The IBS Times; 179th issue; April 2015

OIL PRICES AND UNREST IN YEMEN: A DIRECT RELATIONSHIP BY SACHI KHESKANI

The IBS times April 2015, Issue No. 179

PRICEY SPECTRUM: BOON OR BANE BY ALISHA SINGH

MUTUAL FUNDS

BY AVIK CHAKRABARTY

INDIA OVERTAKING CHINA: A MYTH OR REALITY

BY SRISHTI KARMAKAR

1|APRIL2015

FinStreet, IBS Hyderabad

ISSUE NO. 179, April 2015

What’s Inside

2|APRIL2015

INTELLIGENCE BEYOND SUCCESS

LETTER FROM THE EDITOR TEAM IBS TIMES Dear Readers,

KAUSHIK CHANDELL (EDITOR-IN-CHIEF) AVIK CHAKRABARTY (MANAGING EDITOR)

ALISHA SINGH APOORVA ANUSHA KOLISETTY AISHWARYA MANJARI SHARMA NAVJOTH SAHU PRIYANKA MALIK

Greetings from Team FinStreet!

With the release of every new issue of The IBS Times, we keep trying to deliver our best and keep you updated with the ongoing events on national and global level. No magazine is ever complete without its readers and henceforth, we would like to thank you once again for your continued support and overwhelming response which not only made us one of the most read college magazine but has made us 179 issues strong. On this note I would just like to say “Keep reading, keep appreciating and continue to be our strength”.

We proudly bring to you the 179th issue of The IBS Times. This issue shares the insight on the recent goings with Oil prices and war in Yemen. We have put in our thoughts on whether India can overtake China or not in the coming years. Also, in this issue we have discussed about the pricey telecom spectrum issue whether it’s a boon or a bane along with a speculative report on whether India is brewing an e commerce bubble or not. With our strength in market watch we also bring to you an article on Oil in USA, Economic strain or gain in brief. This issue also sheds some light on ADB giving $300 million loan to India and LICs investment in railways. From the investment point of view, this issue also brings to you an exhaustive report on Kotak Mahindra bank by Team Vriddhi Research.

RAHUL MISHRA

RIPU TANDON SACHI KHESKANI

Hope you have an enriching experience reading The IBS Times. Your feedbacks and opinions will help us make it better.

HAPPY READING

SAMEENA USMAN SRISHTI KARMAKAR

Kaushik Chandell

-VINCE LOMBARDI

3|APRIL2015

TELECOM SECTOR ANALYSIS

PRICEY SPECTRUM: BOON OR BANE

-Alisha Singh

We reside in the twenty first century, a century of modernization and globalization where Technology has taken the leap making our lives completely digitalized.

Right from bank operations, official services, defense operations and many more chores have become more or less dependent on Digital Technology.

What is Telecom Spectrum?

Spectrum (also sometimes referred to as airwaves or

Methods used for Telecom Spectrum Allocation:

frequencies) is a scarce natural resource. Prior to 1995, it was believed to be a property of the Government, thereafter the Supreme Court verdict in 1995 stated that “The airwaves or frequencies are a public property.

Their use has to be controlled and regulated by a public authority in the interests of the public and to prevent the invasion of their rights. Since, the electronic media involves the use of the airwaves; this factor creates an in-built restriction on its use as in the case of any other public property.� Therefore, like any other scarce public resources, its allocation needs to be efficient in order to protect the interest of the public by minimizing wastage and maximizing public utility.

India is also among the early adopters of auction as a mechanism for telecom spectrum allocation.

Among the various methods of spectrum allocation, for instance the first come first serve (FCFS), lotteries, beauty contest and so forth, auctions have gained ground as a more acceptable allocation mechanism due to greater transparency and less administrative discretion involved in the process. It is also likely to ensure better efficiency in the sense that it allocates licenses to those providers who can ensure services in the best possible way, whereas the allocations under all the other mechanisms specified above are more random and therefore more likely to

Telecom spectrum has become the key component in

allocate licenses to less efficient providers.

this era of digitalization. Telecom spectrum is a scarce natural resource whose misallocation causes adverse impact on an economy. It is therefore crucial for a country to ensure efficient allocation of telecom spectrum. Although there are different methods of allocating spectrum, auction as a method of spectrum allocation has been adopted by most of the countries including India.

In 2010, 3G and 4G telecom spectrum were auctioned in a highly competitive bidding. The winners were awarded spectrum in September, wherein Tata Docomo was the first private operator to launch 3G services in India. The Government earned INR677 billion (US$11 billion) from the 3G spectrum auction whereas the broadband wireless spectrum auction generated a revenue of INR385

4|APRIL2015

billion (US$6.0 billion). The Government earned a total revenue of over INR1062 billion (US$17

spectrum auction generated a revenue of INR385

companies and consumers. The government, though,

billion (US$6.0 billion). The Government earned a total

is ecstatic. The 25-33% of the total bid it hoped to

revenue of over INR1062 billion (US$17 billion) from

receive this fiscal year did not come through the year

both auctions. The major operators to participate were

ended in four days leaving the telecom companies

as follows:

with only 10 days to pay up. The rest of the cash would come in 10 instalments over time. But the



Airtel



Aircel



Idea



Reliance Communications



S Tel



Tata Teleservices



Vodafone Essar (now Vodafone India)

whimper. Telecom players would now obviously

Apart from the above state-owned BSNL and MTNL

borrow the money they have bid up from banks.

were also awarded spectrum, despite their absence from

They also need money to invest in rolling out high-

the auction. BSNL paid the Indian Government INR

speed data networks. The result of handing over so

101.87 billion for spectrum in all 22 circles it operates

much money to the government will be slower and

in. State-owned MTNL provides 3G services in the

lower investment in network rollout and higher

other 2 circles – Delhi and Mumbai.

tariffs to recover debt servicing costs. By some

government is still ecstatic over its auctions. As for India’s promised mobile data revolution, which would promote education, healthcare, mobile marketplaces, direct transfer of subsidies and ebanking for the poor, what could have been a bang would, in all likelihood, end up a prolonged

estimates, banks’ total exposure to the sector is Current Scenario of the Pricey Spectrum and its

already close to 86,000 crore. Banks are already

impact on the Indian Economy

burdened with bad loans. If telecom loans turn sour,

With fierce competition among the various Telecom

all of finance will be stressed.

operators in order to retain their spectrum has caused a

The root of the problem is artificial scarcity of

dent on the Indian Economy. The higher reserve/base

spectrum and persisting with a model of conducting

prices have been prompted by non-tax revenue

telecom business with dedicated spectrum for each

considerations, given the stiff fiscal deficit target of 4.1

player while technology allows operators to share

percent this year. With much discussion and debate,

spectrum. By swapping spectrum between defense

India’s major telecom players have managed to retain

and commercial use, 15 MHz has been made

presence in most of the circles where they operate in.

available, but this was withheld from the auctions

This has come at a huge cost; the total amount raised is

that have concluded. Norms for sharing and trading

an eye-popping Rs 1.1 lakh crore.

spectrum among operators have not been notified

This is a matter of serious worry and concern for

and operators are still in the dark about how much

companies and consumers. The government, though, is

more spectrum will be made available in the coming

ecstatic. The 25-33% of the total bid it hoped to receive

years as the machine-to-machine communications

5|APRIL2015

more spectrum will be made available in the coming

The only valid reason for keeping spectrum prices

years as the machine-to-machine communications also

steady is that usage is time-sensitive: unlike coal,

begin to demand ever more spectrum. The right way to

which can be mined this year or five years later

make money from telecom is from the faster economic

depending on prices and demand, spectrum not used

growth enabled by faster spread of telecom.

this year is spectrum wasted. The government can

The following are the reasons why spectrum will always be costly in India and why telecom companies have to digest the hard facts:

also allow spectrum leasing, spectrum mortgage and easy sale of spectrum between parties, apart from allowing easier mergers between viable and unviable telecom operators.



India has 1.25 billion potential telecom users crammed into a very small geographical area.



The US has three times the geographical area

It’s high time that the India's telecom industry

and one-fourth the population of India. This

accepts the reality that spectrum is an extremely

automatically means spectrum must be used

scarce resource which cannot be made available at

extremely efficiently in India. High prices will

pocket friendly prices. Their business models and

pressure telecom companies to avoid spectrum

profitability cannot be built on the presumption that

hoarding and use better technology to pump

underpriced spectrum will be offered in plenty when

more data through the same available spectrum.

the resource is actually going to get scarcer in the

India as a late starter in mass telephony is over-

coming years, given our voracious appetite for

dependent on wireless services as opposed to

broadband services. India has barely scratched the

fixed-line telephony. While the decline in the

surface of broadband demand, and usage is going to

wirelines is a worldwide phenomenon, India has

head for the stratosphere with plans for a Digital

had a very poor legacy of landlines. Hence our

India being a key driver.

dependence on wireless telephony is very high – and growing in leaps and bounds. Of the nearly one billion telephone connections in India, barely three percent will be wireline. 

Conclusion

Worldwide proportion of wireline to wireless telephony is falling dramatically, thanks to the proliferation of mobiles and hand-held devices, the pressure of spectrum will always increase, and so on India which never expanded much into fixed telephony.

The only valid reason for keeping spectrum prices 6|APRIL2015

steady is that usage is time-sensitive: unlike coal, which

Hence, in today’s immediate situation the Pricey Spectrum has become more of a Bane on the Indian Economy and adequate measures should be taken in order to use this resource in the most efficient manner.

COVER STORY

INDIA OVERTAKING CHINA? A MYTH OR REALITY

-Srishti Karmakar

This is no more a silly question. India and China are the world’s next major powers. They also offer models of development which are competing. Growing up, we have seen toys which have labels that spell “Made in China”. Now the label ranges from shoes and garments to electronics. The assumption stand even today that China is a manufacturing power house. China’s exportled manufacturing boom is largely a creation of foreign direct investment (FDI), which effectively serves as a substitute for domestic entrepreneurship. India has not

parity (PPP) in current international dollars is 2.4

attracted anywhere near the amount of FDI that China

times India’s. Per capita GDP of India at purchasing

has. But we have managed to spawn number of

power parity and constant 2011 international dollars

companies that compete internationally while China’s

is 45% of China’s.

private sector has no world class companies to rival the

But situation may be moving towards the betterment

big multinational. Many of the Indian firms are in the

for India especially after the deregulation of the oil

most

industries-

and commodity prices. This has helped the inflation

software giant Wipro and Infosys and pharmaceutical

to come down and RBI to cut its rates. The

and biotechnology powerhouses Dr. Reddy’s Labs and

implementation of Goods and Services Tax (GST)

Ranbaxy. The Forbes 200, an annual ranking of the

and increased FDI in the insurance, railway and

world’s best small companies, included 13 Indian firms

defense will help boost growth further. Widening the

but just four from mainland China. In all these years,

FDI route is very essential which needs to be

India has developed strong infrastructure to support

facilitated by stable rupee. It will increase our

private enterprises. Its capital market operates at a

capacity and help India become a manufacturing

greater efficiency and transparency compared to

super power. In the coming year, we hope to seen

China’s. But when it comes to GDP figures and other

manufacturing and infrastructure sector doing better

headline numbers, India is still no match for China.

than the FMCG and IT sector. A big part will be

Chinese gross domestic product (GDP) between 1990

played by the ‘Make in India’ project by the Modi

and 2013 increased at a compound annual growth rate

Government. With this project in place, the share of

(CAGR) of 10.2%. China’s GDP at purchasing power

manufacturing in GDP may move up from the

parity (PPP) in current international dollars is 2.4 times

present 16% to 20% in 10 years. India’s growth rate

India’s. Per capita GDP of India at purchasing power

has already started picking up due to the cyclical

knowledge-based,

cutting-edge

parity and 7 | Aconstant P R I L 2 02011 1 5 international dollars is 45% of China’s.

upturn. China’s GDP was 7.4% in 2014 and this was the slowest pace at which China had expanded in the

Z

success in attracting FDI is partly a historical accident-it has a wealthy Diaspora. During the 1990s, more than half of China’s FDI came from overseas Chinese sources. The money appears to upturn. China’s GDP was 7.4% in 2014 and this was the slowest pace at which China had expanded in the last 24 years. China’s growth rate has started to decelerate.

Its mid-term growth rate has slowed down as its economy is dependent on export to Europe. China faces

have had at least one unintended consequence: The billions of dollars that came from Hong Kong, Macao, and Taiwan may have inadvertently helped Beijing

postpone

politically difficult

internal

reforms. For instance, because foreign investors were acquiring assets from loss-making SOEs, the

long term challenges of demographic dividend.

government was able to drag its feet on privatization The International Monetary Fund (IMF) started the

India is a sprawling, messy democracy driven by

trend last October, when its World Economic Outlook

ethnic and religious tensions, and it has also had a

projected India to overtake China’s growth rate by

longstanding, volatile dispute with Pakistan over

2018. In that year, the IMF projects India’s GDP growth

Kashmir. China, on the other hand, has enjoyed two

at

6.7%,

compared

6.4%.

The

decades of relative tranquility. It has been able to

Co-operation

and

focus almost exclusively on economic development.

Development (OECD) took up the refrain, announcing

There are other measures, though, that show Chinese

India would be a whisker away from the Chinese

growth is very different from India’s. Let’s take

growth rate by 2016. Goldman Sachs is the latest to

agricultural productivity—important for keeping

climb aboard the bandwagon, predicting Indian growth

food inflation down. The World Bank indicators

will be higher than China’s in 2016.

show Indian cereal yields at 2,975kg per hectare (ha)

But we can never ignore the size of China’s economy.

in 2013. Chinese yields were around that level as far

It’s four times of the Indian economy. China started off

ago as 1980. Currently, their yields are at 5,934kg

with liberalization in 1980s. India’s national saving was

per ha. Fertilizer consumption in kg per ha in China

half of that of China and 90 percent less FDI. China’s

is 3.9 times India’s.

success in attracting FDI is partly a historical accident-

Consider some macroeconomic numbers. Savings as

it has a 8wealthy | A P R I Diaspora.

L2015

a percentage of Indian GDP were 30% in 2012,

Organization

for

with

Economic

China’s

according to the World Bank indicators; Chinese

utilize their resources, and on this score, India is doing a superior job. Is it pursuing a better road to development than China? We won’t know the answer for many years. However, some evidence indicates that India’s grassroots approach may indeed be wiser-and the evidence, ironically, comes from within China

Consider some macroeconomic numbers. Savings as a percentage of Indian GDP were 30% in 2012, according to the World Bank indicators; Chinese savings were already at 36% of GDP as far ago as 1982. They are currently 51% of GDP. Foreign direct investment (FDI) as a percentage of GDP was 1.5% in India in 2013. In 1992, FDI as a percentage of GDP in China was 2.6%.

It went up to 4.9% in 1995, before it started falling and it’s now 3.8%. Research and development expenditure as a percentage of GDP was 0.8% in India in 2011—it was almost that in China in 1990. It’s currently 1.98%. itself.

The less said about the difference in infrastructure between the two countries the better. But let us take one indicator—electricity consumption per capita. For India, this was 684 kilowatt-hour (kWh) per capita in 2011, a level China crossed in 1994. In 2011, Chinese consumption was 3,298kWh per capita. The real issue, of course, isn’t where China and India are today but where they will be tomorrow. The answer will be determined in large measure by how well both countries

9|APRIL2015

CIVIL WAR

OIL PRICES AND UNREST IN YEMEN: A DIRECT RELATIONSHIP

-Sachi Kheskani

Yemen, officially known as the "Republic of Yemen"

in any developing country, then why Al Qaeda had

is a developing country in south of Arabian Peninsula.

to intervene? Well, to cut the long story short,

Yemen has been in news lately for the number of people

Yemen supported U.S during the World trade Centre

evacuated from the civil war struck areas, which is not

Attack and Al Qaeda had a new enemy born with the

good news for Global brotherhood. Crisis in any

exception of it being of same religion! Al Qaeda

country not only affects its own trade, but global trade

started to strengthen its roots taking the advantage of

as well! Well, Yemen is a classic example of hurting its

power vacuum. In January 2009, the Saudi and

neighbor’s trade! The oil producing Saudi Arabian

Yemeni al-Qaeda branches merged to form Al-

regions suffer a loss as their trade route is hampered; for

Qaeda in the Arabian Peninsula (AQAP), which is

Yemen is situated With Red Sea to its west, Gulf of

dreaded by the U.S.

Aden and Arabian Sea to its south and Oman to its east.

Next, comes the explicit motive of Saudi Arabia to

The bone of contention for this crisis is political power,

maintain its influence in Yemen through same old

as weak state institutions paved way for elite politics

regime figures and other tribal leaders, who were

that constituted de facto form of collaborative

part of so called GCC initiative. The motive surely

governance. The competing tribal, regional, religious

has a valid reason being, the oil and natural gas

and political forces in Yemen were kept under check

pipelines in Yemen that help in overseas trade. While

through power sharing between president Ali Abdullah

all these attacks and unrest were ongoing since 2011,

Saleh, who controlled the state; major general Ali

Mr. Saleh resigned and fled to Saudi Arabia to save

Mohsen al-Ahmar, who controlled the largest share of

his life ofcourse! The presidency was transferred to

the army; and sheikh Abdullah al-Ahmar, figurehead of

Abd Rabbu Mansour Hadi who was formally elected

the Islamist Islah party and Saudi Arabia's chosen

in 2012 in the one man election and his supporters

broker of transnational patronage payments to various

known as Houthis were backed by Shia Muslims of

political players, including tribal sheikhs. Yemen, as a

Iran as per news reports. But this government was

country is home to poverty, unemployment, corruption

overthrown on 22 January, 2015 by Houthi rebels

and the efforts of Ex-President Saleh were rewarded

attacking the senior officers and forcing them to

with much expected opposition as he wanted to amend

resign. However, on 21st February, 2015 Hadi

Yemen's Constitution and eliminate presidential term

rescinded his resignation and declared he was still

limit, thereby making himself and his successor’s rulers

the legitimate president in Aden. Hadi called on

of Yemen forever.

government institutions to gather in Aden, which he

Now a question arises, that while all this is common in any developing country, then why Al Qaeda had to 10 | AWell, P R I Lto 2 0cut 1 5 the long story short, Yemen intervene?

supported U.S during the World trade Centre Attack

proclaimed on 21st March 2015 was Yemen's "economic and temporary capital" while Sanaa- the former capital remains under Houthi control.

about 133,000 barrels a day of oil in 2013, making it the 39th biggest producer, according to the US Energy Information Administration. Output peaked at more than 440,000 barrels a day in 2001. Apart from this, there is a transport threat for Ships carrying oil from Europe and North Africa won't be able to take the most direct route to Asian markets if the Bab el-Mandeb strait is remains shut. And this former capital remains under Houthi control.

will have an effect of rise in price of oil which already has begun on 26th March, 2015. The price

Currently, Yemen is divided into two parts: The Sanaa's

per barrel reached $59.71 with an increase in 5.7 %.

(Supported by Saudi Arabia) and Houthi's (Supported

Saudi Arabia led OPEC's decision in November to

by Iran) and amidst all this ruckus Al Qaeda seized

resist calls to reduce its output target of 30 million

much of Hadramawt provincial capital Mukalla. U.S

barrels a day. OPEC's decision and an expanding US

has extended its support to Sanna's (Saudi Arabia

supply glut have driven global benchmark oil prices

supporters) and sent war planes and other ammunitions,

to a six-year low of approximately $ 45 per barrel.

which led to air strikes in Houthi supporting areas. Iran has approached Pakistan for initiating talks of negotiated settlement. Saudi Arabia has proposed Pakistan for joining the coalition. Pakistan maintains a neutral stand by not joining either of the sides that could worsen the sectarian divisions of Muslim world.

As the situation in Yemen has dramatically escalated, it's seen primarily as a threat to international shipping and oil transport. The more ungovernable Yemen becomes, the more it could become a base for piracy in the Red Sea area. But as a measure for caution U.S, NATO, Iran and Egypt

Effect on Global Trade:

have deployed their naval forces so that international

Yemen contributes to less than 0.2 % of global oil

trade is not hampered. So let me put it that way: If

production but its geography poses a problem to its

peace is maintained in Bab el Mandab strait, then

neighbouring countries for supplying oil and natural gas

oil prices won't be affected, but if there is breach of

as there is a major port named Bab el-Mandeb in Yemen

peace then oil prices are left to market forces and

which is the fourth largest port in world, through which

volatility is apprehended. So let us pray that air

3.8 million barrels a day of oil and petroleum passed in

strikes in Yemen should end for us (in India) so that

2013. Its closure may keep tankers from the Persian

we can travel in air at low prices, for that's one

Gulf from reaching the Suez Canal and the SUMED

industry which is already in problem and we surely

Pipeline, diverting them around the southern tip of

are not prepared for further losses!

Africa, adding to transit time and cost. Yemen produced about 133,000 barrels a day of oil in 2013, making it the 11 | A P R I L 2 0 1 5

39th biggest producer, according to the US Energy

SPECULATION

IS INDIA BREWING AN E- COMMERCE BUBBLE

-Priyanka Malik

In e-commerce your prices have to be better because the consumer has to take a leap of faith in your products.

-Ashton Kutcher India has the third largest base of internet users after United States, United Kingdom or France. The ecommerce market is growing rapidly and the fastest in India among the Asia-Pacific region. The industry is expected to be around $2 trillion in 2016 and is expected to grow by $137 billion in 2020. Around 70%

Few of the reasons which cause these losses might

of the industry is single handedly dominated by the

be loss to revenue ratio wherein the companies make

travel industry. Rest 30% comprises of the e-retail out

losses on every penny earned because of the

of which electronic appliances and apparels form the

extensive discount policy, the other major reason is

major proportion of sales. The first e-commerce bubble

the customer acquisition cost which includes the

was witnessed in the period 1997-2000. During this

amount spent in advertising, hoardings etc., last the

time the prices of all the dotcom companies started sky-

predatory prices or selling of the products even

rocketing. After this period there was a boom in the e-

below the manufacturing cost. The firms are able to

commerce industry which is still continuing.

keep up with the predatory pricing as the operating

Major factors which contribute in brewing this bubble

expenses are much lower as compared to the brick-

are rising subscriber base along with smart-phone users

mortar model. Further, the remaining gap in the

and standard of living, availability of much wider

pricing is maintained via the funds provided by the

product range, competitive prices and last the upcoming

Venture Capitalist.

million-dollar startups like Jabong.com, zomato, make

India follows cash on delivery model (COD) wherein

my trip.com, book my show.com, Flipkart, snap deal

the customers have the liberty to pay only when they

etc. Although, the above stated companies are able to

are satisfied this model also contributes to the loss of

sustain themselves in the market but they aren’t

this industry. This model along with intense

profitable. For instance Flipkart lost $150 million

discounting policy isn’t profitable in the long run.

during the Big Billion Day sale which was held last

The unreliability owes to the slippery nature of the

year. Also it lost a lot of money in marketing the sale

customers who would shift to the e-commerce

and in the PR efforts.

offering better discounts and value for money products. Apart from COD, problem of fake

12 | A P R I L 2 0 1 5

addresses, returns and exchanges also pose threat to the sustainability of the current model followed by

Logistics for e-commerce industry also varies in

cash on delivery model can be thought, of the firms

comparison to that of the stores. It isn’t just about the

would save on a large chunk of funds which they are

volumes but also about safety stock, delivery speed,

currently losing henceforth, ensuring the sustainable

delivery at the door step and zero delivery prices. In

model for e-commerce industry.

order to provide a quick delivery the companies resort to air transportation which in turn increases the delivery mechanisms. In India logistics and infrastructure are not that supportive in nature and warehouses are also limited to the tier-1 cities or metro cities thereby further increasing the cost of shipping.

As evidently the e-commerce industry is growing, India is indeed brewing an e-commerce bubble and the growth will continue at least till the period of 3-5 years for the firms are able to raise millions of dollars through the Venture Capitalists. Despite the expected growth of the industry, all the major giants are yet to make profits as the current model isn’t stable enough. For protecting the bubble there are few changes which the firms should consider on an urgency basis.

In the near future, only click or brick-mortar model won’t be successful therefore the firms should continue with inclusion of both the models into one to suit the Indian markets. As a result of which the number of warehouses in multiple cities should increase just like the Amazon is doing. This will not only cut down the shipping cost and time but will also make the model stronger. Further, uniform taxation policies and FDI in the inventory led retail will also shape the new face of the industry. Two billion USD investment announced

by Amazon is a supporting fact that FDIs will ensure proper infrastructure and robust supply chains. Last, if checks on fake addresses and a suitable alternative for 13 | A P R I L 2 0 1 5

SPECIAL REVIEW

MUTUAL FUNDS

-Avik Chakrabarty

Your goals and dreams may be varied but so are the

wonder of the world! So what exactly is

options given to you by Mutual Funds!

compounding? Simply put, it is when the interest an investor gains is reinvested back in the fund. Every time this happens, investment amount is allowed to grow, paving the way for a systematic accumulation of wealth. Investments literally starts to snowball, multiplying as it goes along. As small an amount of Rs. 100 invested every month at an interest rate of 8% for 25 years would give Rs. 9.57 Lakh! That

Starting early pays well

means with an investment of Rs. 3 Lakh would have

It’s crucial for an investor to start early in order to truly

snowball three times over!

maximize the end returns.

Here is a graph that represents the same for a time

Here’s an example why:

period of 15 years.

Let’s assume there’s two friends- Rahul and Ripu. Now both of them start investing Rs. 2000 every month, earning interest at 8% p.a. on a monthly compounding basis. The only difference is that Rahul starts at the age of 25, whereas Ripu starts at the age of 35. Both of them have a principle investment of Rs. 1.2 Lakh over a period of 5 years and then hold their investments till they turn 60. But Rahul’s investment appreciates to

Why do we invest?

over Rs. 14 Lakh while Ripu’s investment grows to

There is many a thing that one may desire, from a

only about Rs. 6 Lakh.

With the figures in place, the stark difference between the two and the clear advantage of investing early can be seen.

The power of long-term Mutual funds offer schemes of various tenures, but there is a special advantage with long-term investments compounding. Albert Einstein called compounding mankind’s greatest mathematical discovery, the 8th wonder of the world! So what exactly is compounding?

14 | A P R I L 2 0 1 5

Simply put, it is when the interest an investor gains is reinvested back in the fund. Every time this happens,

comfortable lifestyle to securing children’s future.

Investing is what takes an investor one step closer to achieving these goals. The fact is that merely saving for these desires may not actually help in achieving these goals. The fact is that merely saving for these desires may not actually help in achieving them. A certain level of risk needs to be taking, according to the nature of the objective, to ensure that these goals are actually met.

Usually when a person saves and invests, it would be

investor wants and what the industry is able to offer.

for anyxof the following reasons:

There are two simple questions that investors ask: is

1. zCapital Preservation

the return better than bank deposits? And, will the

2. Income Generation

capital be safe?

3. Capital Appreciation

The conceptually correct answers are: a mutual fund tries to do better than the benchmark and, therefore,

Start with yourself In a way investing is very personal in nature. Since your needs and desires are specific to you, so what works for you may not work for your friend. The world of investments is constantly evolving and the sheer

should not be compared to a bank deposit; an MF is subject to market risks and there is no guarantee on the invested capital. There is decent long-term performance to showcase, but a large swathe of investors remain unimpressed.

number of options and alternatives available can leave even a seasoned investor confused. And there is always

But why these two questions matter. First, choices

a conscious need to avert risks and choose an option that

are always evaluated with respect to a reference

delivers the highest with the least amount of risk.

point. Two, the aversion to losses is higher than the

Unfortunately, this is not always possible. But the

joy from gains. Investors should ideally see that MFs

learning in this should be not to give up and completely

have done better than benchmark, but the reference

switch off, but instead to list down your needs,

point in their mind is bank deposit rates. Investors

expectations and desires. It may sound like an easy task,

should see large potential gains over the long-term,

but sometimes the simplest of things are the hardest.

but their concern is whether there would be a loss.

Once you are certain of what you need, you can then

To assume that investors should choose what is good

shop around and find the Mutual Funds that are just

for them is to be obstinate and blind about their

perfect for you. Your safest bet to eliminating risk is not

behavioral preferences.

by simply choosing what seems to be a risk free fund,

How do Mutual Funds work?

but by thorough and methodical planning.

INVESTOR PUTS THEIR MONEY IN

Is the return better than the bank deposits?

A good product cannot achieve wide spread acceptance

FUND

RETURN

WHICH IS INVESTED IN

GIVEN BACK TO

is a nagging problem discussed every year in the mutual fund industry, but simply won’t go away. There is SECURITIES

perhaps a serious gap between what the common There are two simple questions that investors ask: is the return better than bank deposits? And, will the capital be safe?15 | A P R I L 2 0 1 5

THAT GENERATES

What the government has planned about the

Reduction in Securities Transaction Tax initiate

industry?

additional investment from investors in order to earn higher return. In the previous budget government had

It was expected that the government will roll out host of measures in order to revive the economy and the investment scenario. However not all the expectation

reduced STT from 0.2% to 0.17% and in the current year’s budget the same has been reduced from 0.17% to 0.1%.

has been met, but the measures proposed are positive for the Mutual Fund Industry.

Pension and Provident Funds can invest in ETF

The measures announced for the mutual fund industry

Pension and provident funds can now invest in

has been done with the intention of channelizing

exchange traded funds; this will also benefit Mutual

household savings into investment. This will help to

Fund Industry as these institutional investors have

increase the gross domestic product and in turn will

huge investment pool. New Pension Scheme was

revive the growth of Indian economy which is the need

been launched for non-government segment. The

of the hour.

scheme is open for anyone from 18 years to 60 years of age; investment in NPS is also eligible for tax

Rajiv Gandhi Equity Savings Scheme (RGESS) RGESS has been introduced for the current financial year; the scheme offers benefit to the first time investor in capital market for the investors with income less than Rs. 10 Lacs. However in the 2013-14 budget FM has proposed to liberalize the RGESS by increasing the limit from Rs. 10 Lacs to Rs. 12 Lacs with respect to the income and investments can also be done in the mutual fund scheme which are allowed under RGESS scheme. This will boost up more and more investments under this scheme and will benefit Mutual Fund Industry. The scheme allows maximum investment of Rs. 50 k and deduction limit of 50% of the invested amount i.e. the said scheme reduces the taxable income unto Rs. 25 K, thus benefitting investors across different tax slabs.

Reduction in Securities Transaction Tax (STT)

16 | A P R I L 2 0 1 5

deduction.

However there were many expectations from the budget as far as the mutual fund industry is concerned which were not realized It was expected that the government will increase the limit of sec 80C in order to accommodate higher investment in tax saving mutual fund schemes. This would have helped to mobilize household savings and channelize the same. This expectation of the mutual fund industry has not been realized. It was also expected that the capital gain tax on the merged scheme will be done away with. However there has been no announcement with regards to this. Investors had to pay tax on the schemes which had been merged into one as it resulted in exit from one i.e. registered as a sale transaction even though it was combined.

MARKET WATCH

IT’s YOUR PICKS

-KOLISETTY AISHWARYA

The reflexes of the market are instant. Tied up in

dropped by 49 paise a litre and Rs.1.21 respectively.

various emotions, the markets instantaneously portray

Prior to this, the month of March had seen a rise in

their reactions. It seems previous fortnight has been

the prices of diesel and petrol by around Rs.3 each

difficult on the markets as well as an investor. Well the

which was cooled down by the rate cuts for the

buyers struck the hot iron and made their best out of the

month of April.

falling scenario. The end of March marked the end of

Stock markets:

another financial year and the markets saw a steep fall around then. A new year marked positivity in them markets as recovery seemed on its way. High hopes for all the investors with the new tenure. Various events bag packed in the last fifteen days that have affected the prices and increased its volatility would be discussed

The recovery of the prices after a long run of moving downward was a sigh of relief for the investors as their hopes in the markets built back in. A strong rise in the share prices which moved to about a ten days run, the markets again crashed shattering hopes .

further.

Yemen and oil prices:The bomb strikes in Yemen sure did not affect Yemen alone. The oil prices recorded then were supposedly the greatest spike in oil prices seen after a long time.

cnx nifty 8900 8800 8700 8600 8500 8400

Close

Yemen being a producer of crude oil, the social damage caused a high instability in the oil prices across the world. The prices of oil per barrel on the 25th of March

sensex

jumped up by 5 % bringing the price to $60. The question pondering is that the price movements in spite of such causes are rising at such a slow pace. At this rate, the recovery of the oil prices will be quite a while from date.

29500 29000 28500 28000 27500

Close

Meanwhile the fluctuations in the oil prices, countries like India are being benefited to a great extent as the prices of petrol and diesel dropped by 49 paise a litre

Perhaps the start of the month April was showing

and Rs.1.21 respectively. Prior to this, the month of

hopes of rise but the quarterly results expectations

March had seen a rise in the prices of diesel and petrol

disappointed the investors. The major fall in the

by around Rs.3 each which was cooled down by the rate

private banking sector dragged the markets down.

17 | A P R I L 2 0 1 5

cuts for the month of April.

the private banking sector dragged the markets down.

Top gainers in Nifty included regarding the global

The private sector in the banking industry fail to uplift

oil

the expectations of the investors in banking as their

announcements, quantity of the oil production is

non-performing assets make the balance sheets look

going to be decreased by 23000 barrels per day

bad. The fluctuations of Axis Bank (550.80) and the

which quantity of the oil production is going to be

downfall

seemed

decreased by 23000 barrels per day which will

disappointing to the shareholders. Still maintaining the

enable the restoring of the demand supply gap thus

highest level of patience the banking sector awaits the

stabilizing the prices.

of

HDFC

Bank

(1029.65)

interest rate hikes as expected from the federal bank which would be beneficial in the long run. Talking about the oil markets, the largest gainers in the falling markets are the oil companies. The announcement of the government paying subsidies to the oil companies to get them back on track which amounted to Rs.5300 crores made the oil companies raise their share prices will enable the restoring of the demand supply gap thus stabilizing the prices.

Another sector hit hard by the ongoing socio economic Top gainers and losers as on 16.4.2015.: events is the telecom sector that has been blamed to Sr.no NSE come up with ways to mint money though their internet Gainers Rs. Losers Rs. providing. neutrality revolution does not seem 1 The net Cairn ind 236.

Heromoto 2430.

60 making Idea cellular 10 good for the telecom companies 2 ONGC 327. Ultratech 2895.

(418) and Bharti Airtel (202.75) a skeptical option 65 05to 3 these stocks Idea however 202.

Ambuja 252.5 invest in. managed to finally gain Cellular 75 0 th on the 16 2015. 1228 Sunpharma 1087.

4 of April M&M .50 95 5 Hindalco 137. Lupin 1900.

15 5

prices

is

that

according

to

the

Another sector hit hard by the ongoing socio economic events is the telecom sector that has been blamed to come up with ways to mint money though their internet providing. The net neutrality revolution does not seem good for the telecom companies making Idea Cellular (418) and Bharti Airtel (202.75) a skeptical option to invest in. these stocks however managed to finally gain on the 16th of April 2015.

BSE Gainers ONGC M&M

Rs. Losers 327.50 Heromoto

Hindalco

1225.4 Sunpharma 0 136.25 Cipla

NTPC

156.65 Larsen

HDFC

1308

Rs. 2428.8 5 1128.5 0 698

1789.9 5 Dr. Reddy’s 3740.8 lab 5

Among the top gainers as evident, the oil sector has caught up the upward movement pretty well but when we look at the cement segment and the pharmaceutical segment, these sectors are still facing a downward trend. The quarterly results hope to be the game changer for the markets this time.

18 | A P R I L 2 0 1 5

Shale

VRL Logistics IPO details: The VRL logistics went for an IPO on Wednesday that is the 15th of April and has outperformed in the markets.

The response to the IPO was exceptional as it got subscribed up to 1.1 times its issue. The public offer received bids for 1,79,64,375 shares against the total issue size of 1,62,69,006 shares, reflecting a subscription of 1.10 times, data at the NSE till 1400 hours showed. The IPO constitutes a fresh issuance of Rs. 117 crores worth of equity and an offer for sale of

Pharma April 2015 futures were at 1423.05, at a premium compared with spot closing of 1418. State Bank of India April 2015 futures were at 292.05, near spot closing of 291.85. In the spot market, the 50-unit CNX Nifty fell 43.50 points or 0.50% to settle at 8,706.70, its lowest closing level since 7 April 2015. The April 2015 derivatives contracts expire on 30 April 2015.

April 16th , 2015 Product

1.71 crores shares by NSR-PE Mauritius LLC and the promoters’ family. The company has fixed a price band of Rs. 195-205. At the issue size of 1,62,69,006 shares, the company would raise over Rs. 333 crores at the upper band.

The money raised shall be utilized by the company for

No. of

Traded value

contracts

( Rs. Crores)

Index Futures

716494

19274.62

Vol futures

0

0.00

Stock futures

865768

28156.38

Index options

9045218

212481.18

Stock Options 462451

15071.78

F & O Total

274983.97

11089931

its loan repayment, expansion of its logistics and transport and any other corporate needs. Post IPO, promoters' stake will come down to 69-70 per cent while 25 per cent will be held by the public and the rest 5 per cent by investors. The shares are proposed to be listed both on the BSE and the NSE. The issue is being managed by ICICI Securities Limited and HSBC Securities and Capital Markets (India) Private Limited.

Futures and options: Nifty April 2015 futures were at 8710, a premium of 3.30 points over spot closing of 8706.70. Turnover on NSE's futures & options (F&O) segment rose to Rs 2.74 lakh crores from Rs 2.03 lakh crores during the previous trading session on Wednesday, 15 April 2015. IndusInd Bank April 2015 futures were at 934.50, at a premium compared with spot closing of 929.60. Aurobindo Pharma April 2015 futures were at 1423.05, at a 19 | A P R I L 2 0 1 5

premium compared with spot closing

The correction factors of the markets do not seem to have ended and this is building up fear in many investors. The low prices definitely indicate a market for buyers and the long term gains would be high in such investments. The highly hit traders are the intraday traders with the negative trending markets.

The investors still seem hopeful and the strong market players will definitely prevail.

DEVELOPMENT AGREEMENT

ADB TO GIVE $300 MILLION LOAN TO INDA

-Navjoth Sahu

The Government of India and the Asian Development Bank (ADB) signed a $300 million loan agreement aimed at improving road connectivity and increasing domestic and regional trade along the North BengalNortheastern

Region

(NER)

international

trade

corridor. The motive of taking such a step was to improve road connectivity and efficiency of the global trade corridors by expanding roads in North Bengal and the northeastern states as cited by Tarun Bajaj, who is the joint secretary at the department of economic affairs in the finance ministry and also is the representative of this deal from Government of India. On the other side

Quadrangle (SAGQ) with the primary objective of

Improvements in road connectivity in North Bengal and

accelerating sustainable economic development

the Northeastern Region will enable efficient and safe

among them. According to the statement released by

transport within India and regionally with other SASEC

Government of India, the loan is the first tranche

member countries was said M. Teresa Kho, Country

under a $500-million multi-tranche South Asian

Director of ADB’s India Resident Mission, who signed

Sub-Regional Economic Cooperation (SASEC) road

the loan agreement on behalf of Asian Development

connectivity investment programme. Under this

Bank.

programme, about 500km of roads will be constructed. The multi-tranche financing facility

Asian Development Bank had shown keen interest in funding road projects in the country’s northeastern region (NER) to establish transport linkages with India’s neighboring countries for greater intra-regional trade in South Asia and have provided with $300 million for the same under Asian Development Bank’s South Asia Sub-regional Economic Cooperation (SASEC) programme. SASEC is an initiative to promote economic cooperation between Bangladesh, Bhutan, India and Nepal. In 1996, these four South Asian neighbors formed the South Asian Growth Quadrangle (SAGQ) with the primary objective of accelerating 20 | Asustainable P R I L 2 0 1 5economic development among them. According to the statement released by

(MFF) is a flexible financing instrument offered by the Asian Development Bank. It enables Asian Development

Bank

to

provide

assistance

programmatically by aligning the provision of financing with project readiness and the long-term needs of a client. The tranche 1 project will build two national highways totaling about 150km in West Bengal, as well as state roads totaling about 180km in Manipur, extending to Myanmar. The project is expected to be completed by 31 December 2021.

Asian Development Bank’s loan of $300 million makes up almost 71% of the total project cost of about $425 million, with the central and state governments providing counterpart finance of about

makes up almost 71% of the total project cost of about

the nations, but the political dynamics may have a

$425 million, with the central and state governments

different aspect towards it. One of the serious

providing counterpart finance of about $125 million.

concern with the India Nepal relationship is the

The loan has a 25-year term, including a five-year grace

border insurgency and human trafficking. An

period with an annual interest rate determined in

estimated 100,000-200,000 Nepalese in India are

accordance with Asian Development Bank's London

believed to have been trafficked till date. Sex

Inter-Bank Offered Rate (LIBOR) -based lending

trafficking is particularly rampant within Nepal and

facility.

to India, with as many as 5,000-10,000 women and

The program was endorsed by the South Asian Subregional Economic Cooperation trade facilitation and transport working group in a meeting in Singapore on 30 October 2013. In this statement released by Government of India Tarun Bajaj, Joint Secretary (Multilateral Institutions), Department of Economic Affairs at the Ministry of Finance, who signed for the Government of India also cited “The project area under the investment program is a key strategic thoroughfare integrating the regions of South and Southeast Asia, with the corridor connecting the countries of Bangladesh, Bhutan, Myanmar, and Nepal also it shall pave the way for India and other South Asian countries to link to Myanmar, and further afield with the member countries of the Association of Southeast Asian Nations.� The project documents meanwhile were also signed by O.Nabakishore, Additional Chief Secretary (Works), for the Government of Manipur; A. D James, Deputy Secretary for the Ministry of Road Transport and Highways, Government of India; and Shaktibrata Basu, Chief Engineer, Public Works Department for the Government of West Bengal. Although the project says about

building strong relation

between

India's

neighboring nations and boosting up the trade between the nations, but the political dynamics may have a different aspect towards it. One of the serious concern with

21 | A P R I L 2 0 1 5

girls trafficked to India alone each year. Similar treats stands with the relation with Bangladesh and Bhutan. And with this improvement in the trade and road transport development the figures may go to new heights. Also the point of repaying the loans which is having repayment tenure of 25 years may also condense the development in the trade between the nations. But as it is said when it is right, it is right.

The step taken by Government of India and the Asian Development Bank may result in further better relation among the countries which may even surpass the trade of Silk routes among the nations.

OIL EXPLORATION

OIL IN US, AN ECONOMIC STRAIN OR GAIN

-SAMEENA USMAN

Unlikely as it may sound, the Oil exploration and

The exploration and production on U.S. shale

production industry has gained prominence in the

deposits has been an important source of job growth.

United States of late, the reason being that the newly

The hydraulically fractured well requires a lot of

found unconventional oil extraction from shale

drilling activities at deposits. All this activity

sediments has reduced the amount of oil imports in the

requires labor including drilling crews, loader

country and at the same time has enhanced the economy

operators, truck drivers, diesel mechanics, site

with various positive outcomes in the form of

engineers, geologists etc. The people working in

employment, investments, and subsequent growth.

these areas then support surrounding businesses like hotels, restaurants, and car dealerships. Thus in this

A few decades earlier, the nation was struggling with lesser domestic oil production. Oil wells in Texas and other prominent oil regions, though still producing, were falling way too short of meeting the rapidly increasing energy demands. But presently, oil and gas is being economically drawn from the shale deposits with the aid of hydraulic fracturing technique.

scenario, i.e. on the flip side, lower oil prices mean less drilling and exploration activity because most of the new oil driving the economic activity is unconventional and has a higher cost per barrel than conventional source of oil. Less activity can lead to layoffs which can hurt the local businesses that catered to these workers. Therefore, the negative

Speaking of prices, before the dawn of U.S. oil

impact will be felt keenly in the shale regions even

production, a drop in oil price was largely viewed as

as some of the positive impacts of lower oil prices

positive, as for obvious reasons, that price is directly

start to show in other regions of the United States.

proportional to the cost of airplane fuel used for

This is regionally painful for the country and effects

transporting goods and people. A drop in fuel prices

show in state-level unemployment statistics such as

thus means lower transport costs and cheaper airline

in the case of Midland Texas.

tickets. Also as many industrial chemicals are refined from

oil,

lower

oil

prices

also

benefits

the

manufacturing sector as well. This reduction of costs could be passed on to consumer. Greater discretionary income for consumer spending can further stimulate the economy. All this, with respect to the view of a purely oil consuming nation, but what about now that it entered into the production as well?

Thus the United States now feels an unpleasant pinch when oil prices have drastically fallen which is well depicted in the following graph which shows that the U.S. shale boom has been a major growth catalyst for employment hike. However, it is generally being presumed that in an overall effect, low oil prices should benefit the U.S. economy as the oil and gas industry only accounts for about 2% of the gross output.

22 | A P R I L 2 0 1 5

since 2010, energy companies have raised $550 billion in cheap bonds to increase oil and gas production and fund acquisitions. Of course, investors and bankers are well-versed in risks and rewards, but the losses still destroy capital when they happen. Between the job losses and the capital losses, a dip in oil prices can trim the growth of the U.S. economy, if not attempt to stagnate it! And, the plausibility of the inability to pay out the high debt levels is in part the reason as to why the fall of the share prices of Energy dealing companies of the U.S. output. The remainder of the economy stands to gain

has been more severe than the fall in the price of oil

and the typical consumer will have some extra dollars

itself. In today’s world, a series of defaults could

in their pocket to spend on.

have a powerful chain effect that might impact not

But it should be kept in mind that the U.S. shale oil has

just the United States, but also global credit markets.

attracted massive amounts of foreign investments, with

Comparatively, the U.S. economy, owing to its

100 factories that will produce oil and gas infrastructure

incredibly diverse and dense sectors, isn’t as

such as pipelines, servicing equipment, and drilling

pathetically tied to the price of oil as some of the

rigs, scheduled to open over the next few years. This is

other top production nations such as like Russia and

projected to boost the nation's economy by $300 billion

Venezuela whose fortunes heavily fluctuate with the

and create an additional 1 million jobs. At least that was

price of oil. Although oil and gas production has

the plan before the oil prices started plunging down.

been one driver of recent growth, and is of course as

Also more importantly, the other sectors that tend to

mentioned connected to other important sectors, but

suffer when U.S. oil prices drop are the banking and

sectors like manufacturing gain more than they lose

investment sectors. There are a lot of different

where fuel costs are a primary concern.

companies drilling and servicing wells on the shale deposits, and many of these companies finance their operations by raising capital and taking on debt. This means that investors and banks both have money to lose if the price of oil drops to where new wells are no longer profitable and the companies dependent on drilling and service then go out of business. According to a study, since 2010, energy companies have raised $550 billion in cheap bonds to increase oil and gas production and 23 | A P R I L Of 2 0 course, 15 fund acquisitions. investors and bankers are

well-versed in risks and rewards, but the losses still

So you can never decide if it’s a half glass empty or a half glass full argument that is right but you can sure as hell drink that glass! i.e. the United States can take up cautious measures to protect its oil & gas & related industries while hoping for a better turn of events

in

the

global

oil

price

scenario.

POLICY RISKS

IMF CHIEFS FLAGS CURRENCY FED POLICY RISKS FOR INDIA

-MANJARI SHARMA

The IMF's first female chief Christine Lagarde came on

last five years it has almost doubled upto $120

a two day visit to India from 16 March 2015 to 17

billion. It is a fair bet that most of that amount has

March 2015. Once she arrived at the New Delhi

remained

International Airport she went on to meet Prime

fluctuations. A couple of months ago, RBI Deputy

Minister Narendra Modi and Finance Minister Arun

Governor HR Khan expressed concern that the hedge

Jaitley. The following day, she went on to meet RBI

ratio of outstanding forex loans and liabilities was

Governor Raghuram Rajan and also women leaders of

just 15 per cent compared to about 35 per cent from

India Inc at Mumbai. In her speeches, IMF chief lauded

previous year. The rupee will be in for a testing time

India as the bright spot of the global economy and also

if US rates rise in a couple of months, even if RBI

said India has the “opportunity and potential to become

intervenes in the market. On this, Christine Lagarde

one of the world's most dynamic economies” with

on Tuesday warned companies that have borrowed

growth running at above seven per cent. The IMF chief

heavily in foreign currency due to a sharp

also hailed the government's financial inclusion plan

appreciation of the US dollar. The tightening of

Jan Dhan Yojna and said that the JAM trinity as well as

monetary policies by the US at a time when other

Make In India project is an important step towards

countries are easing theirs could make emerging

repairing the subsidy regime and called for bringing

economies "vulnerable" as many of their firms and

more women into the workforce to boost growth. She

banks have sharply increased their borrowings in

also emphasized that fall in global crude prices has been

dollars in the last five years.

un-hedged

against

exchange

rate

a major boon to a country that is one of the world's biggest oil importers. However, she also outlined a

Fed’s Low-interest-rate policies have encouraged

series of areas where the government needed to

companies in these emerging economies to borrow

encourage investment more. She highlighted that

dollars because they could do it more cheaply than if

reforms of India's complex labor laws to encourage

they took out loans in their local currencies, like

youth, the easing of land acquisition and other

the Brazilian real or Indian rupee . As the RBI

clearances, should help revive the investment cycle and

governor, Raghuram Rajan, put it earlier this year in

achieve faster growth.

an interview, "Borrowing in dollars is just like

On March 17,2015 while speaking at the Reserve Bank

playing Russian roulette, especially if you're

of India (RBI) she discussed over US-Normalization of

borrowing relatively for a short term." These words

monetary policy and the rise of the dollar which could

can be analyzed as for the present time it might work

pose challenges to emerging economies such as India.

out fine however, as soon as the value of the dollar

Indian corporate sector debt had risen rapidly and in the

rises, the companies find that they need more of their

last five years it has almost doubled upto $120 billion.

local currency to pay back the dollars that have since

24 | A P R I L 2 0 1 5

It is a fair bet that most of that amount has remained unhedged against exchange rate fluctuations. A couple of

gained in value.

local currency to pay back the dollars that have since gained in value.

Companies in emerging markets that are primarily exporters might be good. Since, their income is in dollars, thus it should keep pace with the rising debt service obligations. The problem arises for those focused domestically, like real estate developers as more expensive dollar can make it much more costly to service debts. In these cases, money is coming in a local currency like the Indian rupee or the Malaysian ringgit, and it suddenly takes a lot more currency to pay debts owed in dollars. This time around the biggest difference is that not the governments, but the private companies have incurred debt in a currency not their own. The likely outcomes to follow are layoffs, bankruptcies and cost-cutting for individual companies that borrowed too

also said if the market volatility materializes, central

aggressively. A vicious cycle of the economic collapse

banks should to be ready to act with temporary,

and government austerity measures is harder to

though aggressive, liquidity support to certain

imagine. IMF chief also said about how the dollar

sectors or markets, along with targeted foreign

appreciation was also putting pressure on banks’

exchange interventions. As a precaution, she also

balance sheets, households and firms that borrow in

said effective and clear communication of the policy

dollars but have assets or earnings in other currencies.

intentions could reduce the risk of creating very large

According to several economists and top management

market volatility. Also, the developing markets need

situation is not alarming. According to them the impact

to prepare well in advance!

of dollar appreciation on corporate debt should be judged in the light of three factors — forex reserves versus external debt, interest payment on external debt, export earnings and short-term loans versus total exports.

While concluding her speech at Mumbai, IMF chief also said if the market volatility

25 | A P R I L 2 0 1 5

TALE OF A CURRENCY

DECREASING VALUE OF INDIAN RUPEE

-APOORVA ANUSHA

The Indian rupee is the official currency of the republic of India. The reserve bank manages currency in India and derives its role in currency management on the basis of the Reserve Bank of India Act, 1934.

Considering the international use of Indian rupee it’s official currency of Aden ,Oman , Dubai , Kuwait the Seychelles and Mauritius. The Indian government introduced the Gulf rupee – also known as the Persian Gulf rupee (XPGR) – as a replacement for the Indian rupee for circulation outside the country with the

attempt to influence their exchange rates by buying

Reserve Bank of India (Amendment) Act of 1 May

and selling currencies. It is also known as dirty float.

1959. The creation of a separate currency was an

RBI also exercises a system of capital controls in

attempt to reduce the strain on India's foreign reserves

addition to intervention (through active trading) in

from gold smuggling. After India devalued the rupee on

currency markets. Capital controls are residency-

6 June 1966, those countries still using it – Oman,

based measures such as transaction taxes, other

Qatar, and the Trucial States (which became the United

limits, or outright prohibitions that a nation's

Arab Emirates in 1971) – replaced the Gulf rupee with

government can use to regulate flows from capital

their own currencies. Kuwait and Bahrain had already

markets into and out of the country's capital account.

done

respectively.

Capital controls were an integral part of the Bretton

Recently Zimbabwe added the Indian Rupee as a legal

Woods system which emerged after World War II

tender to be used.

and lasted until the early 1970s.

Officially, the Indian rupee has a market-determined

On the current account, there are no currency-

exchange rate. However, the RBI trades actively in the

conversion restrictions so there is no problem in

USD/INR currency market to impact effective

buying or selling foreign exchange. On the capital

exchange rates. Thus, the currency regime in place for

account,

the Indian rupee with respect to the US dollar is a de

convertibility to bring money into and out of the

facto controlled exchange rate. This is sometimes called

country and buy securities except some quantitative

a "managed float”. Managed float regime is the current

restrictions. Local firms are able to take capital out

international financial environment in which exchange

of the country in order to expand globally. However,

rates fluctuate from day to day. But central banks

local households are restricted in their ability to

attempt to influence their exchange rates by buying and

diversify globally. Because of the expansion of the

| A P R I L 2It0is1 also 5 known as dirty float. selling26 currencies.

current and capital accounts, India is increasingly

so

in

1961

and

1965,

foreign

institutional

investors

moving towards full de facto convertibility.

have

diversify globally. Because of the expansion of the

The foreign institutional investors have been selling

current and capital accounts, India is increasingly

index futures and Indian equity market is weakening.

moving towards full de facto convertibility.

As a result there is a heavy demand for dollar and

The most concerning chapter for India during last two months is the weakening of rupee against dollar. It is not only that rupee has lost its value in the global context but also dollar has improved its performance in the

global

trading

markets.

The

outstanding

performance of US equities and the improvement in the labor market has made Americans more optimistic about the US economy, thereby stimulating greater hopes of QE (Quantitative Easing) tapering

Indian currency as well as economic situation is looking too gloomy. These worries, combined with a record high current account deficit and now uncertainty over the central bank’s monetary policy stance, have prompted foreign investors to sell more than $12 billion of Indian debt and equities since late May. Reserve Bank of India has taken certain steps and some more to be followed to have a control over rupee. The best business prototype anyone can have is to spend in rupees and earn in dollars, which is

The government has a strong role in controlling

what the giants of India Inc., including the top IT

currency in the form of policy regulation and reforms.

companies, excel in. Basically the sector which is

The current UPA leadership has failed to strike with

targeting exports for its industrial operations are the

some heavy reform to generate more cash inflows. As a

one wins the game.

result the government has gradually lost its control over rupee depreciation. Investors’ sentiment plays a pivotal role over here. Oil and gold imports account for 35 per cent and 11 per cent of India’s trade bill respectively.

There has been an uninterrupted demand for the dollar from the oil importers pushing the rupee lower.

Likewise the falling gold prices have made the central bank to reduce imports, which increases CAD and hits the currency directly. Indian economy requires a strong structural reform to maintain a positive balance of payment. Also, government spends excessively as election approaches just to woo electorate votes. This causes the rupee to depreciate. Then the government beats around the bush to control the currency behavior.

But most of the time these measures worsen the economic crisis to a great extent.

Dollar appreciation would be positive for sectors such as IT, pharmaceuticals, hotel, textiles and automobiles which have the total foreign exchange earnings of these firms are far greater than their forex spends. As much as the rupee weakens, the foreign exchange earners gain provided the other factors remains constant. A sharply declining rupee triggers inflation, broaden the current account deficit, hits investor

sentiment

and

creates

burdens

for

organization with high exposure to foreign debt. The government and the Reserve Bank of India have taken several reform initiatives to resist the downturn, but their success stories are looking gloomy. Buying imported materials will become very costly. A weak rupee will create extra stress on Oil Marketing Companies (OMC) and this will surely be passed on to the consumers as the

27 | A P R I L 2 0 1 5

companies are allowed to do so after the deregulation of petrol and partial deregulation of diesel.

buy bonds to ease liquidity in the market. Finally we can say that the situation is tight and challenging for us, but we can not only hope for the best but also should contribute the most to get back Indian economy in the driving seat.

surely be passed on to the consumers as the companies are allowed to do so after the deregulation of petrol and partial deregulation of diesel. If the OMCs increase fuel prices, there will be a substantial increase in overall cost of transportation which will trigger inflation.

More the depreciation graph is steep and without control it will strike up the inflation. As a result the Central bank would have very less chance to impose further rate cut and that’s the burden the borrower would have to bear.

Indians who have gone to abroad for tours or studies are highly affected in these times. The only smiling people in this context are the NRI’s who gain more on sending money to their homeland. As a whole we can say that though weakening rupee is the reason for someone’s smile it is a real threat for the country’s overall fiscal health and increase the current account deficit heavily.

But in my opinion this huge downgrade is a temporary phenomenon and the rupee is really oversold. Now the Central bank and Government should work hand in hand and find out the policy measures to stabilize the frightening scenario. I personally hope a further cut in SLR to ease the liquidity to save rupee and also import duty hike in gold and other related materials. RBI can buy bonds to ease liquidity in the market. Finally we can say28that | Athe P R situation I L 2 0 1 5 is tight and challenging for us, but we can not only hope for the best but also should

QUICK BITE

LIC’s INVESTMENT IN RAILWAY

-RAHUL MISHRA

Life Insurance Corporation of India, the major state run insurance company has decided to invest Rs. 1.5 lakh crore in one of the largest railway network of the world, the Indian Railways. The step taken by LIC is being appreciated by the Finance Minister and the investment would be made over a period of five years. As per LIC Chairman S K Roy bonds worth Rs 30,000 crore would be subscribed over the tenure of next five years after

more options the profits will be high as the overall

signing the MoU between LIC and the Indian Railways.

capacity would increase and it can happen only with

Thirty years will be the tenure of the bonds but the

investment not just by gross budget or by charging

disbursements will happen over a period of five years.

extra taxes from people. So, this is a good and

The interest rate is yet to be finalized and hopefully

commercially viable thinking.

would benefit both the parties and will be commercially

LIC had invested around Rs 22,000 crore in the

viable. These bonds will be issued by railway entities

infrastructure sector, including power, housing and

like

Corporation

transport, in the last fiscal year. That was only 13%

beginning next year. LIC being a financial giant is a

of the total investment against the mandatory 15%

well-known brand in itself with a faith of millions of

which they have to maintain. According to me it is

policy holders in it. Railways though having a long

too early to judge the decision as the interest rate is

history require growth and expansion to serve the

not yet decided. It would be good if the decision is

growing demand with more professionalism so that it

taken as a commercial one because if not so then

can provide more comfort and satisfaction to its

millions of the policy holder will be at loss as

passengers and for that it requires speedy projects and

railways has also been a toy in the hands of the

funds other than centre and associations like these can

politicians and they have been the reason for its

prove to be beneficial as the proposed amount to be

profit or loss so the rate should be high enough to

invested by the Railway Minister Suresh Prabhu in the

make LIC an active part of the treaty. But if done

Rail Budget was Rs. 8.50 lakh crore for the next five

properly then public money will be used for public.

the

Indian

Railways

Finance

years and make Railways profitable expansion and diversification is a must to its operations.

These funds will increase the efficiency as there will more lines, the freight volume will increase and with more options the profits will be high as the overall 29 | A P R I L 2 0 1 5

VRIDDHI’s RESEARCH CORNER

COMPANY IN FOCUS: KOTAK MAHINDRA BANK

-MOHIT BHAYANA

Kotak Mahindra Group is one of India’s leading

Kotak Mahindra Bank is the flagship company of

banking and financial services organizations, offering

the Kotak group. The business model of the bank

a wide range of financial products and services. In

is corporate/wholesale banking forming more than

February 2003, Kotak Mahindra Finance Ltd.

50% of the advances. The bank was the first to

(KMFL) received a banking license from the Reserve

identify stress among the commercial vehicle

Bank of India (RBI). Thus Kotak Mahindra Bank

market and has reduced their exposure over the

Limited (KMBL), India’s first Non-banking Finance

year. The Net interest income has increased by

Company (NBFC) to become a bank, was born.The

16% in FY 14 from FY13. Profit before tax of the

bank along with its subsidiaries, offers a wide range

Bank for FY14 was ` 2,272.5 crore as against `

of financial products and services to its customers.

1,972.1 crore for FY13. Profit after tax of the Bank

The key businesses are commercial banking,

was ` 1,502.5 crore in FY14 compared with `

investment banking, stock broking, car finance, asset

1,360.7 crore in FY13.

management and life insurance. The group has seen a steady and sustainable shift in its overall business mix

Although the value of the share using the free cash

to relatively stable lending businesses from capital

flow model is calculated to be Rs 1145.08 using

markets-driven revenue streams. The diversified

the figures of financial year 2014 but the share is

business profile of the group allows it to sustain

currently trading at Rs 1390. This could be

healthy profitability despite cyclicality in some of its

attributed to the merger of ING Vysya Bank with

businesses.

the Kotak Mahindra Bank. The merging of ING Vysya Bank with Kotak Mahindra Bank Limited

Company Information:

has almost doubled the branch network for the

Indusrty: Finance

bank from 641 to 1214 branches making Kotak

Segment: Banking

Mahindra fourth largest bank in terms branch

NSE Ticker: kotakbank

network. The combined entity would have an RoA

ISIN: INE237A01028

1.8% and RoE of 12.8%. In the near future the

CMP: 1371.60

bank could see some pressure from commercial

52 Week Low: 752.90 on April 07, 2014

vehicle and farm loans turning NPA’s due to

52 Week High: 1456.60 on March 04, 2015

unseasonal rains destroying crop in the north

P/E (x): 60.74

India. So the target price for the bank could be set to Rs 1410-15 in the near to mid-term with improving macros.

30 | A P R I L 2 0 1 5

The segment wise distribution of advances is as follows: Segment 31 March 2014 Corporate Banking 14,377.3 Home Loans and LAP 12,099.4 Agriculture Division 10,468.1 CV/CE 5,441.2 Business Banking 5,387.9 Small Business and Personal Loans 3,403.6

31 March 2013 12,291.3 10,726.6 8,356.0 7,805.5 5,215.5 2,897.0

Key Ratios: Key Financial Indicators FY14 FY13 FY12 FY11 Net Interest margin (%) 4.97 4.7 4.83 5.23 Return on Average Assets (%) 2.1 2.1 2.2 2.4 Book Value per share( in Rs) 248 204 174 149 Return on Equity (%) 14 15.6 15.4 16.4 CAR (%) 18.9 17 17.9 19.5 Gross NPA ratio (%) 1.6 1.3 1.3 1.7 Net NPA ratio (%) 0.9 0.6 0.5 0.6

FY10 5.81 2.7 114 18.2 19.3 3 1.5

Key Financials: Comparison FY14 and FY13 FY14 NII Other income Net Total Income Employee cost Other operating expenses Operating Expenditure Operating Profit Provision and Contingencies PBT Provision for Tax PAT

31 | A P R I L 2 0 1 5

FY13 3720.1 1399.7 5119.8 1159.1

3205.7 1160.7 4366.4 1051.2

Growth % 16% 20.60% 17.30% 10.30%

1383.5

1158.6

19.40%

2542.6 2577.2

2209.8 2156.6

15.10% 19.50%

304.7 2272.5 770 1502.5

184.5 1972.1 611.4 1360.7

65.10% 15.20% 10.40%

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