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From the Editor It gives us the immense pleasure to come up with the October issue of 2013 successfully. We are happy to announce the winner of “Article of the Month” award, ANUJ ARORA and HIMANSHU GARG from IMT Ghaziabad, for their outstanding write-up on “ INDIA POST TO POST BANK OF INIDA.” This issue highlights the problems faced due to shortage of cold storage facilities in the Food Processing Industries and the steps taken by the Government to overcome the same. Technical terms like Securitization has been explained in very simple layman’s language. An in depth study has been done on ‘ The Monetary Plans and Economy’. This also talks about the recent TATA-SIA Joint Venture and it’s strategies to take head on competition in the aviation sector. The Pros and Cons of FDI in insurance has also been focused.

Learning by sharing is always considered to be fruitful. Quiz at the end of the issue gives a platform to enhance knowledge through the same.

Saurav Kumar Singh

Money Matters Club wishes all its contributors and readers a VERY HAPPY DIWALI





Particulars India Post to Post bank of India? - Anuj and Himanshu, IMT Ghaziabad Post Harvesting: Loss of Horticulture Products

Page No. 01


- Rina Singh, CSS NIAM, Jaipur 3.

Securitization in the Layman’s term


- Siddhartha Banerjee, IFMR, Chennai 4.

‘Gold’en No More


- Saurabh Aggarwal, TAPMI, Manipal 5.

The Impossible Trinity: The Monetary plan and an economic study


- Ritu Agarwal and Rohit Matta, IIM Lucknow 6.

TATA: 360 degrees


- Paras Agarwal, DoMS, IIT Madras 7.

FDI in Insurance: Yes or No?


- Sameer Singhal, IBS Hyderabad 8.



Let’s go ahead … 3

India Post to Post Bank of India? Anuj Arora Himanshu Garg


IMT Ghaziabad

IMT Ghaziabad

Introduction Since the year 1858, the Department of Posts (DoP) has played a vital role in the country’s socio-economic development and has is responsible for the nations’ communication system. It reaches the Indian mass through several ways. Government of India provides services for citizens such as Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) wage disbursement and old age pension payments. Such services are carried out by the Department of Posts. With 1,55,015 Post Offices, the DoP has the most widely distributed postal network in the world. Since, independence India Post has been providing a variety of services ranging from mail services,


financial services and retail services. Below are the functions of India Post:

1 There are 26 applicants applying for RBIs banking license including companies having big pockets like TATA, RELIANCE to financial services, and micro-finance lenders to NBFC’s like L&T finance holdings. India post is one of the contenders who has strongest network in villages. India Post can leverage its customer base in rural areas. But with comparison with other players India Post does not have any knowledge about giving credit or risk management. Also Post Office is now going to enter into banking segment that would need complete Business Process Reengineering. It also comes under government of India so it’s not aware of private corporate culture. There are few guidelines which company should follow after becoming bank. Consulting is needed to help India Post adhere RBIs guidelines and become efficient bank. India Post’s Financial Strength – Statistical Data Whether we talk about the requirement of Rs. 500 crore paid-up equity capital or a maximum of 49% 4

foreign holding or minimum of 25% rural coverage, the numbers play a big role in the banking sector. RBI


published these new banking guidelines in February this year for licensing of new banks in the private sector. Out of 26 applicants for the bank license, 10-15 odd aspirants are very serious about meeting all the guidelines furnished by RBI and their numbers also speak volume. However, the New Delhi office of Department of Posts (India Post) is not very worried about the financial numbers. Even though it has to fight out with some big financial conglomerates in getting the license but with a huge customer base in micro-rural, rural, urban and developed cities and also with high level of trustworthiness among government institutions, India post has to mainly work towards a proper management system. In terms of reach, Exhibit 1 shows the numbers of post offices in entire India. As per the latest Annual Report of India Post, a single post office covers 21.23 sq. km, on an average. All the urban as well as rural post offices are equipped with latest technology and solutions. Internet & Mobile Banking, WAN connectivity, ATMs are present for the public service. Apart from that, rural post offices also have fingerprint, smart card and bar code readers and scanners. Government of India is planning to fund INR 1300 crore to enable DoP to form India’s first Post Bank of India. The requirement of initial INR 500 crore equity capital would be easily managed by DoP, which plans to launch its banking operations with 50 branches in the first year to 150+ branches in next four years.


Currently, India has over 90,000 branches of different banks but after inclusion of India post into the banking industry, its branch base would get tripled. India’s largest nationalized bank, State Bank of India, has over 15000 branches. India Post will still be larger than SBI even if it just decides to convert only 10% of its branches into banks. Amongst all the applicants who have applied for banking license, Department of Posts is already having the core banking experience and massive customer base. It provides varied number


of financial services such as Savings Scheme through Post Office Savings Bank (POSB), Instant Money Order (IMO), Investment

options using mutual funds, international money transfer, pension schemes

and many more. POSB functions like a bank by providing variety of savings options such as Savings Accounts, Recurring Deposit (RD), Time Deposit (TD), Public Provident Fund (PPF) etc. It not only has a very big portfolio in terms of outstanding balance but also has a huge customer base of over 260.16 million account holders. Exhibit 2 shows the different savings schemes including their respective accounts and outstanding balance of POSB as on 31.03.2012. India Post earned total revenue of INR 78993.47 million in 2011-12 out of which 54.5% comes from its Savings Bank and rest from sale of stamps, postage realized in cash, commission on money orders and other receipts. Exhibit 3 presents the revenue details of India Post for year 2010-11 and 2011-12 with their respective growth in each functional area. With its strong customer reach all over India and its well-established savings bank, India Post has a strong financial strength to open a nationalized bank. Not only, it has the rural reach (Exhibit 4), which is the most important criteria RBI will consider, it also has prior experience in the field of banking operations.


Exhibit 5 presents the story of other banks in the rural sector of India. Exhibit 5(a) provides the data of


private sector banks in the rural and semi-urban sectors of India in quarter of June’12. Data shows that these banks do not have required reach in Northeastern, Eastern and Central regions of India because of certain political and social reasons. India post, with its already set base, could strategically focus upon these areas. Then, Exhibit 5(b) shows advances of private sector banks to agriculture and weaker sections of India in year 2011. This provides a picture that old private and big banks of India, such as Axis Bank, HDFC Bank and ICICI Bank are contributing more to the rural sector of India as compared to newly developed private banks like Yes Bank and Kotak Mahindra Bank. Conclusion: Financial inclusion and rural reach is the major merits of postal banks. This will lead to availability of the financial resources in the rural areas, which will positively impact the society. To convert India post to Post bank of India (PBI) needs adherence of lots of guidelines by the RBI. India Post need efficient and effective operational activities, banking services or products, hardware installations, software designing for automation, automated mailing system, data handling, customer care, consulting various actors from government and corporate as well, security issues, and infrastructure building. Planning would be the first phase and then would come the implementation part with regular maintenance and modernization in processes.


Exhibit 1 : (as on 31.03.2012) Source: India Post, Annual Report 2012-13

3 Exhibit 2 : (as on 31.03.2012) Source: India Post, Annual Report 2012-13



Exhibit 3 Source: India Post, Annual Report 2012-13



Exhibit 4 7

8 State/Population Group-wise Distribution of Number of Reporting Offices, Aggregate Deposits and Gross Bank Credit of New Private Sector Banks (Quarterly) in India - Part I (June , 2 0 12 ) (Amount : Rs. in Million) Rura l Re gion/ S ta te s/ UTs Northe rn Re gion North- Ea ste rn Re gion Ea ste rn Re gion

S e mi- Urba n

O ffic e s

De posits

Cre dit

O ffic e s

De posits

Cre dit


3 6 110

10 5 9 2


13 4 9 9 2




12 4


18 4 6 3



110 9 2

15 0 0


7 8 6 10

119 6 4

Ce ntra l Re gion



2 16 1


4 0 16 7

118 9 5

We ste rn Re gion

17 7




14 5 6 16


Exhibit 5(a) Source: RBI Advances of Private Sector Banks to Agriculture and Weaker Section in India - 2 0 11 Tota l P riority S e c tor Adva nc e s


Ba nk


Tota l Agric ultura l Adva nc e s

O f whic h Dire c t Agric ultura l Adva nc e s



(Amount in Rs. c rore ) O f whic h Indire c t Adva nc e s Agric ultura l to We a ke r Adva nc e s S e c tions Amount


P riva te S e c tor Ba nks Axis Bank Ltd.











City Union Bank Ltd.






Development Credit Bank Ltd.






Dhanalakshmi Bank Ltd.






Catholic Syrian Bank Ltd.


Federal Bank Ltd.






Yes Bank Ltd.






HDFC Bank Ltd.






ICICI Bank Ltd.





















IndusInd Bank Ltd. ING Vysya Bank Ltd. Jammu and Kashmir Bank Ltd. Karnataka Bank Ltd.






Karur Vysya Bank Ltd.






Kotak Mahindra Bank Ltd.






Lakshmi Vilas Bank Ltd.





















Nainital Bank Ltd. Ratnakar Bank Ltd. SBI Commerc ial & International Bank Ltd. South Indian Bank Ltd.






Tamilnadu Merc antile Bank Ltd.






Exhibit 5(b) Source: RBI


Post Harvesting: Loss of Horticulture Products


Rina Singh, CSS National Institute of Agricultural Marketing, Jaipur INTRODUCTION India is the 3rd largest growing economy in the world, which holds 2.3 % of world’s land and represents 17.31% of total world’s population (census 2011). Since population is growing rapidly every year, demand for a particular commodity is not being met properly. India produces 57.73 MT of fruits and 111.77 MT of vegetables per year which accounts 10.9% and 11.90% country’s share, respectively, in the world according to NHB. Out of which only 22% of total production of horticulture products reach to the retailer and whole sellers. During harvesting, it is estimated that about 20-30 % of fruits and vegetables are lost every year and 30% of fruits and vegetables are unfit for consumption, according to ASSOCHAM study. The post harvest losses touched an alarming amount of Rs. 2.13 lakh crore in 2011-12 and may cross Rs. 2.50 lakh crore in


2013-14 according to the ASSOCHAM study. Horticulture crops started getting proper attention soon after independence to boost activities in research and development. After a few decades horticultural production of India attained a new high by rising to second highest position to the world.




There is vast difference between product of commodity and its exports level. India stands first in the production of Green pea and Banana with 36% and 23% of world market share but coming to exports it is


17th and 44th exporter of respective commodity. There are some states like West Bengal, Gujarat, Bihar, Utter Pradesh, and Maharashtra where post harvesting loss consider being very large due to low technology, inadequate cold storage, insufficient ware housing/ cold storage for horticultural commodities and improper or insufficient food processing units for perishable .


There may few more reasons like physical damages, microbial reaction which leads to physiological changes, environmental factor like temperature, relative humidity and oxygen balance in store room which leads to deterioration of perishable commodity. These all factor are very much responsible for quantitatively and qualitatively losses of horticulture products. During year 2009 total losses estimated about 44000 crore in economic term (NHB). Though India is the 2nd largest producer of horticulture commodities, only 2.1 % of total produce get processed where as Malaysia processes 83% of its total perishable product. According to above table India stands nowhere at global level in food processing sector. There is large deficit in processing units in India according to NMCC (National Manufacturing Competitiveness Councils, March 2009), there are only 25352


food processing factories are registered in India.


Table below, states about the capacity and utilization of warehouses under CWC from 2006 to 2012. As per 2012 data, the country needs 61,130 thousand MT cold storage capacity, against which only 24,298 thousand MT cold storage facility is available. Cold storage deficit stood at 3094 Thousand MT In case of Bihar. Other than Punjab all states faces the unavailability of adequate storage facility. In case of Punjab the available capacity (1318 Thousand MT) is more than the required capacity (1345 Thousand MT). In case of North Eastern states situation is even worse. Manipur and Mizoram together required almost 154 Thousand MT of cold storage capacity, against which there is no cold storage facility in these states. State government and central government are providing financial assistant to entrepreneur small






gradation, modernization, agencies establishment of food processing units (FPUs) and for improvement of cold storage condition and setting up new cold storage / ware house in India.


8 With co-operation of central institutes like CIPHET, CFTRI, IIHR and other similar institutions like NIAM, new advanced technologies can be transferred to the various levels of post harvest stages to check losses and consultancy can be delivered to the farmers and ground level workers to acknowledge them with post harvest management in order to reduce losses. Energy cool chain may be the boon for small farmer and small scale entrepreneur at village level which reduces 10-15째C temperature lower than normal temperature and maintain 90% relative humidity at very less construction and maintenance cost.


Securitization in the Layman’s term


Siddhartha Banerjee, IFMR, Chennai Introduction: This article tries to explain the concept of securitization in such a way that even a layman can understand the concept without much of technical knowhow. By definition the securitization process means conversion of existing asset or future cash flows into marketable securities. In other words the process tries to convert assets which are not marketable ones to marketable assets. To make the distinction between two different kinds of securitization, the process of conversion of existing assets which are not marketable ones to marketable securities is called asset-backed securitization whereas the process of conversion of future cash flows into marketable securities is called future-flows securitization. The common assets that can be securitized are car loans, credit card loans and the future cash flows which can be securitized are like ticket


sales, car rentals etc. The following example can be used to explain the concept more vividly. Suppose a person A wants to open a multiplex and is in need of money to do the same. To raise money A can sell the future cash flows from the sale of movie tickets and food items (that is going to happen in future) in the form of securities. This will benefit the investors since they will have a claim over the future cash flows coming from the business.


At the same time A will also be benefited since the loan obligations will be met from the sales itself. Basic structure of securitization In its most basic form the process of securitization involves two steps. In the first step the company with loans or any other income producing assets identifies the assets it wants to remove from the balance sheet. It then pools them into what is called a reference portfolio. It then sells this asset pool to an issuer such as a Special Purpose vehicle (SPV). SPV is an entity set up usually by the financial institution specifically to purchase the assets and realize their off balance sheet treatment for legal and accounting purposes. In the next step the issuer issues tradable interests bearing securities that are sold to capital market investors. The investors receive fixed or floating rate payment from an account that is funded by the cash flows generated by the reference portfolio. Therefore in essence the securitization means a diversified source of finance based on the transference of the credit risk from the issuers to investors. The securitization is further refined in the recent times. The reference portfolio is further divided into several slices called tranches each of which is associated with different levels of risks. The conventional securitization structure has a two-tier security design i.e. junior or mezzanine and senior tranches. The junior tranche is the lower most tranche of the security and is deemed most risky and for accepting this risk it also pays the highest rate of interest. The junior tranche is also known as mezzanine tranche and it rarely

12 accounts

for more than 10-20% of the total value of the security. The senior tranche is the highest tranche


in the security structure and is the one deemed least risky. Any loss in the value is experienced in this tranche once all other tranches have lost their values and because of this senior tranche pays lowest rate of interest. Of the total value of the security this tranche is also the largest and sometimes it comprises about 80% of the security. Evolution of securitization Initially the securitization was used to finance simple self-liquidating assets like mortgages but in general any type of asset with a stable cash flow can be structured into a reference portfolio. Securities can be backed by not only by mortgages but also by consumer credit, project finance, trade receivables, corporate and sovereign loans. The generic name of such instruments is Asset backed securities. The securitization transactions backed by mortgage loans both residential and commercial are called mortgage backed securities. Another variant is Collateralized debt obligation which uses the same structuring technology like Asset based securities but with a more diverse range of assets. Alluring of securitization and risks To go into further details about the securitization process one must also understand the underlying reason why an entity goes for this process instead of standard procedures like taking a loan or selling a bond. Its


ability to raise money by standard processes depends upon the company’s overall financial health and credit rating. If the entity could find buyers, it could sell some of the leases directly and in that way it could effectively convert a future income stream to cash. But the problem is that there is virtually no secondary market for individual leases and so the companies pool the leases and raise cash by selling the package to an issuer who in turn converts the pool of loans and leases into a tradable security. Thus the securitization


process does not inflate the liabilities of the company and it produces funds for future without balance sheet growth. Moreover, since assets are detached from the issuer’s balance sheet, it allows issuer to raise funds cheaply than it would have been possible on the strength of the balance sheet alone. This point can be explained by the following example to make it clearer. A company with an overall rating of “B” but with “AAA” rated assets in its balance sheet might be able to raise funds at a rating of AAA rather than at B by securitizing the assets. Investors also benefit from the more number of investible assets made available through the process of securitization. The flexibility of securitization also helps issuers of the security to shape the risk return properties of the tranches according to the risk tolerance of the investors. For example the pension funds require diverse range of fixed income securities beyond what the public debt issuance by government can provide. If securitized debts are traded investors can adjust their individual exposure to credit sensitive assets in response to their own risk sensitivity and market sentiment. Securitization: Indian Context The securitization market in India is gradually picking up pace. Although the market has been in existence


since 1990s it has only matured post 2000. The securitization in India is largely fuelled by the repacking


of retail assets and residential mortgages of the financial institutions. According to popular estimates the structured issuance volume have grown substantially in the last few years; although it is still small compared to the international standard. Among the different classes of products Asset Based Securitization (ABS) is the largest product variant driven by growing retail loan portfolios of banks. The main reason for growth being investor’s familiarity with the underlying asset and the short maturity periods of these loans. The Mortgage Based securities market is a bit slow in development because of the longer maturity period, lack of secondary market liquidity and the risk arising from the repayment of the underlying loan. The issuers are typically private sector banks, foreign banks and NBFCs with their underlying assets being mostly retail and corporate loans. So by studying the present context of securitization in India we can assume that its future securitization looks promising especially in the Asset based security area. Although more complex securitizations and public issuance are still a distant dream, appropriate legislation and proper investor education will give securitization much needed drive.

Conclusion Nowadays the landscape of securitization has changed dramatically. No longer it deals with only traditional


assets such as mortgages, bank loans and consumer loans. Improved modeling and risk quantification and greater data availability have enabled issuers to consider different asset types like home equity loans, lease receivables and small business loans to name a few. In future the securitized products are likely to become simpler in nature. Reviving of securitization transactions and investor confidence might require the issuers to keep interest in the performance of the securitized assets at each level of seniority.



‘Gold’en No more


Saurabh Aggarwal TAPMI, Manipal Gold, in India is celebration of joy. It is closely knit in our fabric of life. India’s tryst with the yellow metal is from time immemorial. Brahma, the creator of universe, is thought to be born from a golden egg, that’s why He is called Hiranyagarbha - the one born of gold. Gold’s association with the divine makes it auspicious and litmus for well being and happiness. The metal has been a reason for countless wars among dynasties. Like a blessing it’s passed from mother to daughter to granddaughter. The metal is known for its high returns in comparison to other assets (Exhibit 1) and has been favorite among risk averse investors. But fetish for the metal is killing India’s economy. Hackneyed old phrase, ' all that glitters is not gold ‘is literally being proved true, especially in context to the Indian economy. The penchant for gold is not new to us. For long it has been our trustworthy friend (remember 1991 India economic crisis) but as we know


there is a flip side to every coin. India is the world’s biggest importer of gold importing $62 billion of the metal every year. It consumes about a third of the world’s supply. Barring oil, gold is the country’s biggest foreign purchase. The lustrous metal is taking luster out of Indian economy. India’s domestic production of gold is very limited, resulting in a constant increase in gold import as a percentage of total import YoY (Exhibit 2). As declining value of the rupee and widening current account


deficit (CAD) are the biggest issues looming on Indian sky, gold import is badly hurting the economy. CAD (the shortfall between what we earn through our exports and what we spend on our imports) of 5.4 percent of GDP (Figure 1) is almost double the percentage that economists recommend. Without the gold imports our deficit would be around 3 percent of GDP, a well-behaved and totally controlled level. The household saving in banks and investments products have reduced from 12 % to 8 % of GDP, whereas their investment in gold have risen to 14 % from 11 % of GDP. The quantity of gold imports continues to rise despite a surge in global gold prices. The major component of current account deficit is trade deficit i.e. country imports more that it exports. If a country imports more of capital goods e.g. machinery this would mean increase in economic activity and economic output. However our major imports are oil and gold, these two commodities do not increase manufacturing or export. The current trade deficit thus would mean that there is a net outflow of



payments to foreign sectors and fewer payments are coming in from the exports causing less revenue available for domestic economy. The lack of adequate foreign capital flows can have implications for maintaining adequate foreign exchange reserves buffer. Less revenue means less income which means less expenditure and less production. This revenue if retained would have been diverted to government sectors as taxes and would have helped government improve citizen’s standard of living. This shows how trade deficit hinders the progress of a nation. Gold import is a double whammy as it causes trade deficit and results in unproductive gold stocked in lockers or in the form of jewelry resulting in money getting blocked. The government has taken many steps to curb gold imports. In August this year, government hiked import duty on gold for a third time to 10 percent (figure 2). Reserve bank of India made it mandatory for banks and other financial institutions to export at least 20% of the total gold they import. Traders do not have enough orders to match the 20% export criteria set by RBI. This has shown immediate results with trade deficit in September to thirty month low as gold and silver imports plunge 82%. RBI also banned import of coins and medallions and made it mandatory for importers to pay cash up front.


If these steps could not arrest the gold imports, the govt. might consider taking the extreme step of banning the import of the yellow metal completely, as done by many neighboring countries. But practically speaking this is not







connect Indians have with the ceremonious metal.

The following initiatives can be taken to pacify the condition: •

More Bank penetration: As the Indian economy is growing, so is the disposable income. India has one of the highest saving rates in the world. But due to lack of financial institutions especially in rural areas, people find it most convenient to convert their savings into gold.

Educating people about alternative investments: Even today there are a very small percentage of individuals who invest in Indian equity or debt markets. More and more people should be educated about various forms of investments in the form of equity or bonds. Also the process of investing in financial instruments must be streamlined considering the ease of investing in gold.

Ease of liquidity: High liquidity of gold makes it one of the best options for investing. This is not the case with other financial instruments. The power of information technology can be of great help in this



17 •

Buying gold from citizens: The government can consider a plan to direct commercial banks to buy gold from citizens. With 31,000 tones of commercially available gold in the country, diverting fraction of it could ease some domestic supply.

Stabilizing gold import is no silver bullet to solve all problems faced by our country, but this could be a small initiative to bring back our dilapidated economy back on track. Exhibit Used:




The impossible trinity:


The monetary plan and an economic study Ritu Aggarwal and Rohit Matta, IIM Lucknow Our economy, grappling with issues of slow growth, rising inflation and rupee depreciation finds itself in a classic case of the ‘Impossible Trinity’. With India’s GDP growth at a mere 4.40% in Q2 of 2013, continuously depreciating currency, the twin fiscal and current account deficits and a high inflation rate and as exhibited by the WPI and CPI, the Indian Economy needs to act and prevent the downward spiral it has got into. Inflation has to be the first one to be tackled. Since, it affects every layer of the society and it drives economic policies which are the backbone of growth. Also, it can be seen that food inflation rose to 18.18% from 11.91% MoM- driving inflation to 6.1% from 5.79% MoM.








happening is majorly because of the high inflation and alarming CAD which is above the tolerance levels for so many years now and has resulted in fall of nominal value of


rupee. Financing of alarming twin deficits by borrowing, huge gold imports, rating downgrades, policy paralysis and contraction of exports due to weak global demand are among the other major factors influencing depreciation of rupee. Also, inflation attacks growth of the economy by pushing the interest rates upward and putting immense pressure on the manufacturing and business activity of the economy. So, it is to see that the sectors which are essentially the major pillars of any economy’s growth are struggling badly in India. •

The manufacturing sector - contributes only around 15% to the country’s output for about 30 years now while in China, it does about 34% to that country’s GDP which is a big weakness. While infrastructure bottlenecks are well known, the Land Acquisition, Rehabilitation and Resettlement Bill— cleared by Parliament— will add to all-round escalation in the cost of projects.

Infrastructure sector: Its growth slowed down to 3.1% in July, mainly due to contraction in crude oil and natural gas production. It needs to grow at a CAGR of 15% over the next five years to support the


growing requirements of virtually every other sector of the Indian Economy


Now, let’s look at a proposed Monetary Plan for approximately the next 3 months: First, let’s see the impact of short term monetary tools like CRR, Reverse/Repo rate on inflation since our monetary plan will be guided by the inflation crisis in India.


An econometric study: The following hypotheses are set for the study: (The data used is given in Appendix 1) Hypotheses: 1. Change in CRR reduces the inflation. 2. Change in Repo/Reverse repo rate reduces the inflation.



Hypothesis 1: H0: There is no significant difference between changes in CRR and inflation H1: Change in CRR reduces the inflation


The coefficient of correlation is 0.8995 which is high between inflation before and after the change. Also, since t stat is much lesser as compared to t critical obtained at 11 degrees of freedom and 5 % level of significance, it can be concluded that the null hypothesis is accepted. Hence there is NO significant difference between changes in CRR on inflation. Hypothesis 2 H0: There is no significant difference between changes in repo/reverse repo rate and inflation. H1: Change in repo/reverse repo rate reduces the inflation.

P A G E The coefficient of correlation is 0.7833 which is high between inflation before and after the change. Also


since t statistics is greater than t critical value obtained at 11 degrees of freedom and 5 % level of significance, it can be concluded that the null hypothesis is rejected. Hence there EXISTS a significant difference between the changes in repo/reverse rates on reducing inflation. So, these results have been used to propose a monetary plan for RBI. 1. Increase repo rate by 25 bp to 7.75%: •

To squeeze out liquidity in medium term

Lowers inflation as shown by our hypothesis

Desirable differential w.r.t. U.S. interest rates ahead of due QE tapering; Rupee will stabilize

Even QE tapering might not lead to exodus of funds since FIIs invest largely in equities, not in debt market.

2. Increase MSF by 25 bp to 9.75%: •

Unattractive for banks to borrow rupee and buy dollars in forward markets & reduce pressure on rupee

• 20

To Penalize banks to borrow more than 0.5% of NDTL (LAF Cap) by making it costlier by 200 basis points


3. SLR increased to 24% : •

Tightens liquidity without damage to growth

To transfer money out from CRR to SLR to at least put the idle money under CRR to good use.

4. CRR daily req. reduced to 70% : •

Idle money freed up for better uses

To balance liq. after hardening of overall interest rates

To bring down short term rates and correct the yield curve by increasing long term yields.

5. OMO, buy G-secs frequently: •

To control excessive increase in yields on long term bonds

To provide liquidity support after hardening of interest rates.

So, this will help to contain inflation faster in the window of opportunity provided by holding back of QE tapering by Fed Reserve. Next we try to forecast some of the major indicators of Indian Economy. (We have used technical and fundamental analysis in forecasting the 2013 figures).


1. Indian GDP Per Capita PPP: Rise in household incomes will continue its trend over the next year thus maintaining the GDP as per PPP growth rate intact.

18 Indian GDP Per Capita PPP forecasted to be $3340 in

2. Current Account Balance: Trends in export prices (increasing) and import prices (decreasing) are expected to reduce CAD marginally.


Current Account Balance expected to turn less negative for the coming quarters


3. INR vs USD: With the recommended changes in Repo and control measures, inflation is expected to control rupee depreciation.

So, the economy seems to be improving slowly as inflation is directly attacked by the economic policies of RBI.





TATA: 360 degrees


Paras Agarwal DoMS, IIT Madras It was October 15, 1932 when JRD Tata (Former Tata group chairman) piloted the first commercial flight, a single-engine Puss Moth aircraft from Karachi to Mumbai. Tata Airlines became the first commercial airline of India, but it was nationalized in 1953. For the Tata group, which has around $100 billion annual revenue, aviation was always a missing jewel in its crown. It has previously attempted twice to enter into the industry in 1990 and 1995 but the attempts resulted in vain. Even Ratan Tata, recently retired as Chairman of Tata group, had said that returning to airlines was one of his dreams. But now firing a Bazooka out of the blue, Tata has announced its 360 degree expansion plans in Indian aviation industry. Earlier this year it tied up with Malaysia based Air Asia Berhad and Telestra Tradeplace Pvt. Ltd to start a low fare domestic carrier in India. And now adding to the shock of the industry, on


September 20, this salt to software conglomerate announced that it has applied to the Indian government for the starting of full service airline in the partnership with Singapore Airline Ltd (SIA). Also taking the final shot for its complete cover plans, Tata Sons Ltd has also announced that it is in talks with AAI to set up a maintenance, repair and overhaul (MRO) unit for planes in India.

20 Strategy: leveraging the infrastructure With investing in two different airlines with two different business models (Air Asia JV- no frill low fare carrier, Tata-SIA- full service carrier), people are confused about Tata Sons decision as it is certainly assumed that they will be competing on same domestic routes as in India, airlines must have a five year track record before flying overseas. “I can’t think of any case where a non-airline company brings in two different foreign airlines for different segments. It seems unlikely the Singapore venture can avoid competing with the Air Asia venture, given 23


the five-year rule against foreign routes,” Craig Jenks, president at New York-based consulting firm Airline/ Aircraft Projects Inc. Though there are challenges of positioning these two different aviation products, Tata is going to follow a hybrid business model. Tata is certainly to take advantage of leveraging the common infrastructure and knowledge of Indian market with huge cash back up. From supplying salt for the meals to supplying buses used to transfer passengers from airport to plane, Tata is going to reap the benefits for its subsidiary companies. Also setting up a MRO will help its maintenance for both airlines and for making profits there are always other airlines present which would have Tata MRO unit as the only available option in India. Also though bound by the five year rule, the strategy of Tatas’ hybrid model would be to focus SIA JV on west bound routes (Middle East, European Union, North & South America) and AirAsia JV on Asia routes. Tata’s Machiavellianism To make a small fortune in aviation industry you have to start with a big fortune and with its heavy cash pockets Tata is literally playing all the tricks to set up its foot with an impact in aviation industry. Both SIA and AirAsia have significant operational experience, and with cash rich and knowledge about Indian market Tata with their side, these new JVs can weather losses and competition from already existed players like Jet


Airways (India) Ltd and Spicejet Airlines. There is definitely going to be a price war between the airlines so passengers wait for your win-win position. Also existing domestic carriers who are on a expansion spree (Spicejet and Indigo, only ones with a profit model) could be hit as pilots, cabin crew and engineers could join a Tata enterprise. “I get calls from pilots saying they would like to join Tata’s even if it comes with a pay cut,” said Mohan


Ranganathan, a former plane commander and member of a government-appointed air safety council. “There will be a war in the skies for talent and passengers, like we saw when Air Deccan launched (in 2003). The wheat will fly to Tata-SIA and AirAsia JV, the chaff will remain”. Another Machiavellian Theory associated with Tata is that it has designed its 360 degree strategy to take a head on competition to Air India and weaken its position. Already Air India with its strange financial decisions under former chairman V. Tulasidas has slipped to fourth position in Indian Aviation sector and currently operating on Rs21000 crore bailout package from GOI. “Tata wants to weaken Air India to a level such that government has no other option but to divest itself of it, by selling it (to Tatas, of course)” said Steve Forte, former CEO, Jet Airways (India) Ltd. Challenges MRO Though MRO industry has huge growth potential, it has not grown in India because of high incidence of service tax. Not only it has a long break even time but also requires continuous investment in tooling, certification from safety regulators such as the Federal Aviation Administration (FAA) and the European Aviation Safety Agency (EASA). Tata must need a aviation partner to operate the MRO unit.



TATA-SIA JV and Air Asia JV Certainly Tata is going to take advantage of economies of scale but it has to create synergies between these two Joint ventures. AirAsia Bhd MD Tony Fernandes have cleared in public that he has no problem with Tata-SIA deal but on the other hand Arun Bhatia of Telestra Tradeplace Ltd. had cited his concerns over the issue. Tata has to look out that there is no conflict of business interest takes place if it had to run this hybrid model profitabily in the long run.

Indian Aviation Industry India's aviation industry is weathering rough times. There is a hike in Aviation Turbine Fuel (ATF) prices and growth in passenger traffic really slow. Also there is an inconsistency on sales tax levied by states on jet fuel. Since fuel costs 35-40% of total expenses, it remains to be seen how Tata tackles this problem and where it source oil from.




FDI in Insurance: Yes or No ?


Sameer Singhal, IBS Hyderabad A worried government of India(as it has to face general elections in less than a year) announced a no. of investor friendly measures to encourage overseas funds by easing foreign direct investment (FDI) caps in 13 sectors like insurance, tea, telecom, courier services, defense productions, asset reconstruction companies, commodities as well as stock exchanges and others.

In India the second largest market after bank fixed deposits – is the insurance sector, which is now likely to get a flow of foreign capital in terms of increased FDI cap from 26% to 49%. Indian insurance sector offers huge potential and infinite opportunities in the years yet to come.


Insurance has a deep rooted history in India; it has been mentioned in various forms in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmashastra) and Kautilya (Arthashastra). The essential context of the historical reference to insurance in these ancient Indian texts is the same i.e. pooling up of the resources that could be re-distributed in times of calamities such as fire, epidemics, floods and famine.


Currently, the condition of Indian insurance sector is not good. Only 6 percent of Indians have insurance cover. Out of this, 4.4 percent have life insurance and 5 percent have a reasonable health cover. Most small businesses (family-owned) have no insurance at all. Lakhs of people lose all of their savings when a disaster strikes. After 66 years of independence, should one not aspire to get adequate protection? Why not good crop insurance for our farmers, weather insurance, health insurance, life cover and protection for all our assets? Insurance regulatory Development Authority (IRDA) says that the insurance sector needs capital infusion nearly about Rs 60,000- 65,000 crores over the next five years to add to the growth. It is far more than Rs 25,000 crores that came in as foreign and domestic capital combined in FY13. Insurance density for India is just $70 as compared to US-$4000, France-$4000, even the countries like Thailand have insurance density more than $200. Rural and social sectors offer huge potential for improving insurance penetration for the uninsured sections of our population and this call for innovations on product design and distribution, introducing superior technology, better risk management and greater investments. Insurance penetration to rural and social sectors is marked by high risk. Therefore, more dynamic and efficient risk management systems are essential, while innovation is required not just in terms of insurance products but also in ways of distributing them to the distant rural areas. In addition, use of improved technologies, right from insurance


to services, is significant for future growth of insurance sector in India. This actually builds a strong case to


raise the FDI cap. Indian Insurance industry is witnessing the transformation of insurance agents from just intermediaries to advisors. Greater FDI would help in training and skills up-gradation of the agents. Well trained agents would be better equipped to educate the customers about the benefits of insurance besides contributing to simplifying the procedure. Raising the FDI cap will help in bringing expertise and knowledge which India is lacking currently. Moreover, greater investment in form of FDI will facilitate movement towards an era of electronic policy issuance and dematerialization. This will reduce the cost of operations and would address logistical difficulties through use of electronic distribution channels via mobile phone and internet technologies. Now addressing the most common question, that why FDI now and not earlier? There are basically two reasons- Firstly Evolution- as it is the law of nature that time brings maturity and adaptability, Similarly as the economy matures and learns, the earlier caution that either prevented or limited FDI inflows is replaced by confidence. Secondly being the Necessity- as it is said that necessity is the father of invention; Indian


economy is suffering from a current account deficit of 5% and FDI inflows being more stable than FII’s can prove to be a good idea for future. There has been a logjam among the two major political parties of India i.e. Congress and Bhartiya Janta Party (BJP) over the passage of the Insurance amendment bill, which should have been passed a long time ago. The Congress government wants to raise foreign direct investment (FDI) in insurance to 49%, a move


that is expected to bring in investment and dollars flowing back to India and The BJP, India's largest opposition party, wants the foreign direct investment in insurance to be capped at 26%. It is actually hard to understand because when in power, BJP itself proposed exactly similar reforms and was opposed by congress. In concise form- Larger FDI would mean greater investments and enhanced efficiency, insurance will also become cheaper, which should be in the larger interest of the common man or the so called aam-aadmi. Also if all the insurance companies have to work under strict regulations of IRDA, we can even increase the FDI cap to more than 49% if our insurance industry is ready for it.

But presently the discussion on the Insurance Amendment bill has to be conducted in the winter session of the parliament this year. Now all we can do is hope for a positive outcome which is in favor of both-the Indian economy and its stakeholders. 27

Quiz (true or false)


1. A thief steals your credit card and racks up $2,000 worth of charges. You notify your credit card company as soon as you realize the card is missing, but you must pay off the $2,000 bill charged by the thieves. 2. Sales taxes are not deducted from your paycheck by the federal government. 3. Using a cross-cut shredder to destroy credit card applications and sensitive personal information like Social Security numbers is an effective way to prevent identity theft. 4.

The close quarters of most college dormitories means college students are at a high risk for identity theft. 5. As long as you still have money at the end of the week, you don't really need to keep track of where you're


spending your money. 6. You want to purchase a $30 shirt at the mall. Your part-time job pays $6 an hour. You will only need to work five hours to earn the $30 needed for the shirt. 7. There's no need to match the checks you've written and debit card purchases you've made to your bank statement, because you can check your account balance over the phone or online anytime you need to know it.


8. After pulling an all-nighter studying for an exam, you need a cappuccino to keep you awake for the test. The bank's Web site shows that you have $25 left in your account. You head to the coffee shop to purchase your cappuccino, assuming the debit card will be declined if there are insufficient funds. 9. Maggie has $1,000 worth of credit card debt and tries to pay the minimum balance each month. Sometimes she pays a few days late or forgets to pay at all. But she knows that won't affect her credit score because she's just a college student. 10. Marcus receives a $200 monthly allowance from his parents to help cover his school expenses. He also works part-time and time and earns about $300 a month. Marcus must spend $150 on rent and $100 on car insurance. If he budgets $85 for eating out, $45 for clothes, and $50 for everything else, it will take him eight months to accumulate savings of $500.

Answers will be available in November issue issue. Kindly write us your answers on our email-id. September Issue: Quiz answers 1. 2. 3. 4. 5. 6. 28




THE FINANCIAL BULLETIN Money Matters Club Official Finance Club of IBS Hyderabad Vill: Dontanpally, Shankarpally Road,, Shankarpally, Dist: RangaReddy Hyderabad, Andhra Pradesh: 501203


The Financial Bulletin October 2013 edition