Post on 17-Jul-2020
The Winding Road
to Recovery Pg. 5
India gearing up for a strong
Bull Market Pg. 7
Structured Thinking and
Investments Pg. 9
Inflation Indexed
Bonds Pg. 1
Prof. Suresha B
Assistant Professor
Department of Management Studies
How Right will Modi Tread
Pg. 3
A Sale in Distress Pg. 10
Rupee says ‘I am stronger’ Pg. 12
Brazil’s World Cup Paradox Pg. 13
Headline Inflation in India Pg. 15
Arthavikas Pg. 16
The ‘M’ factor Pg. 17
Poll 2014 After Effects: understanding BSE SENSEX 25000 mark Pg. 19
World Economy is hit by ‘Lost Gener-ations' Pg. 21
Dealing with the Wild Cards Pg. 22
Impact on the financial system due to a political trigger Pg. 24
A Win That Supersedes Money Pg. 25
The Oil World Pg. 26
Contents
1
Inflation risk is a major concern for Indian investors.
Investors can reduce their exposure to inflation risk
using a variety of methods. Gold for long has been
used as a hedge against inflation. Till recently, gold has
produced some good returns for the Indian investors.
Apart from gold, investors have also the option of
investing in real estate and stock market. However,
owing to volatility in the prices, investment in gold will
not offer any capital protection. Inflation indexed
bonds offer capital protection and can also be used as
a hedge against inflation rates.
In United States there are different forms of inflation
hedge instruments. The popular instrument is
Treasury Inflation Protected Securities (TIPS) that are
adjusted for inflation based on the official CPI figures.
Similarly, inflation-protected government bonds in
Europe have also drawn the attention of some
investors. Notably, these inflation-adjusted securities
can also serve as an indicator of confidence in a
government. For instance, investors concerned about
the negative implications of inflationary policies may
opt to purchase inflation-protected securities in lieu of
non-protected securities, which would create a
growing spread between the two over time - a clear
warning sign.
In the year 1997 for the first time government of India
issued capital indexed bonds to enable investors to
protect their investment from inflation risk. This was
short lived and lacked market participation. This bond
provided inflation protection only for the principal and
not for Interest. The recently announced inflation
indexed bonds, is an enhanced version of capital
indexed bonds. Inflation indexed bonds provide
inflation protection for interest payments as well, but
were not well received due to its complex structure.
Theoretically, inflation indexed bonds could indicate
the willingness of the government to maintain optimal
Inflation numbers. In this the invested principal is
adjusted as per the prevailing WPI (There is a proposal
to use CPI as benchmark) rates and a fixed interest
rate is paid on the adjusted principal.
Inflation Indexed Bonds
Is it a better investment tool to hedge
Prof. Suresha B
Assistant Professor Department of Management Studies
Christ University
Consider the following example, in which the initial investment (in 2004-05) is Rs. 25,000, historic WPI data
is from 2004-2005 (taken as 100) and the coupon rate is assumed at 8 per cent.
2
However, currently inflation indexed bonds are
linked to WPI. Instead of WPI, the consumer price
index (CPI) stands as a better representative of the
purchase power of individuals. As per the latest
data, WPI is at 4.89 per cent whereas CPI is at 9.39
per cent. The differential between these two
measures of inflation is substantial. From the retail
investor's perspective, linking the interest with CPI is
more beneficial compared to linking it in WPI. Linking
the interest rate with CPI will give the necessary
advantage for both investors and the regulators.
It may be concluded that the bond
investments are not risk free. The indexed bonds
protect the investments principal and interest from
the inflation risk and maintains the time value of
money throughout the tenure of holding. Short
coming of the inflation indexed bond is that it is
based on the whole sale price index which is
unrealistic as it is not true representative of the real
inflation. Instead of WPI, the consumer price index
(CPI) stands as a better representative of the
purchase power of individuals. Therefore, in the
coming years for the success of such instruments
it is essential to base the returns calculation on
consumer price index.
Table – 1 Table Showing adjusted principal and interest for Inflation Indexed Bonds
Year WPI Adjusted principal
Coupon rate Interest paid
2005-06 104.47 26,118 8% 2089.4
2006-07 111.35 27,838 8% 2227
2007-08 116.63 29,158 8% 2332.6
2009-10 126.02 31,505 8% 2520.4
2009-10 130.81 32,703 8% 2616.2
2010-11 143.32 35,830 8% 2866.4
2011-12 156.13 39,033 8% 3122.6
2012-13 167.6 41,900 8% 3352
References
A study by Indian Institute of Management, Calcutta (IIMC).(2011). The Development of Bond market in India. Retrieved from
http://www.docstoc.com/docs/19475216/The-Development-of-Bond-market-in-India
ADB report on development of securities market in India: Asia Bond Monitor. (March 2011). Afraid of inflation? Inflation-
indexed bonds may bring respite. (2011, January 10). The Economic Times.
Coleman, T. S., Fisher, L. and Ibbotson, R. G. (1993) ‘ANote on Interest Rate Volatility’, The Journal of Fixed Income, 3, 97–
101.
Collection of data for the Wholesale Price Index in India. (2011, April 10). Office of the Ministry of Commerce and Industry.
Retrieved from http://eaindustry.nic.in/wpi_data_display/display_data.asp.
Dialynas, C. P. and Edington, D. H. (1992) ‘Bond Yield Spreads: A Postmodern View’, The Journal of Portfolio Management, 19,
68–75.
Dunetz, M. L. and Mahoney, J. M. (1988) ‘Using Durationand Convexity in the Analysis of Callable Bonds’, Financial Analysts
Journal, 44, 53–73.
Fabozzi, F. J., Pitts, M. and Dattatreya, R. E. (1997) ‘Price Volatility Characteristics of Fixed-Income Securities’, in Fabozzi, F. J.
(ed.), The Handbook of Fixed-Income Securities,5th edn, Irwin Professional Publishing, Chicago, IL.
Steward, C. B., Lynch, J. H. and Fabozzi, F. J. (2004)‘International Bond Portfolio Management’, in Fabozzi, F. J. (ed.), Fixed
Income Readings for the Chartered Financial Analysts Program, 2nd edn, Frank J. Fabozzi Associates, New Hope, PA.
3
How Right will Modi Tread.
Samuel Vincy Mathew
III MFM
India’s historical preference for socialism as one of the
core values in the moulding and construction of an
economy might be on the line in the next few years as
Modi begins a reign which promises a lot in terms of
reforms among a lot of other things.
Socialism, as defined by Oxford Dictionary is, “A
political and economic theory of social
organization which advocates that, the means of
production, distribution, and exchange should be
owned or regulated by the community as a whole”.
Although India had, substantially, done away with
socialism as its core ideology, with the
introduction of the New Economic Policy in 1991,
gigantic Government-owned Institutions such as LIC,
Coal India Ltd, Indian Oil Corporation and IFCI Ltd,
among others, have remained substantially,
Government-owned, as a testament to India’s
historically held commitment of the ideology.
The continued ownership stake in these Enterprises
should not be misunderstood as being due to the
existence of any significant strategic issues for the
Nation barring exceptional cases such as Air India,
ONGC and IOC. There is a significant amount of
patronage to be gained from these economic
behemoths, a fact which has not escaped the notice of
politicians and bureaucrats. High positions in the
hierarchies of these organizations are reserved, as in
the case of other Government Ministries, for the
favourites of the concerned Ministers. These Ministers
will in turn, respond by playing to their whims and
fancies and also, possibly, (in a not-so-wild imagination)
by turning a blind eye towards their misdeeds.
Another sticky, and even bigger problem, is the
existence of a high degree of trade union activity which
again is a legacy of the socialist heritage. Although
conceived with the very noblest of ideals in mind, trade
unions have proven to be very significant obstacles in
the search for economic prosperity for any PSU. By
taking advantage of the strength which lies in their
numbers, these Unions have ‘lobbied’, often very
successfully, in obtaining an inordinate amount of
benefits for its Members often with the complicity of
Politicians. Consequently, these Enterprises have
become odes to inefficiency and privatization has been
opposed tooth and nail by these same forces as it will,
inevitably, be accompanied by the relative
discomfort and uncertainties of the real global market
conditions.
It is in this context that the current ruling
dispensation seeks to implement those reforms which
4
were promised by it. The extent to which it is willing to
go remains to be seen. It can either continue to hold
the ownership stakes and put the organizations under
Professional Management as opposed to the current
system where IAS Officers are kept at the helm. Or it
can go the whole way and completely privatize all
these Institutions. Although these two options are not
the only ones available to the decision maker, these
encompass the broad range of options available to the
concerned person. The former route has already been
tried and has failed spectacularly at Air India in the
case of Jitender Bhargava and the blame for the same
should not be blamed on Him. The latter option
requires the summoning of the kind of political
scenario which is rarely found in India these days and
requires a process which promises to be steeped in
politics.
Regardless of the chosen route, this decision will play a
significant role in shaping the opinion the corporate
sector has about the performance of the Modi
Government at the end of the current political cycle.
5
The Winding Road to Recovery
Natasha Chaudhary
III MFM
Among all the cheer and adulation for the new
government at the center, one must consider the road
ahead for India, and whether such joy is warranted
or not. Even though, the government has signaled that
it will ease investment norms, discourage
retrospective taxation, deal in an integrated manner
with power production and coal supply, fast-track
some key
infrastructure and
mining projects,
expedite sales-
tax reform, and
support Raghuram
Rajan’s fight against
inflation, pledges to
maintain fiscal and
monetary discipline
will be difficult to
achieve as the cost
of capital will
remain high and a
major turnaround in the banking system will take time.
A key question then is how the economic cycle will
turn in favor of investment and growth. Prime
Minister Modi may improve the running of
government and clear the logjam of stalled projects,
but that may not be enough to get the ball rolling for
India’s economy. India is short of liquidity at this
juncture, meaning the cost and availability of project
financing will remain an issue.
Currently, with annual growth rate hovering below
5%, Asia's third-largest economy has been weighed
down by high inflation, a weak currency and a drop in
foreign investment.
A slowdown in
mining and
manufacturing
has not helped
matters. But,
judging from a
slightly longer
point of view, the
economy has
been doing quite
well from 1994,
very well from
2003, and especially so from 2005. India has lived
through stretches of slow growth and we are currently
going through such a period. However, recovery is in
sight as the country having a high potential growth,
will need a governance overhaul, which might
happen.
As per Mr. Kaushik Basu, Chief Economist of the World
Courtesy: www.capoliticalreview.com
6
Shefali Mehta
III MFM
Bank, there are two basic challenges for India. One is
the poor governance where due to slow decision
making, the bureaucracy is extremely cumbersome.
This has been the legacy of the last 60 years.The other
is poor infrastructure. India needs to improve
its infrastructure in the next five to ten years. By
improving governance and infrastructure, the
prospects will be immense.
It is not a totally gloomy scenario for India as the
country also has a good many strengths, one being its
high, technical and engineering skills. The reason
for its high intellectual resource is the fact that for a
poor, emerging economy, after Independence,
India invested disproportionately in higher education,
even though it did very poorly in terms of basic
literacy. This is demonstrated by a large Indian
presence in Silicon Valley in the US. The other
strength is labour. With modern technology, the
global labour market is gradually becoming a common
pool and this is changing the structure of the global
economy. It is possible for workers en masse to be
working for Japanese, American and European
companies sitting in India itself which was not
possible earlier. Labour is India's big potential
strength but it needs to be properly utilized. There is
a huge surplus of labour in agriculture, accounting for
50% of the workforce whereas agriculture itself
accounts for 14% of the GDP. India has a huge
potential if there were a vent for such a workforce to
join the global talent pool.
India can once again achieve its growth rate of 8%
which existed between 2003 and 2011. Policy makers
must pursue either domestic adjustments or external
flows to fund an investment recovery for the country,
which will carry with it certain complications and
delays. The government can surely control interest
rates and check the fiscal deficit to ensure a
higherlevel of growth. Such optimism is justified. The
current growth rate of 4.5% to 5% is alarming but a
turnaround is doable under the current government.
7
Shefali Mehta
III MFM
India gearing up for a strong Bull
Market Shefali Mehta
III MFM
8
India is at the initiation of a strong market over the
next few years following a strong mandate for a
Narendra Modi-led government, top brokers and fund
managers.
According to a survey, the Sensex is set to touch
28,000 and the rupee will become stable at 57-58 to
the dollar by the end of the year. Some are also
anticipating the Sensex surging by about 10,000 points
more in two years. India voted for development and
reforms, and the new government will push through
policy changes to revitalize augmentation, which in
turn will elicit a strong bull rally in Indian equities. The
decisive and crucial mandate by the people of India has
paved the way for a favorable policy environment,
leading to the resurrection of growth in the economy
over the next few years. About 50% of the people
expect the Sensex to touch 28,000 by December while
15% feel the benchmark will hit 30,000. About 27% of
the poll's participants expect the rupee to strengthen
to 57-58 against the dollar whereas 18% expect it at 56
-57. The inward bound government may prefer a
stronger rupee and RBI too may decide to discontinue
the forex market intercession. While 58% advised
buying quality infrastructure stocks, 50% preferred
state-owned banks. Energy, capital goods and metals
are the other sectors strongly recommended and
preferred by the poll participants and they have
advised an exit from FMCG, IT, pharmaceutical and
realty.
L&T, Axis Bank, ICICI Bank, M&M, Maruti, ONGC, RIL,
Tata Motors and LIC housing are the top picks of a
majority of fund managers and brokers. Consumer-
price inflation, one of the biggest worries of the central
bank would be at 8% in 2014-2015. As for growth, 47%
of those polled expect India to expand 5.5-6.5% in the
current fiscal in line with expectations, despite the
change of guard at the Centre as the challenges to the
economy. The revival should be gradual rather than
sharp. The highest-ever computation in the Lok Sabha
elections has facilitated BJP secure a majority on its
own, hence elevating hopes of big-bang reforms to
revive and restore the economy.
9
Innovation in the financial markets is currently the
need of the hour. With the increasing retail and
institutional participation in the capital market, new
financial instruments are being introduced to satisfy
the needs of these classes of investors. Structured
investments are the result of the increasing investors’
needs and innovation.
Structured investments or products are pre-packaged
investment strategies which are based on underlying
assets such as equities, interest rates, currencies,
commodities, options etc. It is a market linked product
which features a balance between the risk and return
of the investment. In India the major attractive feature
of the product is the ‘principal protection’. This assures
the investor, the return of his principal investment.
Along with the protection of the investment, these
products try to give a market linked return.
Structured products originally became popular in
Europe and have gained currency in the U.S., where
they are frequently offered as SEC-registered products,
which means they are accessible to retail investors in
the same way as stocks, bonds, exchange traded
funds (ETFs) and mutual funds. These investments
provide an exposure which is helpful to complement
the tradition components of diversified portfolios.
In India, the structured products are issued as
debentures with an option appended. Nifty linked
debentures are a popular example of a structured
product in India. They are usually issued in the form of
NCD’s (Non-Convertible Debentures). There can be
even tailor made structured products developed to
meet the want of customers which depends on the
market conditions. These are usually products offered
to High Net Worth individuals due to its complexity
and large lot size of Rs. 10 lakh upwards.
Structures products are the easiest and safest way to
invest in the equity market. Though the complexities
of these products have kept them away from the retail
investors, they provide the benefits of derivatives
which would not otherwise be available. Inclusion of
structured products in the portfolio would help to
balance the risk and return of traditional portfolio
management.
Structured Thinking,
Structured Investments Neethi D’Cunha
III MFM
Courtesy: www.tradeandexportme.com
10
A Sale in Distress
Preethi Lakshmy K
III MFM
For Raghuram Rajan, one of the top priorities after
taking over as the governor of RBI was to ensure the
lowering of non - performing assets of banks.
Distressed assets have increased significantly over the
past few years, partly because of a slowing economy
and poor demand, and also inappropriate investment
decisions by companies. Public sector banks lead the
accretion of bad and doubtful assets. According to Fitch
ratings and others, the worst is still not over and the
asset quality of banks could deteriorate further,
Stressed assets, that include non- performing loans and
restructured loans, could raise to 15 per cent of the
total loans by March 2015 as against about 10 per cent
as of March 2013. The stressed assets would eat into
the capital of banks and public sector banks could need
as much as Rs. 380000 crore of new equity by 2019 to
meet the Basel III requirements. Sectors including
infrastructure, power, iron & steel and textile led the
NPA’s because of delay in projects due to politics,
supply bottleneck and economic slowdown. The three
accounted for almost half the NPA’s as of 2013,
compared with 28 per cent as of March 2011, Retail
loans had a better quality of assets with gross NPA’s of
2.5 per cent. The SBI planned to sell as much as Rs 4000
Sale of stressed assets rose five times as banks focus on cutting bad debts and improve their financial
Courtesy: www.capstonepioneer.com
11
Crores of NPA in the financial year that just ended. The
nation’s biggest bank said that non-performing loans
rose to Rs 67799 crore in the quarter ended 31
December 2013, and reported 5.73 % increase during
the quarter.
New Guidelines
“Banks are using a mix of all possible options, including
early identification of potential non-performing assets,
sale of riskier assets, and restructuring of loans, and
sale to assets reconstruction companies or special
situation funds” says Nikhil shah, senior director,
Alvarez and Marshal India. In the year ended 31 March
2014, collectively banks may have sold Rs 50000 crore
worth of assets to reduce NPAs compared with Rs 8000
- 9000 crore a year earlier. And in the year March 2015,
such sales could easily exceed sales of the fiscal just
ended”. Banks have been aggressively trying to redress
the problem, says shah. RBI new guidelines are
designed to help incentivise early identification of the
problem account, timely restructuring of those
accounts that can be revived and helping lenders to
take prompt steps for recovery or sale of unviable
accounts. The RBI too is helping out by collecting
industry- wide data at its central repository of
information on large credits. The CRILC will monitor
data on credit information on all borrower having
aggregate fund–based and Non-fund based exposure of
Rs 5 crore and above with them and the so called
special mention accounts. Also, to tide over the
problem of differences with ARCs in valuing distressed
assets, the RBI has come up with a committee to value
assets before sale to ARCs. Incase of NPAs, banks can
now spread their losses over two years instead of one
year as was the case in the past. The RBI plans to come
down hard on banks that are parts of a consortium but
are seen to be taking inordinately long to decide on
NPAs. Non- cooperative borrowers too would be dealt
with sternly. Even as a measure is being set up to curb
NPAs speedily, it is going to be a long hull for all
concerned.
12
Rupee says
‘I am stronger’
Anju Anand
III MFM
Just after the debacle of steady depreciation of the Indi-
an Rupee against the mighty dollar, it was time for the
rupee to surge to an 11 month high. 16th May 2014
marked a new phase of Indian democracy, econ-
omy and politics with euphoria palpable for welcom-
ing India’s 15th Prime Minister Mr. Narendra Modi. Not
only did the Stock market rejoice with the mandate, so
did the Rupee.
As the news of the verdict created a wave of positiv-
ity in the country, the capital inflows gushed into the
Indian economy with a common
expectation of a stable Government with ample growth
under the leadership of Mr. Modi. This had a rippling
positive effect on the Stock Market as well as the
Forex Market with the rupee sprinting 3-5% as com-
pared to its Asia-Pacific peers. Not alone did the rupee
rise against the dollar, it also rose 3.75% against the
New Zealand dollar, 3.5% against the Australian dol-
lar and between 2-3% against the Yen (Japan), Won
(South Korea) and Ringgit (Malaysia). The epic day
showed our Forex reserves stand at a whopping
$314.92 billion. Having this said, the Reserve Bank of
India with its stringent cash flow policies also helped
rupee’s tedious climb.
The two pillars of a strong economy are the
Regulating Bank and a strong and stable Govern-
ment. Thus the political situation has an enormous im-
pact on the dynamics of the stock
market and the currency market. Positive
expectations not only boost the confidence of people
in the governance but it also pools in the trust of people
around the world contributing to the additional foreign
inflow.
The expectations have catapulted, and so has the ru-
pee. It’s now only a patient ‘wait and watch’ to see if
this infant Government will sustain the momentum
of the appreciation of the rupee with its favorable eco-
nomic policies.
13
Brazil’s World Cup Paradox
Sricharan Dhondaley
III MFM
Brazil is hosting the world's two biggest sporting
events: the World Cup of football which started
recently, and the summer Olympic Games in 2016.
Brazil might feel a moment of bliss if the home football
team emerges victorious, as often happens at the
World Cup. But the country already expects to be net
economic losers from the "honour" of hosting a global
event not just once, but twice. There is no denying the
fact that major sporting events like the World Cup can
bring financial benefits to their hosting countries and
communities, Brazil included. But they also without a
doubt bring economic costs. Global games that are
organized, well-designed and managed, like the
Olympics produce the largest potential net economic
impact or help to minimize the cost. Brazil does not
seem to be managing either of these events to
Courtesy: www.truthdig.com
14
maximize the benefits or minimize the costs.
On the plus side, playing host to FIFA World Cup or the
Olympics can help build a country's profile or brand,
possibly attracting new foreign direct investment,
economic activity and tourism. These games may also
provide political "shield" for building large and much
needed public infrastructure like metros.
On stability, however, the long term benefits are
unlikely to balance the significant opportunity costs of
playing host to the World Cup. Rich countries like
London and The United States can afford to host
major sporting events. Developing countries like Brazil,
not so much.
To understand the economic effect of the World Cup
for Brazil, we shall examine it in three stages. Stage
one is the preparation and construction period;
stage two is the big event itself; and stage three is the
long term impact. Stage one involves investment in the
renewal and development of playing facilities, and in
related accommodation infrastructure and
transportation. New investment adds large amounts of
money into the local economy, often with high
domestic content (or a low dependence on imports)
and strong, if short term, occupation and employment
growth. The lift to investment is good for the country’s
short term growth. However, stage one also depends
on project management skills and strong long-term
planning to get maximum benefits. Brazil appears to
lack this expertise and runs the risk of seeing the
potential economic benefits dissolve.
Stage two is the World Cup itself. The event will attract
substantial tourism earnings to Brazil and will
therefore provide an encouraging short-term increase
in financial activity, likely followed by a post-games
stoppage or even recession. This up-and-down
growth pattern occurs because the tourism incomes
are a one-time increase to local spending. Moreover,
local fans change their consumption patterns by
buying expensive tickets, then dropping their
consumption in the following weeks.
Stage three is the long term impact. Limited public
investment dollars are being paid on sports
facilities, but not on things that can create actual long
term wealth, like public education, trade
infrastructure and health care. Brazil will be
repaying interest on much higher levels of public debt
for the next generation, further striking out investment
in long term growth. Many of the accommodations
will be under-utilized and will need timely maintenance
to remain useful.
The bottom line? Brazil should expect a very minor
growth from the World Cup and Olympics due to public
investment in infrastructure, facilities and higher
tourism revenues during these Sport events. On the
other hand, Brazil can also expect a slow-growth
hangover once all the samba and games are over.
15
Headline Inflation
in India
Libin T George
III MFM
India’s Current Average Inflation rate is prevailing at
around 8%. We may not know the diagnosis but the RBI
has managed, and has no choice but to manage, the
only cure it knows: tighten monetary policy by raising
interest rate and squeezing liquidity. Even if the reme-
dy works, and especially if it does only partially, it is
critical to comprehend the fundamental disease.
Leave aside the long-standing debates about the appro-
priate measurement of inflation. We know that con-
sumer price inflation (CPI) has been close to or above
double digits for nearly two years, and the more inter-
mittently sensitive wholesale price index, after dipping
into deflation region last year, has been steadily rising
to surpass double digits.
The puzzle is simply this: why is inflation in India so
stubbornly high and so much higher than other devel-
oping markets, even those that are supposedly over-
heating, such as Korea, Indonesia and China, where
inflation is closer to 3%?
The monsoon is looking better this year, so the agri-
cultural shock factor won’t have the same bite going
forward. And fuel price rises should be of a one-off na-
ture rather than an ongoing source of inflation. The
most telling pieces of evidence against the view that
inflation is supply shock and policy-driven are twofold.
High inflation, especially CPI, predated the monsoon
shock of last year.
Moreover, increasing prices are not limited to agri-
cultural goods and have now spilled over into other
commodities: double-digit price increases are no longer
confined to agricultural goods. We have no choice but
to turn to the third standard, and more worrying, ex-
planation, namely that inflation also reflects over-
heating: the supply capacity of the economy is simply
unable to match the demands on that capacity.
The analysis of and cures for inflation may need some
reconsidering. Inflation may have a lot more to do with
amenities and land as an input. And curing it may need
addressing the macro-economic aggravators of microe-
conomic distortions in addition to traditional monetary
policies. Exceptionalism depicts India's development
pattern, but does it also relate to the nature of its infla-
tion?
Courtesy: www.tradeandexportme.com
16
Arthavikas
Arthavikas
The Finance club is a hub of knowledge, a platform
for interactive learning, which facilitates career
progress by connecting students, industry, alumni
and academia. Finance Club has instituted to take
students to the doorsteps of the professional world
through Finometrics, the monthly newsletter, which
features articles and research publications from
students. The club provides an avenue for members
to exchange and enrich their knowledge by
conducting various events like Panel Discussion,
Guest lectures and Industrial visits.
Arthayudh
Arthayudh is an inter-collegiate management fest of
the postgraduate students of management organized
by the students of Master of Financial Management
under the guidance of Christ University Management
Association. Arthayudh means „combat for wealth‟.
This fest provides the students an opportunity to
evaluate their knowledge and skills by hosting various
events in relation to current happenings across the
world. Arthayudh is one of the most eagerly awaited
fests for the student community across India. T
IIC (Investors Information Cell)
IIC, an exclusive student unit that provides a platform
for students to develop research skills on various
finance and investment related areas and to
experience the practical aspects of investment
consultancy. The cell at present extends its
consultancy service to the staff members of the
University on issues like tax planning,
retirement and estate planning, equity and
bond investments, and insurance policies.
The student associates of the cell are
guided by team of dedicated faculty
members of the department who
possess research qualification and
experience in the field of finance
and investment.
Credits: Editorial Committee
17
I truly believe the most important reason behind
the hype for the general election is “THE MODI
FACTOR”. This is the most widely spoken issue in
the country since the past 7-8 months. This has by
far been the costliest election in India, trailing just
behind the US elections. This election that is
conducted every five years in India, not only draws
the attention of companies such as Nomura,
Goldman Sachs, UBS and Bank of America Merrill
Lynch had indicated their preference for a
government led by Narendra Modi, the prime
ministerial candidate of the main opposition party -
Bharatiya Janata Party (BJP), who is considered
investor friendly.
The market saw a steep growth right from the
moment Modi was announced as the Prime
ministerial candidate. Sensex hit a record high
which drastically shot up to 25000 points in the
month of May, the so called Judgment period.
Analysts differ on how much gain the markets
could witness in the event of BJP and its allies
winning the required seats to form the next
government.
Indian market is largely dominated by the
sentiments of the investors. BJP clearly indicated a
non coalition government, by winning 280 seats as
a single stand and by earning a clean sweep of
victory at 10 states out of the 29 states in India.
The victory was celebrated by Indians residing all
over the world and one such incident was
witnessed at the Times Square, New York. The GDP
of the country which is 4.7% is expected to grow by
The ‘M’ factor Anusha Y
III MFM
18
the end of 2016, where as there are
predictions from various analysts that
inflation would be curtailed under the
finance ministry of Arun Jaitley. There is an
expected appreciation for rupee in the forth
coming months.
One effective decision of the Modi government is
the idea of reduction of gold import duty which
would definitely limit the illegal import of gold into
the country. There is no rule out that the indexes hit
the upper circuit, that is, a 10 per cent jump, the
limit set for S&P’s BSE Sensex. Sectors that would be
in focus include power, infrastructure, capital goods
and engineering; given the
model pursued in Gujarat (the
state of which Modi has been
the chief minister for the past
three terms).
This is that minute of "Sense of Pride"
when the stock market has entered into
a MODI-fied era with a redefining spirit in
the realms of a common man.
The combined market
capitalisation of India's
publicly listed
companies crossed $1.5
Trillion on 10, June 2014
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Poll 2014 After Effects Understanding BSE SENSEX 25000 mark
Stock market varies daily, based on the
most recent economic and political
news from anywhere in the world.
Politics and investments have
something in common: they both
directly influence the lives of millions
of Indians.
Because of the losses suffered in the
past (2008) investors sentiment is very
pessimistic, which is deterring active
participation. Expectations of economic
agents about the upcoming business,
market and economic developments
can strongly effect pace and intensity
of stock market. If policy makers and
regulators ensure healthy financial
climate it results in an economic
growth and increased optimism.
There are numerous scientific/
economic theories which support why
the stock prices/indexes do fluctuate.
An investor’s psychology, sentiments, a
speculator’s aggressiveness are some
of the basic indicators which cause high
volatility in short term.
Same pattern has been followed by
Indian players in the stock market
during poll results of Lok Sabha
elections 2014. For the first time in
Indian electoral history the electoral
behavior has followed a U.S model of
president entered election. In India
corporate lobbying is not very popular
in government decision making, but
the way political parties formulate the
manifestos and statements regarding
fiscal policies have significant impact
on the corporates and has a direct
influence over the stock market.
There was a belief amongst the retail
investors that BJP-led National
Democratic Alliance comes to the
power, it would be positive for sectors
like infrastructure. But then again what
drives a market forward is the
predictions about economic prosperity.
The Indian stock market has seen an
ordinary gain of 8 per cent in the
previous year, but underperformed
significantly in foreign exchange terms
Ram Kumar
III MFM
Courtesy: www.svoyblog.ru
20
as the Indian rupee depreciated sharply in the second
half of the previous year. Speculators have taken a
sophisticated advantage of mob
psychology of retail players in the
market and on the day of poll results
all types of investors have acted like
speculators by attempting BSE
Sensex and Nifty to touch an all-time
high.
It’s known that IT and
Pharmaceutical scrips go in an
opposite direction when rupee
depreciates. But when we deeply observe these scrips,
Hedger’s position was also very crucial in mitigating risk
from adverse index movements.
Suppose index performs more/less than what it is
expected to perform due to large sell offs/ buy offs
there is a provision to halt the trade for certain time
which is known as circuit breaker. SEBI had a special
team to closely observe the investors reactions to poll
results hence circumstances have not led to a circuit
breaker like last two elections. On May 18, 2009 when
the results were announced stocks had responded
sharply and BSE Sensex hit the upper circuit within 30
seconds of the market opening for the first time and
trading was stopped for two hours.
A healthy financial environment of a country can be
measured by index movements. When there is a larger
sell off of stocks for Short term profits
it results in decrease in index points
which is not good for the economy.
Retail investors ‘U’ turn is the best
example of speculative behavior as
accounts closed for profit booking on
the next day after record high close of
25000 (BSE SENSEX) so, one must
realize that whatever the economic
situation long term yield should be
the objective of prospective investor. The key lesson
from Warren Buffet is that a simple business with
steadfast demand for its products, having a successful
operational history and driven by high-ethical
management is likely to perform well regardless of the
vagaries of a stock market.
21
World Economy is hit by
‘Lost Generations’
N. Sakina Begum
III MFM
As a result of the financial crisis and
globalization, the younger generation in
the mature markets struggle with
over fewer job opportunities and the
need to support an ageing
population. The chronic gap between
the incomes of the richest and the poorest
citizens is seen as the risk that is most likely to cause
serious damage globally in the coming decades, that is
according to more than 700 global experts contributing
to the world economic forum’s global risk. After income
disparity the global risk next most likely to cause
systemic shock on a global scale is extreme weather
events, this is followed by unemployment and
underemployment and cyber attacks. Fiscal crisis
feature as the global risk has the potential to have the
biggest impact on systems and countries
over the course of next 10 years.
Taking a ten year outlook, risks that
are global in nature, have the
potential to cause significant
negative impact across all countries.
The risk is grouped under five
classifications: Economic risk, Environmental risk, Geo
political risk, societal risk and Technological risk. They
are measured in terms of their likelihood and potential
impact. And a more fractured geo political environment
threatens to impede progress in industries which are
critical to global development, such as financial
services, health care and energy.
“The world needs more coordinated governance to
prevent slow-burning, systematic risks from developing
into full-blown crisis” and to prevent the present and
future generation from the most potential impactful
risks.
“Many young
people today face an
uphill battle” said
David Cole, Swiss group
executive committee.
Courtesy: cgt.columbia.edu
22
Courtesy: www.moneycrashers.com
Dealing with the Wild Cards
Bindia Nair
III MFM
This year has already proven to be a wild one when
it comes to emerging markets risks. Preparing for
what is to come in volatile and disparate markets is
ever more central to the treasury and risk
management functions.
When it comes to dealing with emerging market
risks, it is like dealing with the wild cards for the
companies who want to enter the highly volatile and
disparate markets. Commencing a business in a
developing country is not meant for the weak
hearted, whether it is for an MNC manufacturing
unit for garments in India or a small pharmaceutical
shop in Indonesia. But the magnitude, complexity,
speed and volatility surrounding these emerging
market risks have only expanded the work load of
the present time’s corporate risk officer and made
protecting people, property and reputations a tricky
task.
The countries today are different and the risks are
bigger, they have become more complex in nature
and the reaction time available
to the risk officers is much less.
Earlier the companies would
just be dipping their toes to
test the waters of the
emerging markets, but now
the investments are more
substantial and risks are
immediate. In addition,
corporate boards have greater expectations of their
risk managers’ role in helping them handle a
politically volatile world. In the past, a risk manager’s
role was predominantly to buy insurance; risk
management was a small part of the job but now the
role has evolved. They are facing a multitude of real
time data. Given the increasing political volatility in
many parts of the world, the job of the risk manager
is going to get even tougher in the future.
The risks faced by a multinational can shift,
depending upon a host of factors, including its home
country and industry. Where the company’s
activities or intentions are perceived to threaten the
needs and interests of any group or favour another
(whether a nation, business rival or political
movement) the vulnerabilities and exposure to that
risk will naturally differ. In spite of these concerns,
the persistent pressure to reduce costs is driving
more companies’ supply chains into less-developed
economies, where the risks may be greater.
The key reason the risks are
greater is that companies have
more substantial investments
in emerging markets today. A
few years ago companies
might enter a developing
economy just to dip their toes.
Now companies are setting up
subsidiaries and gaining
23
greater portions of their revenue from operations in
emerging markets. Mostly small and medium branches
of multinational companies with no incentive or
capacity to analyze risk fail to spot the threats thus
being reactive in terms of risk and possibly in terms of
business opportunity.
According to Edward Buthusiem, director of corporate
compliance and risk management services at Berkeley
Research Group, it is important for MNC’s to
understand the complete risk profile of the countries in
which they are operating which means carrying out a
rigorous risk-modelling process of all the risks, from
legal to supply chain to research and development. The
risk assessment must encompass an inventory of the
compliance and control mechanisms that a company
has in place to avoid running foul ways of bribery and
corruption laws.
Compliance officers sit at head offices in London or New
York or Tokyo, multinationals frequently fail to build the
mechanisms that could help monitor corruption and
bribery risks in an overseas office in an emerging
market. Ninety percent of bribery risks happen through
third-party relationships. A company needs to carry out
due diligence regarding those risks. There is a need to
build a controlled environment with enough checks and
balances.
Another oversight is that sometimes companies also
send inexperienced executives to run their ventures in a
vague market with reputations of corruptions, as they
see it as a stepping stone for grooming them for bigger
markets.
“Human resources will take a CFO or IT person and send
them to Kazakhstan. They see it as a stepping
stone...grooming them for bigger markets,”
Courtesy: www.gfmag.com
Dealing with the Wild Cards
24
The political scenario in an economy will definitely
influence the financial markets of the respective
country. India being the world’s largest democracy in
the world also headed to the polls in order to elect a
new government a few weeks ago. As experienced by
the other nations, India was also exposed to a highly
volatile financial market .The uncertain political
equations prevailing in the economy and the
investors’ perceptions towards the markets also keep
fluctuating. The political results also form a template
for the trading pattern for the next few days.
In the hope of a new pro market and pro economic
leader, the Indian equity markets as well as the bond
market attracted
inflows of foreign
funds which in turn
form as one of the
crux to influence
exchange rate of a
currency in the
foreign exchange.
The Indian equity
markets traded at all-
time highs and even the rupee value appreciated
causing a rise in the demand for the rupee. It is also
true that if the favourable party wins the elections,
the markets rise along with the appreciation of the
rupee but not necessarily. It in fact, stays for a long
run as most of the investors will look into the
fundamentals and overcome the election buzz.
The fluctuations in the exchange rate are of significant
concern to the exporters and importers in an
economy. Though the government wishes to increase
the amount of exports than the imports to balance
the current account deficit of a nation, the
appreciation of the rupee is always a drawback to
them because they receive payments in dollars which
in turn will incur less yield to them but to the contrary
of this, the importers will be benefited as they can
receive more amount of goods and services for a
lower price and may again lead to increase in imports.
So as a whole, the political stability in a country is
predominantly important because it is the basis for
policy formulations, granting of subsidies and
incentives to attract more foreign investors and
create effective business environment and also
contributes to the reserves and avoids undervaluation
of our currency as a result it is evident that one
political change can affect the entire financial system
of a country.
Sneha T N
III MFM
Impact on the Financial
System due to a political
trigger
Courtesy: www.sonoma.edu
25
A Win that Supersedes
Money Roshan Chugh
III MFM
Brazil, to many fans around the world is the
spiritual home for football and thousands will
descend on to the country for the biggest stage,
known as the World Cup. But until now the
enthusiasm among Brazilians has been muted. An
atrocious $11.3 billion has been allocated for
hosting the World Cup. But the basic social services
in the country are still poorly financed.
A Brazilian opined that the only people who benefit
from the tournament being held in their country
would be the tourists and the FIFA (Federation
International Football Association). Brazilians felt
it’s ridiculous and unacceptable that FIFA build an
entire mega event for profits, in a country where
the basic requirements of the country men are not
fulfilled.
A fact book ranks Brazil 17th out of 140 countries
for income inconsistency. They are rightly
protesting about why a country should spend
billions of money hosting a football tournament
rather
than utilising
it for eradication of
poverty. Tickets for the
matches in the new stadiums are
so expensive that most of the Brazilian
fans of the popular sport cannot afford them. The
cheapest ticket for a game at Brazil would cost
them 25 hours of their work. In a nation where
poverty has hit them hard and where sources of
income have been inconsistent, this is absolutely
unacceptable. For a Brazilian to attend a match at
the World Cup 2014, it would mean for him to
plainly give up his bread and his shelter.
A lot of money has been spent by the government
for the purpose of building stadiums to meet the
order of international standards. A staggering
amount of around $2.7 billion was spent for the 12
new and upgraded arenas. That’s roughly 13% of
the country’s budget for public education.
Education of the population would take a setback
for the sake of conducting this football tournament
in the country. And it doesn’t just stop there. Even
basic health facilities have been pushed aside just
so that the country proves to be everything a
football fanatic would ever dream of.
Irrespective of the protests in the country, the only
thing that could change the entire scene at this
poverty stricken nation would be if Brazil wins the
World Cup 2014. Yes, there will be a boost in the
morale of the citizens, if Thiago Silva and his men
lift the world cup for the 5th time. This nation which
has won the cup for five times believes there is no
second place. All eyes will be on the likes of
Neymar, Hulk and David Luiz to deliver in this
competitive stage especially with the competition
from Ozil’s Germany, Cristiano Ronaldo’s Portugal
and Messi’s Argentina. But we need to wait and
watch to see if the win could help to regain the
trust of the country men again.
Funny how passion for this game sometimes
supersedes the value of money.
Strange how passion for this game
sometimes supersedes the value of
money.
Courtesy: www.manifestoo.com
26
The dependence of the whole world on Oil Producing
countries has impacted the Indian economy and the
Big Oil Nation League. Saudi Arabia has 90% of its
export earnings devoted to its Oil reserves. These oil
baron nations have a political system of
predominantly Monarchy.
Countries like the United States of America are the
highest consumers of oil. The so called ‘First World
countries’ no doubt have high per capita income and
high standards of living but at an
unpredictable price. This has made
the US extremely dependent on
the Oil producing Nations like
Saudi Arabia. Leafing through the
pages of history, we would know
how this has led to the rise and fall
of governments – be it funding for
political campaigns or the zero
thought process towards environment. There is a
huge political impact on a nation when it depends
entirely for a resource from an external country.
Saudi Arabia is the fastest growing nation in the
world. Its per capita income has gone very high in the
past decade. This has led to the country focusing
more on its petroleum sector than any other. The
overall financial development of the country is high,
but, the country lacks in free journalism, media, and
scientific advancements. The point would be proven
if we notice the trend of the nation giving rise to
scientists or scholars (not religious of course!). The
monarchy is getting richer, there is absence of
democracy, and freedom of speech is hindered. All
these factors are related to each other and this is
unnerving news.
The two aspects discussed above lead to an ultimate
conclusion about the ratio of
dependence of receiver to
financial and economic growth of
the supplier. If one economy falls,
the other gets highly impacted.
United States cannot do without
Saudi’s extensive oil reserve and
Saudi in turn would go
for a downfall if nations
like US stop importing its oil. To end with a penny of
suggestions- The Saudi Sheikhs fund the terrorist
madrasas with consumption earnings from
Americans. Who is the US really fighting the war
against?
Sudeep Nachappa
III MFM
The Oil World
Courtesy: www.coloringpages
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