FINOMETRICS DEPARTMENT OF MANAGEMENT STUDIES VOL: (3)18

JANUARY 2014

2

INDEX

RBI moves to curb black money 1

Is Your Job “Just a Job?” 2

Random or Cyclical Financial Markets 3

Behavioural Finance in Stock Markets 4

The Bitcoin Revolution 6

Can Financial Difficulties of a Firm be Measured Efficiently? 8

Stock Market Volatility in India 9

Agriculture in India: Creating a Clearer Picture 11

Home Loans: Not Just a Liability 12

Rewrite your Credit History for Financial Independence 13

3

The Reserve Bank of India has decided to withdraw from circulation all currency notes issued prior to 2005.

This is a move by the RBI to limit the currency stashers and counterfeiters. Withdrawing the currency notes

from being used implies that the public will be required to come within reach of banks for exchange of these

notes.

The RBI governor, Mr. RaghuramRajan has not given any clarification on the withdrawal of pre-2005 currency

notes, the move is expected to disclose the black money held in cash. RBI said there was nothing out of the

ordinary about the measure. It is a global practice across all the central banks to phase out banknotes at

regular periods. This measure will leave currency hoarders with no option but to clear up their unaccounted

holdings by spending or exchanging them. It will capture the money flows into the system and help flush out

phony notes.

Fake notes had been printed in Pakistan and smuggled into India through China and Nepal. As of March

2012, as many as 5 lakh false notes had been spotted in the banking system. RBI has made strict regulations

for all the banks to make sure that the notes they receive over the counter are sent back into circulation only

after they have been correctly authenticated and validated. However there is a panic among the poor

people who transact totally in cash and hence changes are being made in a graded manner.

RBI's move does two things. One, it creates awareness about the issue and second, it persuades people to

swap existing notes with ones that have enhanced and superior security features. Inconvenience is a small

value to pay to guard the economy from terror networks and terror associations.

SHEFALI N. MEHTA

RBI Moves to Curb Black Money

1

4

World of Derivatives: Spread Betting

Wealthy People, Poor Nation

The Double Power Effect

The number of people without a job is on the rise in India as economic slowdown and slower business

expansion activities cast a silhouette onemployment generation. Indicating sluggishness in the country's job

market, the ILO (International LabourOrganisation) has said in its recent report that the unemployment

scenario in India over the last two years has been showing an increasing trend. Referring to ILO's latest

estimate, India's jobless rate could be about 3.8% this year.

According to a survey by online recruitment solutions provider Monster Worldwide and Gfk, an international

market research company, just about half of Indians consider their current employer to be ‘just a job',

whereas 43 per cent see their role as part of a career, says a survey. In France, 70 per cent of people are

career minded, which is followed by Canada at 68 per cent, US at 56 per cent, UK at 44 per cent and India

at 44 per cent. People in both countries Canada and France, work fewer hours than the average worker in

an OECD - member country. Moreover, the young generation aged between 18 and 24 are the most likely

to be career-minded with 46 per cent saying they consider their employment as part of a career .This survey

was a reflection of India's workforce that is a split in terms of those who consider their current employment as

part of a longer-term career.

It may be further noted that as the job market continues to grow and professional opportunities multiply.

Though each country has its own culturally prejudiced views on what it means to have a career, and

regardless of how workers view their jobs, not a even a single person should settle for a role they are not

satisfied with.

JITESH DEMBLA

2

Is Your Job ‘Just a job’?

5

Gold Imports: Necessity or Luxury?

The people investing in the stock market have always a dilemma if they are investing in a cyclical way or

the others. Random analysis refers to the analysis where the investors feel that the markets follow an

efficient path and that no form of analysis can be done to provide a statistical edge. But cyclical analysis

means that with fundamental and technical analysis, one can identify the path in which the stock moves.

The Efficient Market Hypothesis states that the stock price consists of all the known information. Any other

known information will not give the investor an edge over the market. This theory also proposes that all

future news events are unpredictable, and therefore investors cannot predict an outcome on a particular

security to an upcoming event.

Fundamental analysis studies the position of a company over a period of time and also considers its

potential for sustainability and future growth. A fundamental analyst decides to buy a stock after studying

the strength of the company’s balance sheet. This concept conflicts with the EMH theory of the market.

Technical analysis depends on the belief that investor behavior repeats over time. Random walk

disregards the importance of technical analysis while choosing the stock. This proposition is similar to the

tossing of coins. Just like how the result of tossing a coin cannot be predicted, the stock price also

fluctuates randomly. This comparison of random analysis to tossing of coin is not accepted by few

researchers because they believe that decision of buying stocks is a human decision and human decision

can be controlled. But the chances of getting head or tail on analysis cannot be predicted and hence is

called as random analysis. There is only a thin line of difference between the investors in random analysis

and cyclical. From various studies we can say that the market can be cyclic with elements of randomness

along the way. NEETHI D’CUNHA

3

Random or Cyclical Financial Markets?

6

Behavioural finance, a cognitive need in the day-to-day financial decision making is now a good half of

the battle. These cognitive biases affect the present corporate level decision making to a great extent.

Behavioural economics incorporates findings from psychology and sociology and they are used to

understand investor behavior when rational models are unable to provide answers for the market chang-

es.

In finance, judgements are often used to make forecasts from time series data. The effect of these

judgements depend on the forecasters’ beliefs about the presence of regime shifts in those data.

The raders and investors who have personal and business relations with the management of the

companies invest more in those companies because they would feel confident in their action. For

example, few investors do not sell the stocks when the price is falling but they do not hesitate to sell them

when the price is rising. They do not want to realize losses due to price movements. They can internalize

losses only in the case of catastrophic situations. The investors prefer to buy the stocks of companies that

are owned by a well-known group or individual.

The cognitive component which determines the individual's decision-making framework is crucial. The

psychological profile of the borrower is an important factor in consumer credit decisions. As credit users'

attitude towards credit becomes more positive, they are more likely to finance consumption with credit

cards or point-of-sale lending than by using personal bank credit or salary loans. In contrast, as the attitude

of non-users becomes more favorable towards credit, they increasingly prefer point-of-sale lending to

credit cards. The probability of using credit cards also increases as the number of income earners in the

4

Behavioural Finance in Stock Markets

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household increases and when there are strong expectations that income will rise.

Behavioural finance is used as an element to make recommendations to professionals in the finance field

with regard to how to change their behavior or change their communication, so as to yield a positive

output. The risk averseness of people greatly influence the subject of behavioural finance too.

LAKSHMI CHANDRAN

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8

The Indian economy is in shambles, having a hard time trying to combat the global onslaught from all sides.

The rupee keeps on falling and the sensex has not seen days as worse as these. During this dark time and

age, there remains one untouched entity in the cyberspace that is well above and beyond the economic

warfare that embraces us. It is Bitcoins. Bitcoin currency is a form of digital currency which is operated using

cryptography rather than using notes and coins. Cryptography is a technique used for safe and secure

monetary transfers in the presence of a third party. Hence, Bitcoin is exchanged over the internet.

The biggest advantage of Bitcoins is that there is no production cost of the notes as they are traded online

and and thousands of them can be carried on a smartphone without any hassle. . Bitcoin in a cryp-

to-currency that can be generated and traded on the worldwide web without any hassle. The trading is

encrypted guaranteeing safety. It is also untraceable, which can work either way but proves to be a plus

point for the ones trading in illegal activities. Due to the untraceable quotient, huge amounts of money can

be transferred without paying tax and other legal payments necessary to do the transaction. Also, the fixed

sum of 21 million coins guarantees that the inflation will be kept in check. Another important aspect is the

value of bitcoins which is usually determined by the supply and demand, equivalent to a precious metal

like gold. The disadvantage here is that the pricing of bitcoins tend to vary drastically on a daily basis.

For instance, the current rate of bitcoins as of today is 7191 Rupees but was half of this few months ago. Al-

so, as there is no central authority monitoring the supply and demand of the currency, its liquidity is at an all

-time low.

6

The Bitcoin Revolution

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.Bitcoins can potentially flip the monetary system as we know it. If they are made the primary mode of mon-

etary exchange, hard currency (notes and coins) can potentially become null and void. The concept of

Bitcoins, invented by an anonymous Japanese guy, is taking the world by a storm. Sadly, they are not availa-

ble in India at the moment. There are very limited avenues where this revolutionary currency can be spent.

BitcoinFoudations like Wikileaks, P2P Foundation, Operation Anonymous, Free Software Foundation and

Archive.org accept Bitcoin donations. A number of other stores in America have also started trading in

Bitcoins. Even if Bitcoins do not make sense as a mainstream form of currency, the global economy can defi-

nitely take few pointers and change the way our economy flows.

NATASHA CHAUDHARY

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10

To find an answer to this we need to first identify the constrained firms, which have a reasonable rate of ac-

curacy. Since financial difficulties are not that easily identifiable in firms, the observations are done by rely-

ing on hidden or indirect criteria’s such as credit rating, paying dividends and on linear mixes of observable

firm characteristics such as age, size and leverage.

The next dilemma which arises is how well do these financial measures perform in identifying firms that are

exposed to financial difficulties? The answer given to this is “Very Bad Performance”. The analysts have

come up with three different tests or assumptions on public firms; firms with constrains have no trouble rais-

ing debt when their demand for debt’s increases through banks, firms should be unaffected by change in

supply of bank loans, and finally, firms should be engaged in paying out the proceeds of the equity share-

holders.

Results have interpreted the above things as popular measures of financial constraints. They tend to identify

themselves as sub parts of the firms and that which differs from the general firm population of public firms

on a number of dimensions such as their ability to raise external funding like through shares, debentures etc.

Importantly the experiments conducted by the financial analysts can be used systematically up to the ex-

tent of constraints observing one another or each other.

The concluding part is that the factoring estimates are a little different because firms with difficulties and

unconstrained firms have a major difference in their characteristics and sources of financing. On the other

hand privately held firms with low investment and credit grade ratings appear to be financially constrained.

STELAN BEVYNA

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Can Financial Difficulties of a Firm be Measured

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9

Indian equity markets display greater volatility compared with many other emerging markets, even China.

At greater than 3, the ratio of stock market volatility to earnings volatility is about three times the average

for most emerging markets, according to the Morgan Stanley report. Markets in China, Brazil and Russia too,

show much lower volatility. Also, volatility in Indian markets is almost five times the average volatility of de-

veloped markets.

The higher volatility is due to increasing ratio of foreign equity inflows to domestic equity savings. This has ex-

posed Indian markets to global capital market cycles. A classic example was the recent crash in Indian

markets when negative sentiment led by a falling rupee and an improving US economy triggered selling.

Perhaps the volatility would be lower if domestic equity savings were also rising in co-ordination with global

flows. On the contrary, domestic risk capital formation has been low. The Reserve Bank of India’s data

shows that investment in shares and debentures constituted barely 3.1% of the incremental financial assets

of the household sector in fiscal year 2013. This yardstick is down from 6.6% and 9.6% in fiscal years 2007 and

2008, respectively.

Retail investor participation in the Indian equity market is very low. Banks fixed deposits account was about

54% of the household savings, thus indicating the risk-averse nature. This fact does not take into account

that the bulk of household savings are in physical assets. The ratio of foreign to domestic risk capital has

steadily risen from 0.5 times to about 20 times at present. The decline in domestic equity savings since the

1990s is one of India’s biggest structural problems.

Stock Market Volatility in India

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10

One absolutely necessary measure would be to lower inflation so that real returns from financial savings

increase. But that would not be sufficient; getting back to high growth rates is also needed. Some people

cannot deal with seeing the value of their portfolio go down at all. The only way to avoid the resulting

turmoil is to just put the money in the bank in Certificate of Deposits and a few government bonds , may-

be adding a municipal bond fund or individual bond to hold to maturity, and then saving like there is no

tomorrow. No reason to lose any sleep if you cannot take this volatility. But for those risk-averse investors

who nevertheless want to invest, the services of a skilled financial planner are crucial to fully explain the

available choices and help each investor create a comprehensive financial plan that fits his or her needs.

Unfortunately, most investors have no plans and their emotions get the best of them.

NIMISH HALKAR

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In this scenario where India is considering if we should go for genetically modified or transgenic crops, it is

difficult to make a strong decision. Each has its own advantage and disadvantages. Any modified crop helps

in increasing the production and food security mean while it is also argued that it will encourage monoculture

and end of diversity of traditional crops.

From the green revolution era the country has made an effective race in agriculture with better use of

pesticides and chemicals etc. This helped providing food to the population of India that was in the millions at

that time. This topic is relevant for India’s economic security since it heavily depends on agriculture

This saves billions, and reduces poverty and helps in a huge transformation in rural areas. In the mid 90’s there

was a shift in agricultural production. There was a downward shift in agriculture as it slowed down, thus causing

farmers to commit suicide due to debt burden.

However, more than 30%of Agricultural farmers had migrate to another job. Most of the farmers are

agriculturists because they do not know any other profession, this can be clearly explained by the

decrease in agricultural workers in the last five years. It remains to be seen how the agricultural industry will

grow in the years to come.

ROSHITHA VELIYAMBARA.

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Agriculture in India: Creating a Clearer Picture

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12

Buying a home is a big leap. It is a cause of frustration, anxiety and a huge sense of achievement. With the

skyrocketing property rates, it is hard a buy a home through our savings wholly. Almost any of us have to seek

a home loan. Generally, a home loan is one of the main liabilities. Bearing in mind the huge amount and the

long contract involved, however your home loan also provides you some benefits. The points below highlight

the advantages of availing a home loan.

For each and every one who has seen real estate prices increase over the last five years, the prospect of

capital appreciation is the major argument for purchasing a home. Building costs alone, which account for

more than 70 per cent of the flat cost, have increased at 15 per cent per annum in the past decade. Rents al-

so seem to keep up with inflation, making a home one of the very few investments that can shield you from in-

flation for a long period. Purchasing a home is a long-term decision of a 10-year period, the interest rates may

rise and fall over. Thus, you can be certain that you will profit from falling rates at some point in the period.

There could also be circumstances in which the interest rates decrease, letting you to prepay your loan and

own your house. For example, those who bought property in 1996, at an interest rate of 18 per cent saw

Interest rates fall radically over the next decade, to lowest at about 7.5 per cent and property rates too

increased sharply. This works as a dual boost to wealth. The best way to cope with borrowing costs is by keenly

managing your home loans. This is not as hard as it is may sound. Banks and loan lenders often give fresh

borrowers much improved rates than the current borrowers. During the uptick of the interest rate period, if your

rate of borrowing rises by more than 2 percentage, pay 0.5 per cent of the loan remaining as handling fee to

your moneylender to avail the rates presented to the original borrowers.

SRICHARAN D.M.

Home Loans: Not Just a Liability

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The thought about retirement plans comes into the minds of Indians when they are well into their 30s-40s. But

ideally, the right time for one to decide about their financially sound retirement should be after joining their first

job. With the right amount of time, a substantial plan can be prepared with respect to ones retirement with a

disciplined investment approach. In layman’s language, when a person has time at his side as well as the

power of compounding, he or she will have with him a perfect investment approach during his or her sunset

years.

Financial freedom is defined as a sense of hope, inspiration and liberation with relation to the money side of

our lives. It can’t be considered a gift, but yes, it does give a person a sense of achievement. A lot of efforts

are involved to ensure financial freedom in the later stage of our lives. There are some easy measures that one

could follow. One must know their exact financial position; goals must be pre- determined followed by a road

map to follow the goals religiously , sticking to the plan and most importantly reviewing the plans regularly is vi-

tal in achieving financial freedom. It might not give us immediate results but over a period time, with these

steps, being financially sound is assured.

Another aspect of financial freedom is an individual’s credit history. To put it in simple words, it’s to keep track

of all the monetary dues of an entity with banks, financial institutions and bank loans etc. with a good credit

history; one can avail loans easily or get credit cards. On the other hand, one can’t get either of them sanc-

tioned with a very bad credit history.

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Rewrite your credit history for Financial Independence

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A credit trade line tells us the status of the loans and credit cards, one possesses. It also informs us about the

statuses whether it’s being currently used on not. A person can be aware of the dues that have been piled

on. If such is the situation, the trade line should be corrected. Another technique would be to analyse the

number of enquires a person has made at the banks with respect to loans or credit cards. As such the

person will be aware of the transactions made by them which will undoubtedly keep a check on how

much he or she has been overspending.

The top priority for a retired person is to be financially sound. With a good credit history, the individual can

be assured that his later stages life will be free from any financial dilemmas. Having a well thought

investment plan, a good credit score, which comes from a good credit history are undeniably important

and essential. Keeping in mind all this and following it up to the dot will ensure financial independence.

RESHMA MENON

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EDITORS CHARAN.

JITESH

LAKSHMI

NATASHA

NEETI

RESHMA

SHEFALI

STELLAN

NIHAR

NANDHINI

SHRIYA.M

WILLIAM GEORGE

CHIEF EDITOR

Dr JAIN MATHEW

HEAD OF DEPARTMENT

MANAGEMENT STUDIES

ACADEMIC CO-ORDINATOR PROF SURESH B

FACULTY CO-ORDINATOR

Dr K SRINIVASAN CREATIVE TEAM ROSHITHA NIMISH

STALIN

YESHASWI

EDITORIAL TEAM

18

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