Circuit Breaker 7th October 2013

MBA Capital Markets

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Cb café: It Is now safe to shut down your economy or is it????

What is Shutdown ?

The US budget year ends on 30th September. 2 houses of Congress i.e. House of Representatives and the Senate are required to pass the bills required to fund the Government. In case, they do not agree with each other on the spending measures and pass the required bills, it causes a Shutdown.

Will a partial shutdown affect normal lives of US citizens ?

The shutdown will have far-reaching effects throughout the US. Though some services – mail delivery, Social Security and Medicare benefits (termed as essential) – are not affected, others, like national parks and routine safety inspections of food (termed as non-essential), are curtailed. About 1 million federal workers will face unpaid furloughs. A three-week shutdown would slow the economy's annual growth rate in the October-December quarter by up to 0.9 percentage points, Goldman Sachs estimates.

Why did US shutdown occur on 1st October ?

The White House ordered government agencies for a partial shutdown after the Democratic-led Senate and Republican-controlled House refused to back down in a clash over scaling back Patient Protection and Affordable Care Act , popularly known as health care law.

US Shutdown History

Since 1977, it has occurred 17 times. Last time it occurred in 1995-96 under Bill Clinton.

Key features of Patient Protection and Affordable Act-

It will make mandatory for all Americans to have health Insurance.

If one cannot afford the premium, subsidies will be given depending upon their income level.

Ban on insurers denying coverage to people with pre-existing medical conditions.

ObamaCare requires all states to expand their Medicaid program to 133% of the federal poverty level i.e. if your income lies within 133 percent of poverty level income, insurance will be free of cost.

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Cost associated with ObamaCare

The ObamaCare will increase the budget deficit by 190 billion USD.

Will US Shutdown affect India???

Impact will be minimal for IT companies

as they have a very little exposure to federal contracts. But new visa issuance might get delayed.

Stock Markets as well as Rupee will remain volatile as the global economy will be volatile till clouds clear on ObamaCare.

Indian exports might get affected if Shutdown continues for 15 days or more.

Other looming threat-

US Debt Ceiling

Current Debt borrowing limit is 16.7 trillion USD. If it is not increased by 17th October, US Govt. will run out of money to pay its bills. This will lead to US Default. This will affect the US as well as global economy. It might even cause Recession in US. As Treasury bonds and the dollar are cornerstones of the global financial system, a default will shake up the global economy.

Conclusion

Short term effects of US Shutdown will be minimal on world economy as well as global economy. But if it continues for a substantial period of time leading to a US default, there will be severe repercussions for world economy as well as Indian economy.

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NEWSMAKERS India lets unlisted firms list abroad India’s Ministry of Finance has lifted its ban on unlisted companies selling shares overseas in a bid to attract foreign investors. The scheme will be implemented on a pilot basis for two years to test its impact on the Indian markets. Rediff.com and Satyam Infoway were the only Indian-incorporated companies to have sole overseas listings before 2005. SEBI to reconstruct listing, M&A norms SEBI is set to overhaul norms related to stock exchange-listing, issuance of securities, mergers and takeovers to align them with the new Companies Act, improve transparency and give minority shareholders a bigger say in transactions and business decisions by listed companies. When a company launches an IPO, it is mandated to specify the objectives for raising money. The company can change the objectives only with shareholders’ approval. The new Companies Act says that even if a single shareholder disagrees with the change, it is imperative for the company to provide the investor an exit at a certain price. Sebi is examining the terms of such an exit. Once the new law is enforced, approval from the National Company Law Tribunal (NCLT) will be mandatory, and not that of a high court. At present, an entity is termed a listed one if its equity is traded on the exchange but the new law defines a company as listed if any of its securities is listed on the exchange—be it equity or debt. All the prescribed unlisted companies should have at least one resident director, one woman

director, and one-third independent directors on their boards. SEBI to appoint regulatory body for mutual fund distributors Sebi will soon appoint a self regulatory organization (SRO) for mutual fund (MF) distributors, after notifying changes in rules for setting up the body. One of three applicants—Institute of Mutual Fund Intermediaries (IMFI), Organization of Financial Distributors (OFD) and Financial Planning Standards Board India (FPSB)—will be selected as the self-regulatory body. The SRO will assist Sebi and ensure a cordial relationship between mutual fund houses and distributors. Cognizant to acquire KBC’s ValueSource after acquiring Equinox Consulting in France Cognizant on Wednesday announced that it has acquired Equinox Consulting, a financial services consulting firm based in Paris, France. The terms of the transaction were not disclosed. According to a press release by Cognizant, Equinox Consulting provides business consulting services across investment banking, asset management, retail banking, insurance, and specialized financial services. Cognizant today said it will acquire ValueSource NV, a subsidiary of Belgium-based integrated bank insurance group KBC, as part of a five-year contract with the group.

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MoveMent in equity Markets

Dollar anD Euro MovEMEnt W.r.t rupEE

-2.5-2

-1.5-1

-0.50

0.51

1.52

2.5

Perc

enta

ge C

hang

e

NIFTY

NIKKEI

FTSE

Dow Jones

-1.5

-1

-0.5

0

0.5

1

1.5

Perc

enta

ge C

hang

e

Dollar

Euro

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Nifty OptiONs OpeN iNterest (Oi) AnAlysis

Maximum Call OI has changed from 6000 level to 6100 level. Maximum Put OI remained same at the 5700 level. Major Call interest below 5800 level has exited the market. Significant Put interest has built up from 5800-5900 level.

0

1000000

2000000

3000000

4000000

5000000

6000000

5200 5300 5400 5500 5600 5700 5800 5900 6000 6100 6200 6300 6400

23rd September 2013

Call OI Put OI

0

1000000

2000000

3000000

4000000

5000000

5200 5300 5400 5500 5600 5700 5800 5900 6000 6100 6200 6300 6400

4th October 2013

Call OI Put OI

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FUTURES VS. OI

The CUM-OI has been consistently high during the latter half of the last fortnight. The CUM-OI on the start of fortnight has been low but then gained momentum and touched

the peak on 26th September and maintained the volume till the end of the fortnight. The fortnight closed with a slight loss in futures price to end the week at 5950.6

FII StatIStIcS

EQUITY DEBT Date Gross

Buy Gross Selling

Net Gross Buy

Gross Selling

Net

23- Sep -13 5839.20 4502.40 1336.80 922.00 1203.10 -281.10 24- Sep -13 2816.50 2842.50 -25.90 1111.90 760.20 351.70 25- Sep -13 3152.40 3121.30 31.20 395.90 1067.40 -671.50 26- Sep -13 3356.60 2921.30 435.40 527.40 2181.80 -1654.40 27- Sep -13 3560.50 3152.30 408.20 231.10 3006.80 -2775.70 30- Sep -13 1839.00 2009.60 -170.60 1535.80 1198.30 337.50 1- Oct -13 2148.30 2672.80 -524.50 103.20 1822.80 -1719.60 3- Oct -13 1726.00 1812.30 -86.30 777.30 1455.00 -677.70

4- Oct -13 4055.90 2889.90 1166.00 1061.70 2062.20 -1000.50

FII were net Buyers of equities on most of the days. FII were net sellers of Debt on almost all the days due to concern of rupee depreciation

against the dollar.

5700

5750

5800

5850

5900

5950

6000

02000000400000060000008000000

100000001200000014000000160000001800000020000000

23/Sep 24/Sep 25/Sep 26/Sep 27/Sep 30/Sep 01/Oct 03/Oct 04/Oct

CUM-OI Futures prices

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ECONOMIC CALENDAR FOR NEXT FORTNIGHT

Date Currency Event Forecast Previous

Oct 11

INR Indian Trade Balance -16.4 billion -10.9 billion

USD Indian Forex Reserves

- 276.26 billion

INR Index of Industrial Production (Y-O-Y)

3.4% 2.6%

INR Indian Manufacturing o/p

(M-O-M)

- 3%

Oct 14

INR Indian WPI - 6.1%

INR Indian CPI - 9.5%

EUR Industrial Production (M-O-M)

0.5% -1.5%

Oct 15 USD Trade Balance -39 billion -39.2 billion

Oct 16

INR Indian M3 Money Supply

- 12.5%

USD Core CPI (M-O-M) 0.2% 0.1%

USD CPI (M-O-M) 0.2% 0.1%

Oct 18

USD Unemployment Rate 7.3% 7.3%

Upcoming qUarterly resUlts Company Results Date

Infosys 11th October 2013

Bajaj Corp 14th October 2013

IndusInd Bank 14th October 2013

RIL 14th October 2013

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Browsing through the newspaper you must have come across terms like CRR, SLR, Bank rate etc. This is an attempt from our side to explain all these term and their impact on our economy

Bank Rate- It is the rate at which the RBI lends money to the commercial banks. It is a tool used for short term purposes.

How does this affect the Economy?

As RBI increase/decrease the bank rate, the commercial banks also increase/decrease the rate at which they lend to customers. As the Banks increase the rate of interest, people are discouraged to borrow from the market decreasing the availability of cash in the market. It is followed in the case a country is facing high Inflation. As the availability of cash decreases the demand for goods and services decrease leading to a curb on inflation. It also results in appreciation of a country’s currency.

Alternatively, if the rate of interest is decreased, more people borrow the market increasing the availability of money supple in the market. This leads to increase in the demand of goods and services leading to increases inflation. It also results in appreciation of a country’s currency

Currently the bank rate is 9%.

Repo rate- It is also known as Repurchase rate. Repurchase rate occurs in a banking transaction called a repurchase agreement. A repurchase agreement involves a commercial bank buying securities from the national bank. However, the national bank will repurchase the securities at a set date and price. The rate, specifically the interest rate, for repurchasing these securities is called repo or repurchase rate. The Repo rate affects the economy in the same way as the bank rate

The major difference between Bank rate and Repo rate is that repo rate is offered on collateral while bank rate involves no collateral. Consequently, Bank Rate is higher than Repo rate.

Cash Reserve Ratio- It refers to a specified minimum fraction of deposits that commercial banks have to keep with RBI as reserves.

The amount specified as the CRR is held in cash and cash equivalents, is stored in bank vaults or kept with the Reserve Bank of India. The aim here is to ensure that banks do not run out of cash to meet the payment demands of their depositors. CRR is a crucial monetary policy tool and is used for controlling money supply in an economy.

By increasing the CRR requirement the RBI can decrease the availability of money on the economy thereby controlling inflation.

Statutory Liquidity Ratio-It refers to the fraction of the deposits that every bank has to maintain in form of cash, gold or approved securities. Statutory Liquidity Ratio is maintained in order to control the expansion of Bank Credit. By changing the level of Statutory Liquidity Ratio, Reserve bank of India can increase or decrease bank credit expansion. Statutory Liquidity Ratio ensures the solvency of commercial banks.

CB CLASSROOM: BANKING TERMINOLOGIES

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By determining Statutory Liquidity Ratio, Reserve Bank of India also compels the commercial banks to invest in government securities like government bonds while the banks would like to invest in equity market which provide a better rate of return.

Marginal Standing Facility -Marginal Standing Facility (MSF) rate refers to the rate at which the scheduled banks can borrow funds overnight from RBI against government securities. MSF is a relatively new instrument. RBI first announced about MSF in the annual policy review for the financial year 2011-12; the concept came into existence on 9 May 2011.Marginal standing facility is a window for banks to borrow from Reserve Bank of India in emergency situation when inter-bank liquidity dries up completely. Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate. The MSF was raised to 10.25 % in order to curtail liquidity in the market. However under the reign of Raghuram Rajan it had been revised to 9.25% and revised to 9%.MSF can also be used to control the money supply in the economy. If the MSF is increase the loans become costlier which leads to contraction in the money supply

Rates/ratios % With effective from Bank rate 9% 20th September 2013 Repo rate 7.25% 20th September 2013

CRR 4% 9th February 2013 SLR 23% 11th August 2012 MSF 9.% 6th October 2013

Current RBI rates

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The ediTorial Team of invesTocrafT

Chakshu Aggarwal Editor in Chief

Ravi Srikant Content Head

Khushboo Shah Communications

Pratik Jain Circuit Breaker

Tanvi Mittal IT Head

Shekhar Kaushal Design Head

Contributors to this edition Bharat Goswami Raunak Agarwal Kanav Dhawan

Sections CB Café CB Classroom Newsmakers, Graphs and Analysis

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