finestra - finesse newsletter

8/12/2019 Finestra - Finesse Newsletter

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Finestra-Finesse

BimonthlyNewsletter

OCTOBER NOVEMBE

ISSUE-1

Sponsored By :

ADVANCE RESEARCH INSTITUTEOF TECHNICAL ANALYSIS

Lal Bahadur ShastriInstitute of Management, Delhi


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C O N T E N T

Foreword

RBI & Banks

G-Sec

FDI Approvals

IMF & World Bank Forecast for India

Coalgate Scam

Politics & Stocks

US Shutdown

NDF Markets

Rupee BondsQuantitative Easing

Summer Internship Experience

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Foreword

I am happy to know that the 'Finesse' The Finance Club of LBSIM is bringingout its first bi-monthly Newsletter Finestra. I congratulate the students fo

bringing out such an important monthly newsletter which updates us aboutthe financial world be it in India or the world. This effort helps us in refreshingour knowledge base and horizon of financial issues.

I wish all the best to our young to-be-managers for such a good effort.

Prof. P. K. BiswasDirector, LBSIM

It gives me an immense pleasure to see the enthusiasm of the Finesse team forhaving come up with Finestra which stands for an eye on the financial issuesin the economy. My heartiest congratulations to the entire team for thisinitiative and best wishes for their future endeavors. I hope they will continue

the good work with the same zeal.

Dr. G. L. Sharma

Advisor - Corporate Interface, LBSIM

I heartily congratulate Finesse- the finance club of LBSIM for bringing out theinaugural Finestra Newsletter. The objective of the newsletter is to enhance the

awareness of students regarding current and future trends in economy andfinance, thereby facilitating their professional growth in their future career.

Prof. Prem SibbalArea Convenor-Finance, LBSIM

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RBI & Banks

G-Sec Market

FDI Approvals

IMF & World Bank

In a move to regulate foreign fund flow and avoid financial crisis, RBI has now mandated foreign banks with complexstructures and which do not provide adequate disclosure to operate in India only through wholly-owned subsidiaries (WOS).

WOS can acquire private sector banks in India. However, foreign bank subsidiary will not be allowed to hold more than 74

percent, the sectoral cap for overall foreign investment, in private banks they may acquire. Foreign bank subsidiary are nowalso allowed to list on local stock exchanges. Also to safeguard against the possibility of the Indian banking system beingdominated by foreign banks RBI will put a stop on further entry of new WOSs of foreign banks or capital infusion, when thecapital and reserves of all foreign banks in India exceed 20 per cent of the capital and reserves of the entire banking system.

The RBI framework stipulates that the initial minimum paid-up voting equity capital for a WOS would be Rs.500 crore for thenew entrants. Foreign banks, which commenced banking business in India before August, 2010 will have the option tocontinue their banking business through the branch mode.

A 13-member group, headed by RBI Executive Director R Gandhi, has made various recommendations on G-Sec market, retailparticipation and interest rate derivatives market. The panel suggested that investment limit for foreign institutional investors

(FIIs) in government securities should be increased gradually. The present limits for investments by FIIs, QFIs and long terminvestors in government securities and corporate debt stands at $30 billion and $51 billion, respectively. To broaden financialmarkets, the Reserve Bank will unveil steps to improve the liquidity and depth of government securities market in the coming

weeks. Dr. Raghuram Rajan said the Reserve Bank plans to build its developmental measures over the next few quarters onfive pillars. The pillars are: clarifying and strengthening the monetary policy framework, strengthening banking structure,broadening and deepening financial markets, expanding access to finance and improving the system's ability to deal withcorporate and financial institution distress.

Foreign Investment Protection Board(FIPB) has cleared 20 FDI proposals worth 916crore in the month of October. This also includes approval given to Tata Group andSingapore International Airlines for a 51:49 joint venture to set up an airline in India

entailing an initial foreign investment worth 303.18 crores. The two companiesannounced their venture on September 20, 2013 to set up an airline with an initialinvestment of around $100 million. The airline is likely to become operative by summer2014. Other approvals include Rs 179.43-crore proposal of Religare Enterprises toissue warrants to carry out the business of Investment Advisory Services and FinancialConsultancy, the Rs 22.19 crore proposal of JM Financial to issue warrants to set up acore investment company. The two proposals -- DLF Limitless Developers and SingTel Global (India) are kept on hold.

The proposal of DLF was to exit foreign investors and the repatriation of the capital. SingTel's proposal was to hike the foreignequity participation of the existing foreign investor from 74 percent to 100 percent in telecom sector company for aninvestment of Rs 2.98 crore.

The World Bank slashed India's economic growth forecast for the current financial year to 4.7 per cent from an earlierprojection of 6.1 per cent. The IMF, in its World Economic Outlook, projected an average growth rate of about 3.75 per cent,based on market prices, for India in 2013-14, that is expected to pick up to 5.1 per cent next fiscal As per the IMF Asianeconomies has been hit by growing expectations that the U.S. Federal Reserve may soon taper its asset purchase programand there has been a reversal of capital inflows across much of emerging Asia. Stock prices have fallen, currencies have

weakened, and borrowing costs for companies and governments have risen. However, India and Indonesia have been harderhit. High inflation and a reliance on foreign borrowing have left both countries exposed to shifts in global liquidity. Investors aremoving their money out because of increased currency risks in these economies. In both countries, central banks have raisedinterest rates and further rises will likely be needed in the coming months.

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However the Indian government is confident of achieving a growth rate of 5-5.5 percent growth rate. The government isexpecting the manufacturing sector to do well in second half as it will gain from the measures announce last 5-6 months.

Coal allocation scam or Coalgate is a political scandal concerning the Indian government's allocation of the nation's coaldeposits to public sector entities (PSEs) and private companies under Prime Minister Manmohan Singh (the Prime Minister

was also Coal Minister during some of the years under scrutiny). In a draft report issued in March 2012, the Comptroller andAuditor General of India (CAG) office accused the Government of India of allocating coal blocks in an inefficient manner during

the period 20042009. Kumar Mangalam Birla, the head of the Aditya Birla Group & one of the richest industrialists in India,has been charged with conspiracy and cheating to land two coal blocks in Odisha in 2005 for his firm, aluminum-makerHindalco. PC Parakh, who was Coal Secretary when Hindalco landed the coal licenses that are being probed by the CBI, hasalso been accused of corruption in the new case filed today by the CBI. The agency is investigating how and why private firmslanded mining rights at throwaway prices from the government which did not auction coal fields or maintain records of itsdecisions, according to investigators. Details of the 14thFIR in the coal blocks allocation scam which names PC Parakh andKumar Mangalam Birla reveals that the former changed the decision of the screening panel committee that was held in 2005after a personal meeting with the industrialist. Some are speculating that it may hurt investments & create negativeenvironment in Indian markets but CBI has assured that if there is nothing found in the investigation, it will close the caseagainst Birla & Parakh. PMO has also provided all the available files to the CBI. It will be best scenario that the law takes itscourse & everything comes clear.

The positive movement in the stock market is like a ray of positive hope for the Indianfinancial market. But how far Narendra Modi is responsible for this positivemovement is still a debatable topic. Apparently, the stock market has risen since the

time Modi was anointed PM candidate. But Modi solely is not responsible for thisgrowth; there are many other factors such as appointment of Raghuram Rajan as anew RBI governor, Setting of CCI (Cabinet Committee of Investments) byChidambaram, Global tour by Chidambaram to boost the Global Investment andpostponement of the US Fed's QE program. Raghuram Rajan, everyone knows what

the man has done since he took over in September. In fact, the maximum correlationbetween the Sensex and anything is with Rajan's arrival. The man controlled the precipitous fall of the rupee in no time,

bringing confidence back into the external sector. He launched the forex swap scheme bringing in $10 billion already. Heallowed banks to borrow abroad to double the limit they were allowed to earlier. In short, he brought sense back into thesenseless fall of the rupee. In recent times, the Sensex has responded most to the fate of the rupee, not the fortunes ofNarendra Modi. Hence, this could be seen that market is rising not only because of the anointment of Modi as Prime Ministerialcandidate but also because of the improving business scenario.

The recent American shutdown was a result of deadlock between American Democratic and Republican Party with each partyholding an adamant position. There was a lack of consensus among the two regarding healthcare policy popularly known asObama Healthcare. American federal government require annual authorization to raise debt ceiling . Unless Congress votes to

fund roughly 35% of budget annual authorization treasury stopped paying bills such as salaries, pensions , just to name a few.

On October 16, 2013Congress passed a deal to reopen the federal government, raise the debt ceiling and avoid a sovereigndefault. Written into the pact, however, were two horrible words: January and February. Unless the two parties can agree on abudget deal the government will run out of money again, bringing another partial shutdown on January 15, 2014. Then, onFebruary 7, 2014 government borrowing will once again touch the debt ceiling.

The recent slide in value of rupee was exacerbated by trade in NDFs. NDF (Non- Deliverable Forwards) are popular derivativeinstrument catering the demand of foreign investors who want to hedge the risk against the currencies which have foreignexchange convertibility restrictions. This is how an NDF works. Foreign investors are currently not allowed to hedge their rupeeexposure in the Indian over-the-counter (OTC) or exchange-traded markets and must go through category-I banks. This has

forced them to use the NDF market, where there are no restrictions and transactions costs are lower as are barriers to trade.

Coalgate Scam

Politics & Stocks

US Shutdown

NDF Market

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Most of the NDF markets are centered in New York, Singapore and Dubai. During recentdepreciation in the value of rupee NDF was not used only as a risk management tool andlarge amount of trades were done by the speculators who were speculating rupee to fall toRs.70/$. The speculation activity added to the negative sentiments which therefore lead to

the fall in value of rupee. Since the NDF market are located offshore they are therefore notunder the regulatory ambit of RBI or Government. The government has decided to mitigate

the impact of NDF market - where contracts in the currency worth billions of dollars are tradedevery day - by persuading those active in it to shift to the onshore currency futures market inIndia by easing restrictions. The move is part of the next generation of financial sector reformson the government's agenda.

A company or government needs funds to expand into new markets, whilegovernments need money for everything from infrastructure to social programs. Theproblem large organizations run into is that they typically need far more money than

the average bank can provide. The solution is to raise money by issuing bonds (orother debt instruments) to a public market. The World Bank's private-sector arm is tooffer up to US$1bn of global rupee-linked bonds in a move that will boost the Indiancurrency's profile in the international capital markets. The coupon and settlement of

the bonds will be in dollars but the proceeds will be converted into rupees andallocated to private sector projects in India. Investors in the bonds will bear theexchange rate risk, but are likely to benefit from a wide interest differential between India and the United States. TheInternational Finance Corp's bond program, the most significant development to date in the offshore rupee market, comes asIndia is stepping up measures to attract foreign investors and restore confidence in its embattled currency. It also points to aliberalization of the closely controlled rupee, in line with comments from the country's newly installed central bank governor."In

these times of uncertainty for the Indian economy, IFC has been given the support and approval by the Indian Government tolaunch the Indian offshore rupee program," said IFC treasurer Jingdong Hua. The new bonds will settle in US dollars, butprincipal and coupon payments will vary according to the rupee exchange rate. As with standard Eurobonds, they will beaccessible via Euroclear, removing the need for buyers to navigate India's complicated quota and registration system, whileIFC's Triple A rating will allow investors to avoid any Indian credit risk.

A global rupee-linked bond from IFC will further lift India's profile among international investors, giving a much-neededfunding boost to a country that aims to mobilize US$1trn in infrastructure investment in the five years to 2017. It will alsosupport the country's balance sheet, as IFC plans to repatriate all the proceeds from the offshore program to India to fund itsprivate-sector investments. As of June 30 2013, India accounted for US$4.5bn of IFC's committed investment portfolio - more

than any other country. IFC invested US$1.38bn in India in the year ending in June. A global rupee-linked bond from IFC willalso promote interest in India's capital markets at a time when officials are looking to lower many longstanding barriers toentry. Currently, only investors that have registered with India's local securities regulator can bid for a quota to invest ingovernment bonds. The creation of an offshore market for rupee-denominated debt, however, may be one way for thegovernment to increase the pool of potential buyers without relinquishing control over the local market.

Quantitative easing, the unconventional policy of Fed adopted after sub prime crisis to inject liquidity in the system. Under thispolicy Fed injects $85 billion into the Us economy, which is facing high inflation and unemployment. A central bank implementsquantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions thusincreasing the monetary base. When interest rates have been lowered to nearly zero (because of either deflation or extremelylow money demand), when a large number of non-performing or defaulted loans prevent further lending (money supplygrowth) by member banks, and when the main systemic risk is a recession or depression because banks cannot lend any moremoney, then central banks need to implement a new set of tactics. These are known as quantitative easing. QE's purpose is toartificially increase demand of low-risk US assets and thus bringing down their yield. Hence forcing investors to invest in highrisk bonds, which drive US growth. During this period a large part of investment gets flown to Developing World. During QEperiod American investors have access to low interest money. However, with withdrawal of QE, interest rates rise steeply. Thismay lead to investors quickly pulling out their money which they had earlier invested in developing countries, leading to

Rupee Bond

Quantitative Easing

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Lal Bahadur Shastri Institute of Management, DelhiPlot No. 11/7, Sector - 11, Near Metro Station, Dwarka, New Delhi - 110075

Phone : 011-25307700 Fax : 011-25307799www.lbsim.ac.in

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