unleash its potential to reshuffle trillion cubic feet, has started the global energy map. With an unraveling access to its rich shale estimated global energy demand gas

reserves

which

has

the

by 2030 being 40% higher than in prospects to turn the country to a 2007 and the expected world net exporter of natural gas.

The

population to reach 9.2 billion urge to scale up the shale gas people by 2050, when countries production 27

is

straining

the


companies and the nation for huge reduce its dependence on external investments and to boost the countries. manpower

and

However,

currently

t e c h n i c a l Brazil has been showing little

capabilities. Adding to this, the interest

in

developing

these

environmental agencies, as was resources. with all

energy sources, are

Unlike

the

Americas,

differing with these development despite of identified shale reserves, plans by demanding more stringent huge production costs and lack of environmental regulations.

technological know-how along with

Contrary to this, Canada, infrastructure lags are questioning the now world’s largest producer the long term viability of the related and the major exporter of natural investments in Europe which gas to US, cautioned by the future started looking at United States for decline for

future gas import opportunities.

its natural gas demand from US, Russia, a major exporter of natural started exploring markets beyond gas to Europe, identifying the North America to supply its future potential of shale gas is surplus gas and also the options for partnering with technology firms to commercial production of shale gain access to shale gas related gas. Among the South American technology and is also gearing up to countries, Brazil and Argentina s e r v e

the

Asian

Markets

have rich deposits of shale gas anticipating United States to export which are very important to con- shale gas to Europe. In all, Russia trol

their

net

import

bills. and Europe has kept their radars

Specifically Argentine government high on United States, to frame is putting priority in developing their future strategies in this these reserves to strategically segment. 28


Australia, one of the world’s stakeholders to draft its policy of largest producers of conventional shale gas exploration. natural gas is currently a major

Contrary to

the

above

exporter of natural gas due to less benefits, the financial prospects of demand from its sparse population. these

projects

are

driving

Despite of the identified reserves economies to restructure their of shale gas, its development is investments

in

energy sector

uncertain in the near future thereby postponing their long term because of its lag in technology renewable energy projects by years. and skilled labor. However, if The clean nature of the shale gas is significant economically viable also compelling governments to reserves are identified, Australia influence more investments into can leverage its relationship with these short term projects, to meet Asian countries to export its the emission norms. However, the surplus production.

high gestation period required to

In Asia, China with an un- reap the financial benefits from official estimate of over 1275 these projects is inviting the trillion cubic feet of shale gas de- investors with financial risks, posits is moving positively in associated with the huge instabilideveloping its reserves to reduce ties in the gas prices. Given the fact its energy dependency on foreign that

the

hydraulic

nations. Chinese government is technology, actively promoting shale development

and

is

gas polluting

well the

fracturing known

ground

for

water

forming resources, used in these gas

strategic partnerships with foreign extraction projects is banned in companies to acquire technical France know-how. In contrast

and

rai sed

s erious

India, environmental concerns in other

currently a net importer of 25% of parts of the world, gaining the natural gas, is still exploring public confidence on environmental various alternative sources of en- sustainability of these projects is ergy to bridge the ever increasing one among the major challenges gap between its supply and being faced by this technology. demand for energy. With estimated shale gas reserves of 290 trillion cubic feet, Indian government is in discussion

with 29

various

With traditional importers turning to self-sufficient or exporters and the current energy surplus nations eyeing at new relationships


to

export

their

surplus,

the

developments in shale gas are changing

the

economic

political

and

affiliations across

different countries. For instance, Canada, once a major exporter of natural gas to United States now has to compete with the same for exporting its surplus gas. While Europe is eagerly staring at shale developments in United States for an import opportunity, Russia and Australia are looking towards AUTHOR:

Asia. Shale gas developments in

Vijay Kumar Sarakamu

China are decoupling its energy

IIM-Ahmedabad,

letting it to take over the supreme

dependency on rest of the world, throne from United States much earlier than was anticipated. While cel ebrating

nations the

shale

are gas

developments in their territories excited to generate huge investment and

employment opportu-

nities, they should also balance their

commitment

to

environmentally safe renewable energy sources. It is high time for the economies to re-evaluate their trade-offs

between

increasing

energy security versus environmental scrutiny.

30


IS GERMANY CAPABLE OF HANDLING THE STORM? The 2007-08 subprime crisis saw the downfall of many banks and 2. Industrial Production l a r ge

c o m p a n i es .

E u r o p e The recession of 2008-09 affected

remained relatively unaffected t h e throughout However,

this the

growth

of

industrial

t u r m o i l . production. However, it showed

Euro

zone remarkable growth in year 2011

sovereign debt crisis in early and 2010. The outlook for the 2010 put Greece, Portugal, Spain future isn’t bright because of the and Ireland (PIGS) in a state of euro zone crisis and the weakness distress. Amongst

of euro currency. all

the destruction 3. Unemployment rates

around it, Germany rose like a According

to

phoenix from the ashes.

has

The

Germany

Eurostat the

data,

lowest

objective of the article is to find

unemployment rate (5.3%) when

out whether Germany is capable

compared to debt ridden countries

of handling the Euro crisis and

like Spain (26.9%) and Greece

whether it can assume leadership

(26.8%).

position based on its current

unemployment rate for Euro area

economic situation. The article

stands at 12.2%. The youth unem-

will

economic

ployment, according to same

situation of Germany based on

report is 7.6%, compared to Spain

key economic indicators.

(56.5%) and Greece (59.2% in

Key Economic Indicators

March 2013). During the 2008-09

1. GDP

recession, employment growth in

Following the decline in growth

manufacturing sector was the

during 2008-09 recession, it has

worst

recovered well and emerged as

increased strongly in the next few

the centre of attention in Europe.

years.

analyse

the

The effects of Euro zone

sov- 4.

ereign debt crisis and related

hit.

The

overall

However, it

has

Foreign Trade(Exports and

Imports)

European banking-sector risks The decrease in exports in 2012 may affect GDP growth.

can be attributed to Euro zone debt crisis. The exports have increased

31


from 2009 to 2013 by 25.85% Spain. Though it reached a high of while the imports have increased 1.37 US $ in February, it has since by 26.18%. It indicates there is a subsided to 1.3 US $ levels. The strong

domestic

demand

for d e c i s i o n

of

European

foreign goods. Since mid-2010, policymakers to sovereign debt there

has

been

an

ongoing crises may affect the stability of

transition from exports to domestic Euro in the long term. demand as the main driver of economic growth. However, the Euro crisis and slow growth in de- 6. Current Account Surplus veloped countries like US has Germany has Current Account slowed down the growth in Surplus, which was 7% of GDP exports. The share of exports last year. This was the eight shows that exports to Asia have consecutive year that the surplus been steadily increasing while was in excess of 5% of GDP. those to European counterparts Recent recovery in developed have been decreasing. However, countries and strong domestic the share of imports tells a demand has increased its Current completely different story. Though Account Surplus to 2007 levels. growth

in

non-EU

imports 7. CPI and WPI

outpaced growth in EU imports in The data clearly shows CPI and 2010, the following two years WPI have subsided since 2011 reversed this trend.

levels. According to EBESCO report, it is expected that headline

5. Exchange Rates

inflation will remain less than 2%

The data for past two years(2nd

until the end of 2014. The decline

July 2011- 2nd July 2013) shows

in the inflation can be attributed to

that the highest was 1 Euro =

decrease in energy and food

1.4419 US $, with low of 1.2184

prices, from 3.3% in mid 2008 to

US $. The average for this period

1.0%

for 1 Euro = 1.3163 US $.The

mid-2007, inflation developments

euro is seen coming under

have been affected by volatility in

increasing pressure towards the

commodity prices and oil and

end of 2013 from a renewed

food.

marked heightening of concerns about the situation in Greece and 32

in

mid

2010.

Since


Based on all these factors,

the onslaught of the crisis. It can

following assessment can be

be the knight in shining armour

made of the country:

that Euro zone desperately seeks

1.

Economic reforms taken by

currently. However, Germany’s

previous government and the

politicians are under increasing

current government have helped

pressure to use public money to

Germany to show phenomenal

lend to PIGS. Germany must tread

growth in 2006-07 and show

a cautious path and play the role

remarkable resilience in the face

of flag bearer to bring Europe out

of European debt crisis.

of this mess.

2. Germany has gained the most from the creation of Euro zone and it can be expected that German companies will increase their capital investment to meet the increasing consumer demand. 3. Assuming the ECB maintains a very soft monetary policy course in near future, Germany will enjoy lower interest rates 4.

The two main threats to its growth are aging population and

shrinking

Germany

workforce.

will

raise

its

retirement age from 65 to 67 to counter

shrinking workforce.

However, more efforts must be made to attract immigrant workers and increase female full time labour participation to sustain the

current growth

rate. In

conclusion,

the

analysis

indicates that Germany is in a healthy state and can withstand 33


Exchange Rates

Source: AUTHOR:

OANDA.com

CPI and WPI

Yogendra Sarfare T.A.Pai Management Figure: CPI for Germany (Source: EBESCO)

Institute, Manipal Karnataka

34


STABILIZING THE VOLATILITY IN INDIAN RUPEE Owing to the volatility in the do- outlook for the US economy mestic currency during the first six thereby rendering the US bonds months of the current year, RBI more attractive and pulling out of adopted certain measures to hold FIIs investments from the emerging back the falling rupee. Though it markets further compounding the did not target a range within which rupee woes. the currency should settle, it aimed at

containing

the

volatility

resulting from the continuous HIT speculations

in

the

ON

THE

RUPEE

-

foreign REASONS

exchange market. Containing the

1 . R e m o v a l

rupee value is important for the

quantitative easing

o f

long term stability of the economy as rising import cost will offset all

With the improvements

t he

efforts

government

by

t he

experienced by the US

control

the

economy through the quan-

m ade to

inflation.

titative easing program, the

The Indian rupee slumped to the

Federal Reserve in the

all time low levels of Rs. 61

beginning of 2013 decided

against the US dollar in late June,

to withdraw the liquidity

2013 sparked by the news of Fed-

support over the coming

eral Reserve likely tapering of

y

bond buying program following

The rupee hit an all time

the

the

low of 59.94 along with

Financial Institutional Investors

Indian and Asian markets

(FIIs).

falling by more than 2%.

heavy

outflows

by

e

a

r

.

The weakening of Balance of Payments fundamentals and the

2. Behavior of the FII’s

widening gap in Current Account Deficit is building further pressure Owing to the weakness in the Inon the slumping rupee.

dian currency, the investment in the

The improvement in US economy Indian has

showcased

an optimistic 35

markets looked as a risky


option to FII’s. US bonds

continuously establishing

have a higher marginal

positions in rupee and then

output thereby giving better

selling them off as the

yields as against the Indian

currency continue to fall,

counterparts

which further deteriorates

(after

adjusting for the rupee depreciation)

and

the value of the currency.

so

investing in US looked more attractive to these MEASURES TAKEN BY REinvestors. FII’s pulled out SERVE BANK OF INDIA (RBI) over $4-5 billion from the Along with the fall in the value of m

a

r

k

e

t

. rupee on account of strong demand

s

for American currency and foreign 3. Rise in Current Account funds outflow, RBI seemed to believe that the slumping rupee is

Deficit (CAD)

CAD is the macroeconomic also

a

result

of

excessive

challenge which has been speculation in the foreign exchange putting a lot of pressure on market resulting in high volatility in the entire economy by the rupee value. This belief leaving it look unattractive compelled RBI to intervene and to the foreign investors. A take the following actions. major chunk of foreign First phase reserves has been depleted Firstly the RBI imposed restrictions with the rising import of by banning the proprietary trading. This was complemented by SEBI

gold and oil. 4.

Speculation in foreign raising the margin requirements for currency by authorized trades and curtailing open positions dealers (including banks)

in

currency

derivatives

Considering the lag in the commencing 11 July, 2013. On the credit growth as against the backdrop of the RBI’s ban, the deposit

growth

in

the Indian rupee gained against the US

banking system, the banks Dollar. However, the positive prefer

diverting

their impact on the value of the domestic

surplus resources in the currency subsided when banks e x c h a n g e continued to speculate in the cur-

foreign

speculation 36

b y rency market through the route of


their

clients’

h e d g i n g The above measures were taken by

requirements, further pushing the RBI to discourage banks to borrow rupee downwards. Adding

to

for purposes other than meeting the

this,

the

banks liquidity mismatch. And if at all

continued accessing funds from the they did, demanding a higher price repo window well above 1 per cent for funds borrowed for speculation. of

Net

Demand

and

Time

Liabilities (NDTL) not to fund the liquidity shortage but to speculate in the currency market. This further probed RBI to make discretionary funding costlier. S e c o n d

p h a s e

RBI capped the borrowing ability of the banks under Liquidity Adjustment facility (LAF) to 1 per cent of NDTL of the banking system. It also increased the cost of funds available to the banks by recalibrating

t he

Margi nal

Standing Facility rate to 300 basis points above the policy rate to 10.25 per cent thereby forcing the banks to pay a higher price for speculation. This was followed by an additional

In the wake of the above measures taken by RBI, it was hypothesized that had there been a sustained liquidity shortage in the system, there will be an upward surge in the borrowings in the call market and access in the MSF window. However, the hypothesis of RBI proved wrong. The Repo and Call market

volumes

showed

a

downward trend in the week following the RBI’s tweaking in the rates. Also, MSF was not accessed by the banks signaling that there was no genuine liquidity shortage in the system. Instead, banks have been borrowing with the intention of holding positions in the foreign exchange markets expecting a further depreciation in the rupee value.

liquidity tightening spree of RBI CONCLUSION Gradual depreciating tendency of a by reducing the LAF for each bank currency arising out of the unfavorto 0.5 per cent and sucking out able global conditions is acceptable liquidity from the system by as it gives room to the economy to requiring the banks to maintain the make gradual adjusthigher average Cash Reserve Ratio ments.However, the sudden jerk as (CRR) of 99 per cent of the experienced by the rupee in the past requirement on daily basis as quarter was a result of deviation against 70 per cent. from the fundamentals, also making 37


the economy further instable. The RBI needs to build up strong fundamentals

which

monitor

banking activities and the flow of money in the economy. It further needs to address the issue of liquidating

foreign

exchange

reserves and FII’s pulling out of the economy by attracting more foreign investments.

AUTHOR: Naman Kanotra And Niyati Aggarwal T.A.Pai Management Institute, Manipal Karnataka

38


Indian stock market & Indian Rupee Depreciation of Indian rupee has import duty but that hasn’t work been the biggest concern in last much in favour of the rupee .As few months. It touched a life time these measures may have worked low of 62 on 16-Aug-13. Last for temporary period. few weeks for investors in India were the worst days they could

One more major concern for

imagine, rupee depreciating &

Indian rupee is the US federal

stock market tanking down more

reserve view on QE tapering.US

than 10 % in last two weeks. The

federal reserve announced QE

reasons for the markets to fall and

tapering is possible in coming

the rupee to depreciate are to be

months and Indian stock market

analysed. The Indian economy is

s t a r t e d

going through a challenging

downwards .Indian rupee will

phase .In such case expecting

definitely have an impact due to

stock market to perform well

the decision taken by US federal

cannot be justified.

reserve,

i t s

As

the

m o v e

foreign

institutional investors in India One of the major reasons for rupee depreciation is the increasing current account deficit. India's current account deficit has surged to a record high of 4.8 percent. As per a report ,government would focus more on cutting down on imports, especially of gold, silver, oil and non-essential items to lower the current account deficit (CAD) to 3.7 percent of the gross domestic product (GDP) in the current financial year. Government has already tried cutting down the gold imports by increasing the 39

have made big investments which may be withdrawn if QE tapering actually takes place. Also the companies who have raised low cost floating rate debt from the global markets due to low cost interest rates would see significant rise in their interest cost. Indian companies have raised around USD 11.6 billion worth of overseas fund in FY 12-13. The spread between US treasuries and Indian Government Securities have narrowed, thus, making the debt investments in India not


much an attractive option for

rupee is directly proportional .In

FII’s.Thus Indian rupee will be

Jan2008 when currency made a

getting weaker against USD in

high of 39.27 against 1USD, stock

the near term.

market where at its peak, similarly currency made a low of 51 after a

As Indian stock market and INR shows direct relations an Indian

stock market is suppose to see a good down fall in the short term .As the logic says if an FII wants to shift his investments from India to US, He has to sell his holdings in India (sell Rupee) and buy in the respective country (buy

USD)

which

indicates

demand for rupee to fall, leading

year, stock market found a bottom. Today when currency is trading at 62 ,stock market is also away from

its peak. Definitely there are few more reasons for the markets to crash

and

depreciate

the

currency than

to just

interdependence & CAD, but the relationship continues to hold true even in the current scenario as well.

Indian

Looking at the current scenario

show

stock market had a good one side

movement of USD against INR.

fall from its peak levels this

And the other shows movement

month. Also rupee went on to

of Indian stock market over the

make a new low. But looking at

period of time.

the government involvement to

to

depreciation

currency.

Below

of chart

As we can see relation between Indian stock market and Indian 40

curb the imports in order to decrease


AUTHOR:

further devaluation of Indian

economy and rupee, but with bills

rupee should help Indian rupee to

like Food security bill on the table

stabilize a bit for few days at

makes this situation even far from

least. As these measures are not

reach. This all may sound highly

enough to curb the devaluation of

negative

the currency in longer run, Which

something which we cannot deny.

also indicates rupee to depreciate

Optimism can only help a patient

further from the current levels in

to recover from bad health but

the medium term .Stock market

economy

should see a relief rally at least

optimism.....

for a week as it has fallen around 10% in two weeks time without SANKET NARKHEDE

break. As nifty has a strong support zone around 5450-5350

MET’s Institute of

range which has been tested in

Management

last six months couple of times.

Bandra (W)

And also can be tested in coming days before a small relief rally. If

the

rupee

depreciation

continues, Even equity markets will

continue

its

downwards

journey again without a break. This can be avoided only by some miraculous events happening in coming days which will reduce our

CAD

and

stabilize 41

our

but

the

needs

reality

more

is

than


The Indian Gold Rush

“January,

24 t h ,

1848,

moss and became an urban legend

witnessed an unusual rush in the

shortly, following the flagging

Americas. A rush by a gargantuan

stature of India’s economy. Ironi-

mass

as

cally though, the “Indian Gold

‘forty-niners’ pioneered by James

Rush” is a parallel universe of its

W. Marshall who first discovered

American bloodline. Instead of

the yellow metal in Sutter’s mill,

prosperity, the Indians lust for the

Coloma,

With

yellow lustre has taken a toll on

California as the pot of gold,

the economy to fall to heights of

economic

new lows.

of

the

better

known

California. growth

and

development flourished on the

India conceits as the world’s

American soil.”

l a r ge s t

Even

economists define the

accounting for a whopping $62

“California Gold Rush” as a

million of the metal and also

linchpin in history as it stimulated

meets all its demands via import.

economies all around the world.

So, where does all this gold go?

Farming

Chile,

Well, it goes to sit elegantly

Australia, and Hawaii, British

around our necks in intricate

manufactured goods and even

designs, goes to fit nicely, bright

Chinese clothing found a huge

and shiny, around our fingers and

new market to cater. The return of

of

large amounts of California gold

generations as wedding exchanges

to pay for these goods raised

until it has lost its shine. That is

prices and stimulated investment

where it all ever goes. The lust for

and the creation of jobs around

gold runs deep in the Indian blood,

the world.

ideally demonstrated by - A Pune

The Indian Scenario:

moneylender who sports a 22 carat

In the Indian subcontinent too,

gold shirt worth 1.27 crore rupees

there is a gold rush. Rather say,

and a Mumbai socialite who has

we have always had a gold rush,

commissioned a gold leafed toilet

only bereft of a date to mark its

seat.

products

in

i m p o rt e r

course

is

of

passed

go l d

down

birth. And only that it gathered The prime question at hand is – Why this Gold Rush? 42


Consider the Indian background Altogether, gold has an edge but and the answer is why not! : 1.

this wild goose chase for gold has

Our tendency to save is indeed beyond competition.

2.

the

country’s

coffers of foreign exchange and

Investments in gold are marked a dent in the economy. largely

believed

to

be Says who? Says the depreciating

immune to inflation. 3.

emptied

rupee! Economists fear that the

Gold’s superiority as an situation may even mirror the 1991 avenue for investment in crisis though the FM office says terms of liquidity, safety otherwise. and return.

4.

The Inside Story:

It can easily be exchanged Succeeding oil, gold is the next for cash without significant largest shareholder of the country’s loss unlike in real estate in current account deficit (CAD). case of distress sale.

5.

CAD is the difference between our

Banks provide lockers for profits earned via exports and the safekeeping a considerable expenditure on imports. So, a rise amount of gold in a com- in the CAD implies a falling rupee pact space at a nominal fee.

6.

against dollar, the international

A unit of gold has yielded currency. Hence investors prefer to returns in the last five years park money in dollars instead. in comparison to that of Faced with such vulnerabilities, shares and bonds, for which foreign investors redirect their inthe stock market vouches.

7.

vestments and funds to greener

Possession of gold, rather pastures,

leaving

behind

an

flaunting of its possession afflicted India. With no capital is regarded as a status inflow to fuel business growth and symbol in the society.

development,

the

rupee

falls

indefinitely. In addition to

the

prevailing ailments, our exports 43


are not in a position to be

“The increase in import duties on

described as booming or even

precious

promising

go v e r n m e nt ’ s

for

that

matter.

metals

is

part

p a c ka ge

of on

Besides, the stiff competition

measures proclaimed by the FM to

from countries such as China,

restrain CAD to 3.7 % of GDP.

Brazil, Thailand and Vietnam has

The government’s plan is to

put us in a predicament. Under

restrict gold imports at 850 in the

such

current financial year from 950

circumstances,

the

dwindling exports barely impinge

tonnes in 2012-2013.

the inflow of the imperative

Last month, the government also

dollar.

tightened it for dealers to use bank

All these factors are in tandem for

credit to buy the precious metal f r o m suppliers overseas. T

h

e

nation's central b a n k restrained India’s stumbling economy.

banks and trading agencies from

Towards Resolving:

importing gold on behalf of

First and foremost step is to curb

customers and accepting payment

the gold imports by raising

later.

import duties on it. This in turn

required dealers to pay cash in

would help curtail the CAD and

advance for imports. The central

bolster rupee’s volatility.

bank on Monday scrapped the ban

The

government

move

effectively

taken

on deferred payment but required

immediate measures to resolve

banks and dealers that import the

the crisis. Custom duty on the

metal to ensure that 20% of

yellow metal has been raised

imports are re-exported.

from 8% to 10% - a move that

The government could chart out

helped the rupee erase its losses

policies to direct investments

to end at Rs. 61.19/20 against the

towards other commodities. It

dollar, a gain 8 paise over

could also make investment in

Monday.

other assets attractive through 44

has

The


Traded Funds and Inflation Indexed Bonds via attractive tax saving incentives. There goes a saying that “There is always a pot of gold at the end of the rainbow.� But in the Indian context, our pot of gold is to have no more of gold.

AUTHOR:

Amitesh Mohanty

45


QUIZ FIND THE WORD The movement of cash in and out of a business from day-to-day direct trading and other non-trading or indirect effects, such as capital expenditure, tax and dividend payments. The apportionment of cost of a (usually large) capital item over an agreed period, (based on life expectancy or obsolescence) A set of standards and practices developed for global banks to ensure that they maintain adequate capital to withstand periods of economic strain. the practice of taking advantage of a price difference between two or more markets A bond or preferred stock that may be redeemed by the issuer before maturity for a call price specified at the time of issuance. An agreement that pledges securities to guarantee a loan without transferring title to the securities. A written agreement used in connection with a security issue. The document sets the maturity date, interest rate, security, and other terms for the issue holder, the issuer, and (when appropriate) the trustee. The ease at which a security can be bought or sold (converted to cash) in the market. To reinvest in a new issue of the same or a similar security after receiving funds from a matured security. An industry whose success is closely linked to the rise and fall of the general economy

1. 2. 3. 4. 5. 6. 7.

8. 9. 10.

A

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Answers will be available in September issue. Kindly write us your answers on our email-id.

46


The Financial Bulletin August 2013 edition  

Money Matters Club, The Official Finance Club of IBS Hyderabad presents you monthly newsletter in the area of finance and economics.

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