Bottomline Edition 1%2C Oct 2013
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TABLE OF CONTENTS
1.Brakes on BRICS 2
2.Academia Speaks 5
Ailing Economy Wailing India: Lack of Diagnoscs 6
Impact Invesng Pung a human face to nance 9
3.Industry Speaks 12
GST: Game changer or name changer 13
FDIC Interview 16
Birds: Five Good Money Habits 18
4.Students Speak 20
The Slowdown of BRICS 21
Islamic Banking: A catalyst to nancial inclusion in India 24
QE3: The idea that shook QE2 26
Credit Unwinding and EM Growth 28
5.Financial Technology 30
Treasury Management in Banks: A technological perspecve 31
Algorithmic Trading interview 34
6.Sector Talks: Indian Retail Sector 36
7.Mergers and Acquisions 41
Microso Nokia Deals 44
Vodafone Verizon Deal 45
8.Personality Profle 47
Patrick Dlamini 48
Xi Jinping 49
9.News Round Up 50
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[Type text]32 Networth - The Finance Club of IIMB |[email protected] 1
BOTTOMLINE
Team Bottomline:
Chief Editors
Romil Johri
Shashank Shekhar
Senior Coordinators
Abhishek Agarwal
Gaurav Pandey
Gautam Sridharan
Lavanya Pandey
Mehak Chopra
Nikhil Jalan
Pratik Jaipuriar
Shobhit Agarwal
Editorial Team
Akhil Mittal
Akshat Kumar Sinha
Devesh Jhalani
Jyoti Nathany
Rahul Ghosh
Shomrita Pal
Shubham Agarwal
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TEAM NETWORTH
Dear Readers
We are pleased to present to you the firstedition of BottomLine, the bi-annual financemagazine of Indian Institute of Management,Bangalore brought to you by Networth TheFinance Club of IIMB. The endeavor of thismagazine is to bring to you insightful views inthe field of finance and economics from someof the best academicians, industry practitionersand students. We also bring to you a round-up
of economic news, M&A activity and sectorresearch.
The cover story for this edition of the magazinewas chosen as Brakes on BRICs whichrepresents the slowdown of growth in theemerging economies of Brazil, Russia, Indiaand China. While these nations have been inthe news ever since the US Fed announced itsdecision to scale down its unconventionalmonetary policy of QE, we try to look beyond
just this factor and get to the bottom-line of thefactors inhibiting growth in these countries.
We would like to thank Prof. Charan Singh,Prof. Utkarsh Majmudar, Mr. Abhishek A.Rastogi, Mr. Dhananjay Sahasrabudhe, Ms.Radha Valisetty and Kotak Mahindra Bank forcontributing to this edition of the magazine.We would also like to thank the students forthe amazing response we received for thestudent articles section.
We would love to hear from you about ourmagazine. Feel free to send in your feedback,comments and suggestions to the followingemail id:[email protected]
Editorial TeamBottomLine
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When Jim ONeill of the Goldman Sachs coinedthe term BRIC in 2001 while referring to thetremendous growth potential of these economies,global investors flocked to these countries. And
these countries didnt disappoint, at least for thefirst decade of the 21stcentury. However, the paceof growth has slowed down significantly in thesecountries. While part of it is due to cyclicaladjustments, quite a bit of the blame can beapportioned to domestic issues in these countries.
The rise
Brazil, Russia, China and India (the so calledBRIC nations) experienced a period of significantgrowth at the turn of the new millennium.
Together they contributed more than 40% to theworldwide GDP growth at the turn of the firstdecade as the developed economies struggled toattain even 2-3% growth rates. While China wasthe clear leader with consistent growth rates indouble digits, India grew at about 8-10%, Braziland Russia grew at 2-6% and 5-8% respectively.
In PPP terms the share of GDP of these fourcountries in the world GDP has grown from about21% in 2000 to nearly 30% today. The growth
projections for these countries highlighted theirincreasing importance in the global economiclandscape.
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EDITORIA
However the projections for the second decade
did not fructify and the fall from grace of thesecountries (so far) has been as fast, if not faster,as their rise to prominence. In an interviewearlier this year, Jim ONeill mentioned thatthe only country in the BRIC group thatremains worthy of being in there is China.
GDP growth has fallen across the board, andpretty precipitously in the case Russia andBrazil. While part of it can be attributed tocyclical adjustments that were inevitable, a lot
of it is due to the fiscal and/or monetary policyissues that were not addressed by thesecountries.
BRAKES ON BRICS
The tremendous growth witnessed by theemerging economies in the first decade of the
millennium seems like a thing of the past.
Plagued by domestic issues and slowdown inglobal demand these economies are beginning
to stumble.
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Brazils growth was driven by globalcommodity demand which kept spurringBrazilian iron ore and agricultural exports. Thegraph below shows the change in the index ofcommodity prices (CRY Commodity Index)and Brazilian GDP growth. It depicts howBrazils growth follows commodity pricemovements. The lack of GDP expenditure oninvestments (just 18% of GDP for the lastyear) has also been a major impediment insustaining the high growth rates.
On the monetary front, Brazil has not beenable to control its inflation which has averagednearly 6% for the last 5 years. A part of theproblem was also the constant inflow offoreign capital (chasing higher yields) whichled the Brazilian Real to appreciate touncompetitive levels.
Russias growth was primarily driven bycommodity prices and world demand, theslump in global demand due to the USfinancial crisis followed by the Eurozone crisisand the slowdown in China led to collapse ofgrowth in Russia. GDP growth has fallen froma high of 8.5% in 2007 to about 3%.
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EDITORIA
Indias growth has been stifled due to lack ofreforms and policymaking that India badly neededbut was ignored during a time when it could haveimplemented these easily. Crucial reforms on landacquisition, tax related issues have been in limbofor way too long to infuse confidence amongstglobal investors. A bloated deficit has made Indiavulnerable to external capital flows. After havingseen a year of double digit GDP growth, the onlyeconomic indicator close to double digits in India
right now is inflation. Indias central bank missed atrick when it tried to fight the currency depreciationat the expense of domestic monetary policy.
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Chinas growth had been due to over-relianceon state driven investment and an export sectorpropped up by a managed currency. The ratioof Investment to GDP in China is close to 47%and has been consistently above 40% for thelast 10 years. Although China can still boast of7.5% growth rates, the sustainability of itsgrowth depends on rebalancing frominvestment based to domestic consumptionbased growth.
The way forward
Whether these nations achieve the growthwhich they saw in the first decade of thecentury is hard to predict. But to recover tomore sustainable levels of growth thesecountries need to bring about more stability atthe macroeconomic level. They need to ensurethey have greater control on inflation and thathigh inflation levels do not become animpediment for growth.
There needs to be greater fiscal prudence and
political stability to ensure the necessaryconditions for growth are made available.Most importantly, the economies need to moveaway from investment driven model todomestic consumption driven model ofgrowth. This would not only allow for betterdistribution of the benefits of growth, it willalso reduce dependence on foreign demandand capital flows.
The BRICs have certainly slowed down along
with the other emerging economies. But thepotential GDP growth rates of these nationshave not gone down and if the macro andfiscal scene is made conducive for growth theycan still return to the growth rates which wereseen consistently in the last decade.
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EDITORIA
China Only BRIC Country Currently Worthy of the Title -
ONeill (http://blogs.wsj.com/moneybeat/2013/08/23/china-
only-bric-country-currently-worthy-of-the-title-oneill/)
Data Source: Bloomberg
mailto:[email protected]:[email protected]:[email protected]://blogs.wsj.com/moneybeat/2013/08/23/china-only-bric-country-currently-worthy-of-the-title-oneill/http://blogs.wsj.com/moneybeat/2013/08/23/china-only-bric-country-currently-worthy-of-the-title-oneill/http://blogs.wsj.com/moneybeat/2013/08/23/china-only-bric-country-currently-worthy-of-the-title-oneill/http://blogs.wsj.com/moneybeat/2013/08/23/china-only-bric-country-currently-worthy-of-the-title-oneill/http://blogs.wsj.com/moneybeat/2013/08/23/china-only-bric-country-currently-worthy-of-the-title-oneill/http://blogs.wsj.com/moneybeat/2013/08/23/china-only-bric-country-currently-worthy-of-the-title-oneill/mailto:[email protected] -
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ACADEMIA SPEAK
Ailing EconomyWailing India: lack of Diagnostics,Prof. Charan Singh
Impact InvestingPutting a human face to finance,Prof. Utkarsh Majmudar
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DR. CHARAN SINGH
ACADEMIA SPEAK
Ailing EconomyWailing India: Lack of
Diagnostics
CHARAN SINGH.
The Indian economy has been passing throughan extremely critical situation which has beenacknowledged by the PM and the RBI lastweek. The economy is suffering not only fromthe global spillovers but also from domesticailments for quite some time now. This isreflected not only in the lower growth rate of4.4 percent in the first quarter of 2013-14 butalso in the spluttering exchange rate. Theglobal spill overs are expected to continue,probably worsen, once the unwinding of theunconventional monetary policy actuallybegins in the US. The scenario is expected tobe challenging amid the ever widening currentaccount deficit (CAD), worsening fiscaltargets, persistence of high inflation, slowinggrowth, deteriorating asset quality of banksand depleting levels of confidence of themarkets in governance.
These challenges are not easy to face for any
country. But first, we must have the correct
diagnostics and only then can we strategize to
stage a respectable recovery. The first signs of
deterioration in the economy, if analyzed on a
quarterly basis in a dis-aggregated manner,began in 2009-10, with CAD of more than 3
percent of GDP in three quarters. In 2010-11,
manufacturing had succumbed to lower
growth and by 2011-12, services and
construction.
Prof. Charan Singh is the RBI Chair Professor
at IIM Bangalore. His research areas include
Monetary & Fiscal Policies and Issues; Debt
Management; International Reserves;
Financial Markets; Banking; Infrastructure.
Thus the country has been in ICU, in the
economic sense, for more than a year with a
multi-organ failure, or complicated terms.
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The index of industrial production has beenstagnating at very low levels since the last twoyears. The pervasiveness of the slowdown isreflected in a wide range of industries. Thegrowth rate of manufacturing of 2.7 percentand 1.0 percent in last two years compared to11.3 in 2009-10 seems appalling. Someindustries like motor vehicles have registeredcontraction. The services sector has recordedthe lowest growth in 11 years at 6.8 percent
during 2012-13.
The growth rates in construction, touristarrivals, and cargo traffic have declined overthe last two years. And in the absence of acredible measure of real interest rate, nationalsavings and investments have also beendeclining. To curtail the CAD, the governmenthas imposed import duty as well as othermeasures on gold.
This, as would be expected, has resulted,according to press reports, in higher smugglingof gold. However, despite the efforts of thegovernment and stringent measures by theReserve Bank of India (RBI), CAD duringApril to June 2013 continues to be high. Onthe other hand, to contain the GFD, oil subsidyhas been reduced with a monthly reset. But theadditional expenditure on Food Security Bill(FSB) would probably compensate thereduction in oil subsidy and GFD would
continue to be high. In such a depressingsituation, recovery on account of a goodmonsoon can neither be immediate norsubstantial. After all, agriculture only accountsfor about 13.7 percent of the total GDP.
And, in view of the FSB, the assessment of
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ACADEMIA SPEAK
agriculture production and food grainrequirement would also change. The impact ofLand Acquisition Bill, on both industry andagriculture, has yet to be assessed.
To stage a respectable recovery, some concretesteps would be required. First, there is a needto reduce the twin deficits. The best antidoteagainst these deficits is high-growth. Toachieve high growth, the government has to
identify sectors which have potential growthand initiate targeted measures. In a weakeconomy, revenue led fiscal correction is ratherdifficult. Expenditure compression may alsobe difficult unless there is a sharp reduction incapital outlay or substantial increase ingovernment borrowings. A reduction in capitalexpenditure would imply lower accumulationof assets and increased borrowings leading tohigher interest payments, both burdensome inan inter-generational sense. Thus, the complex
situation demands a careful analysis.
Exchange rates play an important role inexports and imports and could an over-valuedcurrency could also be a cause of high CAD. Indetermination of exchange rates, inflationdifferential between two countries is a crucialfactor. As inflation has been high in India ascompared with the US, exchange rate shouldbe permitted to adjust according to marketforces.
China prefers to have a highly depreciatedcurrency while, it seems, India prefers to havean overvalued currency. China, prefers thebeggar-thy-neighbor policy to grab larger share
of global exports while India, it seems, prefers,
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enrich-thy-neighbor policy, by insisting onmaintaining over-valued currency, losing itsshare in global exports.
As a citizen, it is clear that the Ministry ofFinance (MOF), Government of India and theReserve Bank of India (RBI) are aware of thegrim situation. But what is not clear is whetherthe RBI and the MOF have a common view onthe diagnostics of the problem? Is it high
interest rates, policy paralysis, governancedeficit or simple uncertainty that is the causeof lack of demand and slow growth?
There are heaps of analysis in the media butcritical investment decisions cannot be basedon scattered media reports and individualanalysis. In the absence of credible andcommon diagnose, at least in the perception ofcommon public, how would a strategicrecovery path emerge that inspires confidence
in the course of treatment? It is this lack ofdirection and forward guidance that probablyis confusing the market.
To move ahead, and beyond the blame games,and to navigate the economy through such aturbulent period, it would be helpful for thecountry if a committee of economic experts, beconstituted and mandated to arrive at aconsensual approach forward, similar to theNational Advisory Council or a panel of
doctors treating multi-organ failure. That is theneed of the hour, irrespective of ideologies,and a common Indian, even if illiterate, isneither new nor afraid of facing challenges.
.
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ACADEMIA SPEAK
But responding to uncertainty, and confusion, offcourse is a different story and legend ofAshwathama, is an apt illustration.
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IMPACT INVESTINGPUTTING
A HUMANE FACE TO FINANCE*
UTKARSH MAJMUDAR
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Consider the facts. Two billion people on theplanet do not have access to safe water, heathcare, or financial services. A billion people donot have access to electricity. Two hundred andfifty million children do not have access toeducation or childhood immunization. Theproblems are immense and need speedysolutions. With public funds being limited theneed for private investment in public areas isacutely felt. Impact investing expands the rolefor private enterprise in addressing the worldsmost pressing social problems.
Impact investing is defined by The GlobalImpact Investing Network (GIIN) as:investments made into companies,organizations, and funds with the intention togenerate measurable social and environmentalimpact alongside a financial return. Impactinvesting also goes by several other names socially responsible investing, social investing,mission driven investing, responsible investingetc.
The social investing ecology is best describedin Figure 1. Although, traditionally
foundations, development financial institutionsand high net worth individuals havecontributed recent studies indicate that otherinvestors are getting attracted to the potentialof impact investment.
*By Utkarsh Majmudar. The author is an educator, trainer and a
consultant. His interest areas include corporate financebehavioral finance and corporate social responsibility. He can be
reached at: [email protected]
References:
About Impact investing, GIIN, accessed on October 3,
2013,
http://www.thegiin.org/cgibin/iowa/resources/about/index.
html
Social impact bonds,http://www.socialfinance.org.uk/sites/default/files/SIB_repo
rt_web.pdf Accessed October 3, 2013.
World Economic Forum, From the Margins to the
Mainstream Assessment of the Impact Investment Sector
and Opportunities to Engage Mainstream Investors
http://www.weforum.org/news/new-report-bringing impact
investing-margins-mainstream
ACADEMIA SPEAK
mailto:[email protected]:[email protected]:[email protected]://www.socialfinance.org.uk/sites/default/files/SIB_report_web.pdfhttp://www.socialfinance.org.uk/sites/default/files/SIB_report_web.pdfhttp://www.socialfinance.org.uk/sites/default/files/SIB_report_web.pdfhttp://www.socialfinance.org.uk/sites/default/files/SIB_report_web.pdfmailto:[email protected] -
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Impact investors also create new financialinstruments such as social impact bonds - acontract with the public sector in which acommitment is made to pay for improvedsocial outcomes that result in public sectorsavingsThe growth, and visibility, of theimpact investment industry has beenremarkable. However, significant challengesremain. It has generally been pointed out thatthe lack of track record of successful
investments is a main concern and that too fewestablished players are active in impactinvesting. One of the key challenges is ameasurement problem. As an example, if theimpact of an investment is creation of threejobs then the outcome is increased wages tothe workers, higher taxes to the state andreduced government subsidies. On the otherhand, if one of the workers would have founda job without the investment then the benefitwould have been a net of two persons. Hence
it is not easy to track impact over time.Measurement issues are being addressed bythree distinct but complementary tools: IRIS,PULSE, and GIIRS.
Another area of challenge is the much stricterfiduciary obligations of institutional investors.Lack of successful track record and shortageof scalable and attractive investmentopportunities create barriers to impactinvesting. Layering of financial instruments
(e.g. grants and PRIs) also makes it harder toprecisely define impact of investing.Governance is an area of significant concern.Profiting from the poor is a grey area andsignificant attention needs to be paid towards
creating frameworks that build an independent
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ACADEMIA SPEAK
third party monitoring mechanism.
Other roadblocks include investor skepticismabout achieving both financial returns andcreating social impact together; imperfectinformation regarding investment opportunityset; limited exit strategies due to insufficientlydeveloped and illiquid markets.
Despite the challenges, impact investing is set
to soar. Industry research suggests thatapproximately 2,200 impact investments worth$4.4 billion were made in 2011.This is almostdoubling of investments from 2010. In India,the impetus is likely to come from the newCompanies Bill (2012) that mandates 2%investment in CSR activities subject to certaincriteria. Growth in impact investing is likely tocome from four sources:
1. Massive pent-up demand at the bottom
of the pyramid a large number ofconsumers and producers in this segmentwill join the market
2. Driving green growth investment inrenewables are forecast to grow at a steeprate
3. Reconfiguration of the welfare state fundamental shifts in the ways in which weapproach public good output will createopportunities for the private sector
4. Emerging lifestyles of health andsustainability segment at the top of the
pyramid this is already a fast andgrowing segment
Despite several roadblocks impact investing islikely to grow and become part of themainstream finance.
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Case StudyVaatsalya HealthcareThe poor in tier two and three cities in Indiahave limited access to healthcare services, asprimary and secondary healthcareinfrastructure is inadequate and tertiaryhealthcare infrastructure is largelyconcentrated in metropolitan areas or largercities.
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ACADEMIA SPEAK
Vaatsalya addresses this gap in primary andsecondary healthcare infrastructure by offeringhigh quality, no-frills, affordable primary andsecondary healthcare services. Vaatsalyacurrently operates across 17 tier-two and -threecities in South India, such as Mysore,
Shimoga, and Ongole. (www.vaatsalya.com)
Figure 1 Impact Investing eco-system
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GST: Game changer or name changer!!!
ABHISHEK A. RASTOGI
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As India, an aspiring superpower, enters intothe general election environment, the entireWorld bracing a slowdown or dealing with afiscal cliff is again peering at the reformsbubbling in Indias cauldron. To keep the potboiling, the Government realized that theissues gyrating around fiscal bloat, fragileinvestments, obdurate prices and reforms needgreater deliberation so that the economy canhop back to a decent growth trajectory by2014.
The Governments strategy can be discernedby various initiatives with respect toCompanies Act, Goods and Services Tax(GST) and Direct Tax Code (DTC). While theCompanies Act has received the Presidentialassent, the DTC will be finalized based on thebest international practices so that the robustdraft of the Code can be soon introduced.Further, in an attempt to refurbish the horriblyantiquated indirect tax system, theGovernment has taken initiatives forimplementation of the GST which will alwaysbe considered a transformational change inthe history of indirect taxes in India.
It is an acknowledged fact that the services
sector has been a vital force steadily driving
growth in the Indian economy which has
navigated the turbulent years of the recent
global economic crisis.
ABH ISHEK A. RASTOGI
Abhishek is an Associate Director with Pricewaterhouse
Coopers. He has authored eight books on the GST andservice tax published by Taxmann Publications and
Lexis Nexis.
Various measures have been taken on the
service tax front in the last eighteen monthsincluding introduction of negative list and
place of provision of services rules.
INDUSTRY SPEAKS
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The fundamental reason for adopting thecomprehensive basis of taxation framework isto circumvent the current patchwork ofindirect taxes that suffer from infirmities,mainly in the form of exemptions and multiplerates. In addressing this issue, the new servicetax framework has opened a window ofopportunities as well as a Pandoras Box ofthreats for the countrys proletarian class.Thus, in the negative list regime, it is
imperative to examine the new concept ofservice, details of the negative list, details ofexemptions mentioned in the mega exemptionnotification, and broad contours of the point oftaxation and place of provision of services.These significant legislative changes ensurethat the current model is closer to the GSTregime and that the implementation of theGST would not be from scratch.
It is also important to probe into the diverse
impacts that variegated sectors may potentiallyhave. To encourage voluntary compliance andincrease service tax collection, VoluntaryCompliance Encouragement Scheme hasbeen introduced in 2013 for providing onetime amnesty to the stop filers, non-filers, non-registrants or service providers if they have notdisclosed true liability in the returns filed bythem during the period from October 2007 toDecember 2012. The scheme providesamnesty by way of complete waiver of
interest/penalty and immunity fromprosecution.
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The fundamental reason for adopting the GSTframework in India is to not only get rid of thecurrent patchwork of indirect taxes that arepartial and suffer from infirmities, mainlyexemptions and multiple rates but also improvetax compliance.
The spread of Value added tax (also called theGoods and Service Tax) in different countrieshas been one of the most important
developments in taxation over the last sixdecades. Owing to its capacity to raise revenuein the most transparent and neutral manner, theGST has been adopted by a host of countries.This transaction model has already spread tomore than 150 countries and attracts morecountries to be on the same platform. With theincrease of international trade in the arena ofservices, the GST has become a preferredinternational standard. So much so that all theOECD countries except the USA follow the
VAT which makes international trade a mucheasier reality.
India too has been moving slowly and steadilytowards the GST regime. The exercise began along back and was phased out in steps such asimplementation of VAT, rationalisation ofexcise duty rates, introduction of service tax,integration between excise duty and servicetax, introduction of the negative list ofservices, implementation of point of taxation
and formulation of place of provision ofservices rules.
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The Centre and the States are now embarkedon the design and implementation of a uniformGST across the country. The unified tax willtake the form of a Dual GST, to be leviedconcurrently by both the levels of government.The unified tax will comprise of a CentralGST and a State GST and both the Centre andthe States will legislate, levy and administerthe Central GST and State GST respectively. Itis important to stress on the key words
legislate, levy and administer as these wordsclearly show that both Centre and States willlegislate the respective GST Acts and that bothCentre and States will have power toadminister the taxes. It is pertinent to mentionthat under the dual GST system, the sametaxable base will be subject to the Central GSTand State GST.
The proposed tax system will subsume avariety of Central and State levies such asCentral Excise Duty, Service Tax and VAT,thereby simplifying the complicated taxstructure and reducing compliance costs. Fortackling the complicated issues related to inter-state transactions, an innovative concept ofIGST (Integrated Goods and Services Tax) isalso under consideration. The ParliamentaryStanding Committee submitted its report onAugust 7, 2013 with respect to theConstitutional amendments which would markthe beginning towards introduction of theGST.
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Some of the important developments revolvearound the following key aspects:
Establishment of a GST Council
Design of the GST
Compensation mechanism for States
IGST model to tackle inter-statesupplies
Flexibility for States to retain stateautonomy
SGT dispute settlement authority
Harmonised tax structure
The report of the Parliamentary StandingCommittee headed by Yashwant Sinha will actas a significant stride towards implementationof the much awaited GST. Although lot ofchanges have already been introduced in thecurrent service tax regime, there are stilldisputes over various activities whether such
activities would qualify as goods orservices. There have also been disputes onthe constitutional validity of taxing variousactivities. The litigation is still pending invarious cases where there are disputes as towho is the service provider and who is theservice recipient. With the recent changes inthe indirect tax regime in a country of Indiasmagnitude, a deep deliberation and analysis onthe impact of the new service tax structure onvarious sectors is certainly the need of the
hour. These interesting service tax issues willbe discussed in the subsequent articles.
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FDIC INTERVIEW
WITH RADHA VALISETTY
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What is your opinion about the health of the
US banking system at present and the lending
practices followed by banks?
The health of the banking industry in the US isimproving slowly, but the improvement can be
partially attributed to the natural ebbs and
flows of the industry. The lending practices
have done very little to improve the condition
of the consumer.
With so much of analysis going on regarding
the tapering of assets purchases by the Fed,
how equipped are banks to handle an increasein the fed rate?
The Federal Reserve announced that it will
make no changes in its asset purchase program
suggests that U.S. bank liquidity will remain
near record high, as securities held on the
Fedsbalance sheet continue to grow. When a
tapering of quantitative easing (QE) does
eventually begin, the impact of reduced bond
buying will have little effect on banks lendingcapacity and funding costs in the near term.
.
Are the US banks in a position to cope with the
stringent capital requirements as mandated by
Basel III norms?
Implementation date for Basel iii for US banks
has been pushed to Jan 1, 2015. Once
implemented these rules will have a broad
impact on the capital planning and investment
strategy of US banks.
RADHA VA LISETTY
Radha Valisetty works as a Businessand Systems analyst at the FDIC,
Govt. of United States
FDIC, or the Federal DepositInsurance Corporation is a USGovernment agency providing
deposit insurance in member banks
INDUSTRY SPEAK
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Do you feel that the requirement for higher
capital is having an adverse impact on banks
lending and subsequent economic activity?
The goal for mandating stricter capital reserve
standards is to create a stronger, more resilient
industry better able to withstand environments
of economic stress in the future, so even if the
lending standards make capital less available it
is a smaller pain in the near term to avert
bigger future catastrophes.
With so many banks failing after the 2008
crisis, what challenges does it pose for you?
How has risk assessment changed post 2008?
Prior to 2008 the regulators trusted the risk
management strategies and practices of the
banks themselves, whereas after the financial
crisis the regulators have done some
independent assessment of the reasons for thecrisis and are trying to mitigate similar risks as
much as possible in addition to trying to bring
more transparency to the risk management to
understand better what policies worked and
why, and conversely why some policies
failed.
FDIC had recently been filing a considerably
large number of law suits against the leaders
of the failed banks, how, according to you, didthese leaders lead the banks to doom?
In the 2008 financial crisis bank executives
paid little attention if any to mortgage-related
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risks. Executives at theAmerican InternationalGroup were found to have been blind to its $79billion exposure tocredit-default swaps.The bankshid their excessive leverage using derivatives, off-balance-sheet entities and other devices. Law suitsagainst bank officers are one of the many means forrecovering the costs of closing banks where fraudand negligence occurred to protect the depositinsurance fund.
What are the new challenges and initiatives from
FDIC under the Dodd Frank Act for assessment of
risk in the largest, systemically important financial
institutions?
The implementation and enforcement of DFA isvery complicated. FDIC has successfully made thebig banks identify dissolution plans and recordedthem. The biggest challenge would be to see howrealistic these plans are and if the FDIC can handlefailures of such institutions with minimal impact tothe depositors.
FDIC recently decided not to provide insurance forcash held outside the country. What do you think
about it?
According to the chairman this rule protects theDeposit Insurance Fund while at the same timerecognizing both the FDICs commitment tomaintaining financial stability through the promptpayment of deposit insurance.
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GOOD MONEY HABITS CAN
CHANGE YOUR LIFE
BIRDS Five Good Money Habits that will
help you manage your money better
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This article created by collating the views of
the Senior Leadership Team at Kotak
Mahindra Bank talks about the money we
spend. The acronym BIRDS signifies the five
key investor money habits -
B stands forBudget; it always pays to have
your budget in place
I stands for manage yourInvestments well
R is for plan for yourRetirement
D stands for manage yourDebt
S stands forSecure your family
These are the five key mantras- 5 Good MoneyHabits that will help you manage your moneybetter.
B
You can always become rich either by makingmoney or saving money. Avoiding impulsivepurchases with a reasonable, realistic Budgetis the first step to achieving that dream. Tokeep track of your budget, there are lots of
tools available, like Money Manager, moneymanagement tools etc. Also, ensure that youuse whatever loyalty points you earn onvarious cards and all discounts available from
service providers.
I
Managing your Investments is about settingright and realistic goals. So the first point is to
set the right goals and the second is to avoidinvesting into complex instruments. You must
decide an investment allocation based on your
risk appetite and stick to it, irrespective of what
the market dictates.
The rule of 100: A formula for Investment
AllocationDeduct your age from 100, and that would be
your ratio between debt and equity. The thumbrule is that the younger you are, the longer you
have to plan your investments and therefore thehigher should be you equity allocation. Debt is
supposed to give you steady returns in the long
run but equity can give higher returns. So if
you are 25 years old, and you put 75% of yourmoney in equity, it is expected to grow well.
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Charan SinghsPhoto
INDUSTRY SPEAK
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Coming back to risk appetite, if you have
aggressive risk appetite, then you would investmore in equity: in which case even 80%
investment in equity is good. But if you are a
conservative type, even 10-20% is high. All
these things put together, it's a good idea to
have an investment advisor. The earlier you
start the better!
R
If you plan for retirement, plan for long-termgoals. Retirementis one of the biggest goals.
The idea is to invest regularly, save regularly -
here instruments like recurring deposits,
systematic investment plans and insurance
come in handy.
The rule of 72: A formula to double your
moneyThis rule of 72 is not perfect, but it points aperson in the right direction. Say, you want todouble your money in 10 years. Then, yourrate of investment should be 72 divided by 10,that is, 7.2 years. Similarly, if you are getting10% returns today, it will take you about 7.2years to double your money. One should nottry to time the markets, they should continuewith regular investments, having allocationsand sticking to it. The common man shouldtake note of the power of compounding.Einstein once said that the biggest force onearth is that of compounding. That's how `1lakh turns into `7.5 lakh in 20 years; all
because of compounding, where your principleearns interest and the interest too earns interestin turn.
DDebt can be a killer!Let us look at credit cards.
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You spend money and then pay only the 5%
minimum that is required on your cardpayment. This is debt. Rates on credit cardsvary between 24 and 36%, while a typicalhome loan would cost you about 10 to 11.5%.Cards add up debt for wrong reasons, unlike ahome loan which is for a good reason. Socontrol your buying impulses, control the cardexpenditure and don't stack up debt on cards.Also, repay the debt as early as you can.Because compounding works in reverse too.The best thing to do is to repay your debt
before doing anything else.
SIt's extremely important to plan for any
eventuality - for the Securityof your Family!
For instance, when you have a house in a
corporative society it is important to have a
nominee or the house should be in two persons'
name. Even investmentsfixed deposits, bank
accounts etc. should have either nominations or
joint holders, because if something were to gowrong, the process of getting that money
becomes much easier for the family. Second,
everyone should have a will, so that your
property (whatever you have; you needn't be
rich) can be amicably divided. Third,
insurance: you must have life and medical
insurance. Also, if you have debt, make sure
your insurance policy will pay off your debt.
To leave behind debt to the family would be
very, very cruel. Any insurance policy you takeshould protect at least 60-70% of your current
income, because protecting the family if
something unforeseen happens is an extremely
important part of Good Money Habits.
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The slowdown of BRICSBY BHANUPRIYA GUPTA
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INTRODUCTION
BRIC(S) was one such idea, when Jim ONeil,coined the term in 2001. These five emergingeconomies (Brazil, Russia, India, China andSouth Africa) today account for roughly 33%of the worlds population and 25% of GDP.But that confidence seems to be dwindlingnow with the BRICS economies facingchallenges like slowing growth, fallingmarkets, reducing investments which have putbrakes on their growth.
WHY BRICS LOOKS UNATTRACTIVE
NOW
BRICS along with other emerging economieswere dependent on foreign investments, butthey are feeling the global financial heat withinvestors fleeing away from these markets.The economic growth in the BRICS countrieshas slowed down. The MSCI BRIC Index hadtumbled about 17% so far this year and about37% from its 2007 peak. According to EPFR,between 2001 and 2012, BRICS attracted aninflow of $ 184.1 billion in the capital marketsagainst an outflow of $ 13.4 billion sinceJanuary this year.
HSBC expects the GDP of BRICS nations to
expand at 2.4% for Brazil, 2.5% for Russia,
5.1% for India and about 7.4% for China.
Even the research by CME group also shows
how the GDP growth for these economies is
slowing year over year.Factors responsible forthis slowdown are:
Global economic slowdown has led tothe recent drop in investments.Eurozone recession along withvolatility in global markets andexchange rates due to murmuringsabout the tapering of financialstimulus by US Fed has resulted inshifting of investors sentiments from
the uncertain markets (like BRICS)towards relatively stable US market(due to strengthening dollar, recordsetting performance of equity marketand improvements in labour market).
STUDENTS SPEAK
This article has been contributed by Bhanupriya
Gupta, a PGDM student at Indian Institute of
Management Raipur.
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BRICS nations are finding it difficultto attract investments due to factorslike lack of promptness andtransparency in government operations,infrastructure bottlenecks, corruptionand under-development of the modernlegal framework.
Factors like inflation, depreciatinglocal currencies, rising commodity
prices and asset bubbles in theseeconomies have resulted in the socialand financial upheaval, furtherdeteriorating the condition as evidentfrom the figure below.
OTHER OPTIONS
Some other emerging markets likeMIST and other N-11 nations lookattractive.
Significant investments are taking
place in Mexico, Indonesia, SouthKorea and Turkey (MIST) due to theimproved business climate, ease ofdoing business, extensive tradeagreement networks and increasingpopulation with growing purchasingpower.
Indonesia demonstrated stable growthof around 6%, surpassing even India,and attracted a total of $34.1bninvestments in 2012. Similarly, South
Korea had maximum FDI inflowgrowth among the four MIST nationsas depicted below:
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Today it is BRICS, tomorrow it could be MISTand day after it could be any other destination.The bottom-line is that investors look forwardto generate value for their investments. Anynation can assure this with right policy andlegal framework, by improving ease of doingbusiness, stronger infrastructures, extensiveFTA networks and such other initiatives toattract investments and propel ahead on thepath of growth.
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REFERENCES:
The Rise of BRICS FDI and Africa,
UNCTAD Report (2013)
MIST: The next big thing or just hot
air?, Grail Research Report (2012)
BRIC Country Update: Slowing growth
in the face of internal and external
challenges, CME Report (2012)
How Solid are the BRICS?, Goldman
Sachs Report (2005)
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http://www.efinancialnews.com/story/2
013-07-17/cracks-appear-in
brics?ea9c8a2de0ee111045601ab04d6
73622 Accessed on 28.08.2013
http://blogs.ft.com/beyond-
brics/2013/01/22/indonesia-fdi-rolls-
on/#ixzz2d6SyOkCZ Accessed on
28.08.2013
http://www.chinadaily.com.cn/cndy/201
3-07/29/content_16844825.htm
Accessed on 27.08.2013
https://ktwop.wordpress.com/2013/08/2
0/brics-is-losing-bis-as-the-financial-
crisis-bites/ Accessed on 29.08.2013
http://money.cnn.com/2013/08/04/investing/bric-markets/index.html
Accessed on 28.08.2013
http://growingcapacity.blogspot.in/201
3/05/indonesias-gdp-and-fdi-success-
story.html Accessed on 28.08.2013
http://www.businessweek.com/articles/
2013-03-21/bric-investors-lose-their-
taste-for-stocks Accessed on
30.08.2013
mailto:[email protected]:[email protected]:[email protected]://www.businessweek.com/articles/2013-03-21/bric-investors-lose-their-taste-for-stockshttp://www.businessweek.com/articles/2013-03-21/bric-investors-lose-their-taste-for-stockshttp://www.businessweek.com/articles/2013-03-21/bric-investors-lose-their-taste-for-stockshttp://www.businessweek.com/articles/2013-03-21/bric-investors-lose-their-taste-for-stockshttp://www.businessweek.com/articles/2013-03-21/bric-investors-lose-their-taste-for-stockshttp://www.businessweek.com/articles/2013-03-21/bric-investors-lose-their-taste-for-stockshttp://www.businessweek.com/articles/2013-03-21/bric-investors-lose-their-taste-for-stockshttp://www.businessweek.com/articles/2013-03-21/bric-investors-lose-their-taste-for-stocksmailto:[email protected] -
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ISLAMIC BANKING: A CATALYST TO
FINANCIAL INCLUSION IN INDIA?
BYY. VENKATA ACHYUTH KUMAR
The non-availability of interest-free
banking products results in some Indians,
including those in economically disadvantagedstrata of society, not being able to access
banking products and services due to reasons
o aith.
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This was the view expressed byRaghuram Rajan in A Hundred Small Steps,which was the report of his committee onfinancial sector reforms, published in 2008.Financial inclusion came into lime light inIndia, after the recommendations of KhanCommission (2004) were incorporated into themid-review of RBIs 2005-06 policy. Insimple words, financial inclusion is the
delivery of financial services at affordablecosts to vast sections of disadvantaged and lowincome groups. In A Hundred Small Steps,the committee felt that provision of interest-free banking is the most important area in theambit of financial infrastructure for financialinclusion. The main purpose of inclusion is toexpand the coverage of the financial system inthe country, which is the key objective for theemerging economies.
Islamic Banking, an alien concept in Indiasconventional banking system, is a Sharia Lawbased banking system which promotes profitsharing, but prohibits the charging and payingof interest. Islamic banks are operational in 75countries with assets touching $1.1 trillion and
have grown at a rate of 15%.
These countries include non-Islamic nationslike UK, USA, Germany, France, Singaporeetc. These developments across the world seem
promising for implementing the same in India.Recently, the RBI gave nod to Keralagovernment to launch financial institutionfollowing Islamic finance.
Currently, India has a network of 82,000
branches of commercial banks across the
country, but only 5% of villages are catered for
where 70% of the population resides.
Mudarabah, a kind of financing agreement,
involves one party supplying the capital andthe other supplying the labour, with both the
lender and the borrower sharing the risk.
STUDENTS SPEA
This article has been contributed by Y. Venkata
Achyuth Kumar, a 2nd
year PGDM student at Indian
Institute of Management Raipur.
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This is helpful to the low income group,
especially less wealthy farmers who otherwisewould not be able to provide collateral. Riba,which means a ban on interest payments andcollections, prevents the accumulation interestpayments, when the farmer or business personbecomes bankrupt. This is possible because,the Islamic banks not only share profits butalso losses thereby preventing the pile-up ofinterest.
According to Sachar Committee report,
Muslims avail just 4% and 0.48% of the creditfrom NABARD and SIDBI respectively. Andthe Muslims credit deposit ratio is only 47%compared to the average of 74%. In places likeLakshadweep with 95% Muslim population,the credit deposit ratio is mere 9.3%. Thisreflects injustice in part of Indian Muslims toutilize their savings for economic growth.
On the flip side, devising a regulatoryframework satisfying both Islamic and
conventional banking systems would be achallenging task for RBI. Educating the peopleabout the new banking system would be tough,given the low awareness levels of conventionalbanking system. There is a serious dearth ofIslamic banking experts in India who canmanage the banks in the current competitiveenvironment. Nevertheless, the interest-freesolutions of Islamic Banking could restoreequilibrium in Indian society by providingsuccour to debt ridden farmers, labourers and
other marginalized groups. Hence, IslamicBanking has potential as a tool of financial
inclusion.
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.References:
1. A Hundered Small Steps, Report of the
Committee on Financial Sector reforms,
Planning Commission, Government of
India.
2. Why India need Islamic Banking thought
paper, Infosys Finacle.
3. http://www.scief.es/blog/shariah-banks-
look-to-farmers-2011-04-04/
4. http://www.dnaindia.com/analysis/1877270/
standpoint-why-islamic-banking-in-india-is-
a-good-idea
5. http://www.businessworld.in/news/finance/b
anking/rbi-allows-non-bank-islamic-
finance-firm/1040826/page-1.html
6. http://www.ethicainstitute.com/webinar/Ach
ieving_Financial_Inclusion_For_Indian_M
uslims.pdf
7. http://www.economicinitiatives.com/Indian_Economy/Inequality_in_Disbursement_of_
Credit_among_various_states.html
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QE TAPERTHE IDEA THAT SHOOK
Q2
AKSHAT SINHA
Networth - The Finance Club of IIMB |[email protected] 26
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It was May 22 afternoon. The environment
was brimming with expectations investors,
TV reporters, government officials everyone
was anxious to listen to the Director of the
much talked thriller, FOMC QE3, Mr. Ben
Bernanke. However, when he did come out
and speak, the audience all over found their
dreams shattered the Dow finished the day
1.4%, lower, at 15,112 while the S&P 500
dropped 1.4% to 1,629 -the Director had
announced plans of QE tapering through the
FY 2013-14.
But before we discuss what went wrong and
why the market reacted the way it did and
when the tapering would actually start, lets
start with the basics What is this QE and
why should I care? Well, we all must have
used a photocopier, right? So QE employs
exactly the same principle. Whenever the Fed
wants to increase money supply and the
conventional interest rate approach doesnt
work (well, its already 0.1%, how much lower
can you have it?), it loads papers into the tray,
currency onto the glass panel, and pressescopy. The number of copies depends on your
requirement. In this case, it has been around 85
billion. So essentially pretending money out
of thin air.
.
After the financial crisis in 2008 and the post
crisis recession that slumped US growth, the
Fed had to resort to asset purchases such asgovernment securities, MBS etc. to ensure easy
credit for industries and businesses and
increase consumption. To give you a feel, the
Fed has expanded its balance sheet by a
whopping $2900 billion since 2009. But now,
according to Mr. Bernanke, the US economy is
"continuing to grow at a moderate pace" and
"risk that the economy has entered a substantial
downturn appears to have diminished over the
past month or so".
Akshat Kumar Sinha is a first yearstudent of IIM Bangalore. He hasworked in the financial technology
space after graduating from IITKharagpur
STUDENTS SPEA
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But if the US economy is on the uphill, then
why should we be anxious? The problem is not
here. It lies in the fact that this copying
process often creates a vacuum of hot gases
around, particular in form of hot money in
super-funded industries. Given the low interest
rates and stagnant economy in the USA (and
Euro Zone), much of this easy credit was
leaked out in the form of capital outflows to
emerging countries where yields were higher.
Thus most of the emerging countries,
particularly India, with high FII investment
and capital inflow, could weather off the
economic recession in 2009-11. But the
announcement has led to large scale sell-off in
these markets as people fear tapering is going
to happen sooner than later, and with these
economies already reeling with high CAD and
increasing inflation, this declaration hasslumped growth trajectory and caused the
markets to become bearish. The announcement
was backed by recent reports showing
encouraging signs for inflation and
unemployment rate, and was meant to act as a
forward guidance and signal, but it failed
miserably in shaping expectations as it did not
give a timeline for the tapering to start. This
resulted in extreme hysteria in the market and
no one was sure when tapering would begin.
However, the Fed was quick to realize this
mistake, and soon came up with the famous
Evans Rule for guiding the tapering
process. According to this, Fed will start to
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slowdown its LSAP program once the
unemployment level reaches below the 6.5%
target and inflation crosses the 2% mark. With
the inflation hovering around 1.7% and the
unemployment rate nearing 7%, the period that
followed was one that of speculation Will it
happen in September, or December, or Mid
2014, or will it begin no earlier than Early
2015? The period through June and July added
to this hysteria as the US economy grew at a
modest rate and the unemployment rate
reached 6.7% (temporarily vindicating Fed
of its announcement). Though many started the
Sep taper cry, yet a few pointed out fallacies
in industry data. While the unemployment rate
had reduced, employment hadnt increased it
was just that the labor force participation rate
had declined. This created a perplex situation
for the Fed People wanted to know whetherFed will continue with its tapering decision
even in the backdrop of this new finding. It
was argued that even the inflation levels are
quite low, and a decision to slowdown might
lead it to lower levels. Moreover, it was
suggested that decision should be postponed
until December, when we will have a better
assessment of the economic momentum. The
Fed played sensibly, and on Sep 18th
announced that it will postpone its taperingplan until conclusive evidence about the upturn
is found. While this decision has surely calmed
a few nerves, but December is not far away,
and only time will tell whether the taper will
happen this year or not.
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Credit unwinding and EM growth
BY RAHUL GHOSH
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Since the great recession, most of the
economies around the world launched stimulus
programmes to spur growth. The low interest
rates and the unconventional monetary policy
increased the debt to gdp ratio of these
countries. Off late they have started or are
planning to decrease their debt. The United
States (US) Federal Reserve (Fed) has already
started planning its gradual exit from the
quantitative easing (QE) program. At the same
time China, whose ratio of credit to gross
domestic product ballooned from about 134%
in 2008 to 173% at the end of 2011, is also
deleveraging. This dual unwind can have
severe consequences on the EM economies. Itaffects their capital accounts and hampers their
growth prospects directly.
Unwinding US Quantitative Easing
The Fed continued its QE program, to boost
the feeble US economy. Of late, recent US
economic data have started pointing towards
an improving economy with unemployment
rate at 5 year low. Moreover, the incremental
benefits of QE are being questioned.
In other words each additional dollar being
pumped into the US economy is producing
diminishing benefits. All of these factors
combined with the greater risk in the economy
.
caused by the drastic increase in US liabilities
have caused Fed to consider a gradual exit
from the QE program. This results in a base
case of higher real interest rates in US and an
appreciating US dollar (USD). As a result of
the rising interest rate in the US, the capital
that flew into the EMs in search of a higher
yield will flow back into the US. This will
deteriorate the capital account of the
economies. Not only is this true for the already
committed capital but also for any new
investments that are about to enter the EMs.
Rahul Ghosh is a first year student of IIMBangalore. He has worked in the financial
trading space after graduating from IITKharagpur
STUDENTS SPEA
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Additionally, the higher USD results in
depreciation of the EM currencies. To protect
the currencies the respective central banks will
tighten their respective monetary policies
further in order to attract foreign capital.
Higher real rates could trigger a faster unwind
of credit growth. This will hurt growth
particularly in economies where the credit
growth has been excessive (Higher interestrates make refinancing debts more difficult).
Hence, the higher US interest rate will attract
capital back into the US and the strengthening
USD will cause the EM central banks to
tighten their money supply. Both the factors
will result in slowdown in the EM economies.
Unwinding Chinas leverage:
China achieved a massive credit fuelled
growth. As it attempts to achieve a beautiful
deleveraging act, it restricts the availability of
cheap money and hence curbs demand. This
affects the EMs in three ways.
Firstly, the countries that export manufactured
goods to China are witnessing a decline due to
reduction in import demand from China.
Countries such as Taiwan and South Korea
that export large quantities of manufactured
goods to China are affected most due to this
factor. Secondly, China has been a massive
importer of commodities from certain EMs
during its rapid growth phase.
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The deleveraging is causing a reduced demand
for commodities and countries such as Chile
and Brazil that are primarily commodities
exporting economies are suffering.
However, there are certain countries that have
low export exposure to China and are net
importers of fuels and hard commodities. They
will stand to benefit from Chinas slowdown as
commodity prices will cool off due to reducedoverall demand from China. India and Turkey
are among such economies. Therefore, the
impact of China unwinding depends on the kind
of trade relationship a country has with China.
While some countries are at a greater risk of
current account degradation, some other
countries are actually benefitting from it
through reduced commodity prices.
Hence, the primary fear that the EM economiesface right now is what will happen if both the
factors strike simultaneously. The effect of the
change in Feds stance in its monetary policy
will cause flight of capital from EM economies.
Moreover, those economies that followed the
path of strong credit led growth and are net
exporters to China seem to be at the greatest
risk whereas those which contained credit
expansion and are not large exporters to China
will benefit on this front.
References
http://online.wsj.com/article/SB1000142405270
2303360504577411151135639534.html
http://www.bls.gov/news.release/pdf/empsit.pdf
mailto:[email protected]:[email protected]:[email protected]://online.wsj.com/article/SB10001424052702303360504577411151135639534.htmlhttp://online.wsj.com/article/SB10001424052702303360504577411151135639534.htmlhttp://online.wsj.com/article/SB10001424052702303360504577411151135639534.htmlhttp://www.bls.gov/news.release/pdf/empsit.pdfhttp://www.bls.gov/news.release/pdf/empsit.pdfhttp://online.wsj.com/article/SB10001424052702303360504577411151135639534.htmlhttp://online.wsj.com/article/SB10001424052702303360504577411151135639534.htmlmailto:[email protected] -
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With the advancements in the financial modelsand mathematical analysis in today`s bankingindustry, role of these Treasury systems haveincreased manifolds. Post the financial crisis,the risk management capabilities of thesesystems are being used extensively to analysethe credit and interest rate risks. This analysisis required for effective hedging of trades anddeciding on the capital allocation for thetrading desks. Methodologies such as Credit
Value Adjustment are becoming increasinglyprevalent to mitigate credit risk. Efficientimplementation of these in treasury systemsallows banks to monitor such risks. Nosuccessful bank can afford to ignore thestrategic importance of a robust and state-of-the-art treasury management system esp. intodays challenging regulatory environment
Data Sources: Company Websites, Wikipedia
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Provides functionalities for aseveral Interest Rate Derivatives.
Very useful for banks dealing incomplex IR derivative products.
Efficient models for cross assetstructured products
Clients:ICICI Bank
ANZ Bank
UBS
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Considered very strong in handlingForex Trades.
Easy integration with external thirdparty pricing tools.
Efficient straight through processingand flexible platform
Clients:Kotak Mahindra Bank
ING Vysya Bank
Maybank
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ALGORITHMIC TRADING: INTERVIEW
with Mr. Saurabh Das from Silverleaf
Capital Services:
About Silverleaf Capital Services:
Silverleaf Capital Services is a Mumbai-based
firm that has emerged as one of the leaders inthe High Frequency Trading space in India
within one short year of rolling out operations.
Our work combines Machine Learning,artificial intelligence techniques and
mathematical modelling with in-house lowlatency trading capability.
About Saurabh Das:
Saurabh is a co-founder of Silverleaf Capital
Services. He is a self-taught developer whohas worked in the fields of algorithmic trading
and agent-based computational economics.
Prior to forming Silverleaf, he has worked atKPMG in Business Consulting and at Morgan
Stanley. He has a PGDM from IIM
Ahmedabad and a Bachelors Degree inEngineering Physics from IIT Bombay.
How did the idea of entr epreneur ship come
about? Why algori thmic trading?
The idea of entrepreneurship didn't pop up in aday - it's a process that took time and a lot ofthought. As with all of us who have had theluxury of a best-in-class education, it is oft-times difficult to drop out of cushy jobs and
into the uncertain world of entrepreneurship.The prime reason for algo-trading was that thefinancial markets are excellent proving-
grounds. It is a very level playing field for new
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FINANCIAL TECHNOLOG
entrants as compared to most industries. Given thatI would know whether my company is succeedingor failing in a relatively short time span,entrepreneurship and algo-trading was veryenticing and I took the plunge.
What are the cur rent trends that are popular in
the area of algorithmic trading? What does
Sil verl eaf Capital Service speciali ze in (solution
off ered to cli ent)?
Most firms in India are still running regular trendfollowing and simple statistical arbitrage systems(dealing in underlying and its associated F&Ocontracts). Market-making on incentivized illiquidexchanges and commodity arbitrage between CMEand MCX has become popular. More advanced andlatency focused firms are detecting and tradingbased on very short term patterns in the order book.Silverleaf, drawing on our skills in mathematicalmodelling, hardware & software design, specializesin finding patterns to identify opportunities and inbuilding low latency infrastructure to capitalize onthem.
How is the algor ithmic tr ading business shaping
up in I ndia and how do you see Algotrading
business changing in futu re as I ndian f inancial
markets develop fur ther?
Brokers are now much more willing to invest intechnology for High Frequency trading than theywere a few years ago. A lot of them are investing indeveloping in-house expertise rather than buying
software and hardware from vendors.
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The share of algorithmically generated volumesis growing very rapidly leading to increasedliquidity and turnover which is normally a goodthing for algorithmic trading. Most exchangesare providing colocation facilities for HFT.NSE has started providing tick by tick dataalong with traditional snapshot data. We expectother exchanges to start providing tick by tickdata feeds soon because that shouldautomatically increase algo tradingparticipation and turnover
How is HFT dif ferent from Algo Trading?
Broadly speaking, algo trading is execution oftrades using an algorithm. Latency is notnecessarily critical. For example, if a mutualfund wants to buy a very large quantity of astock it can run an algorithm to execute thetrade by placing orders slowly over the day tominimize losses because of market impact.HFT is the latency sensitive subset of algotrading. A fraction of a second delay inexecution could cause you to either lose atrading opportunity or even create a tradingopportunity for your competition - usually otherHFT firms.
What are your views on High Frequency
Trading (HFT)? How do they affect stabil ity
in the markets?
In India and worldwide, it has been shown thatbid ask spreads and trading costs (market
impact) are going down because of HFT. Forexample if a contract is being traded onmultiple exchanges HFT firms are competing toensure that a person wanting to buy thecontract, with access to just one exchange gets
a price as close as possible to the lowest among
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FINANCIAL TECHNOLOG
all the exchanges. Research has even shown HFT tobe driving out market manipulators too.
What are the regulator y constrai nts you face as a
part of the business?
HFT has introduced a few new risks to marketstability for which regulations are being modified.As per SEBI regulations exchanges ask firms todemonstrate strategies before they are approved.Audit trails of strategies have to be maintained and
the systems are audited regularly. New measureslike penalties for a low trade to order ratio havebeen introduced. Immediate or Cancel orders havebeen banned in commodity exchanges.
Regulators round the world have concerns about
the systemic r isks of algorithmic trading on inter -
connected financial system. There have been
instances of mal functions and increased volati li ty
in the markets. What is your opini on on that?
Most algorithms are based on models which havebeen trained only for very normal marketconditions. In extreme market conditions with lowliquidity these algorithms can cause short livedvolatility. Malfunctioning algorithms can alsotrigger big market moves in a very short span oftime. This is where the regulators are stepping in.Measures like tighter circuit filters have been put inplace. Regulators have defined mandatory riskmeasures which all algorithms need to have inplace. The exchanges check the functioning ofeach of these risk measures before approving astrategy to run.
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Online Retail:Currently, a $1.6 billion market, the Indianonline retail market has grown rapidly due toincreasing internet penetration, developmentof the financial services sector, increasedadoption by the youth, ease of use, additionalpayment options like EMI and cash ondelivery, discounts offered, time savings,customisation options, testimonials, reducedinventory and real estate expenses, transparentreturn policy and easy comparison shopping.
Source: Euromonitor, Mckinsey
Among the top players, only 2 players have
seen positive returns as per the latestfinancials. Thus, declining margins has been atrend in the Indian retail sector, especially inorganised retail, adversely affecting theprofitability of the players. The recent deals inthe retail sector, (Aditya Birla & Pantaloonretail; split up of the Walmart-Bharti JV,postponement of IKEAs entry in India etc.)can in short be attributed to strategies tocounter dwindling profit margins
108 302 543 9301355 2054
2005 2007 2009 2011 2013 2015 (exp)
Internet Retail in India ($
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SECTOR TAL
Aditya Birla
Pantaloon Retail
Deal to acquire 50.01% in
Pantaloon retail via
Aditya Birla Nuvo Ltd.
(deal size estimated to be
13 times EBITDA and
around Rs. 3200 crs)
Walmart JV exit Walmart exits after a 6
year long partnership
with Bharti retail
Flipkart PEfunding
A $ 200 mn PE funding(6
thround of PE funding),
from its existing
investors, the largest
raised by any e-
commerce company in
India.
Myntra PE
funding
Raised around $25 million
from existing investors,
Accel partners and Tiger
global
Arisaig India -
Trent
Acquires 2.36% stake in
Trent retail increasing its
overall ownership to
9.88%
Arvind Lifestyle
Debenhams,
Nautica & Next
Business
The acquisition has
enabled Arvind to
diversify into luxury and
speciality retail in the
apparel sector
IKEAentry into
India
Investment proposal of
Rs. 10,500 crs, approvedby the cabinet via the FDI
route. However, first
store not likely to open
before 2016
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FDI in Retail:
Source: AT Kearney Report: Global RetailDevelopment index
Though the government in 2012 has allowed100% FDI in single brand retail and 51% FDIin multi-brand retail, the reforms are yet toyield a substantial impact in foreign currencyinflows. In 2011, India was seen to be one ofthe favourable destinations for retail. HoweverIndias rank has slipped in the wake of
prevailing corruption, policy paralysis andabsence of transparent regulation with regardsFDI in retail due to unclear procurementpolicies and opposition by various states
294536
391567 551
2008-09 2009-10 2010-11 2011-12 2012-13
FDI -Retail &
Wholesale trade (USD
mn)
FDI -Retail & Wholesale trade (USD mn)
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SECTOR TAL
FDI inflows from retail have been stagnating inthe recent years. Also, even though the FDIinflows into the retail sector have doubled inthe last 5 years, it just constitutes 4% of thetotal FDI inflows, which isnt substantial giventhat the sector contributes to around 15% ofIndias GDP
Future Expectations:
Short term growthThe immediate growth of the industry isheavily dependent on macro-economic factorsaffecting consumer sentiment. With persistentinflation, growing current account and fiscaldeficit and negative investor sentiment maywell impact the short term growth of the sector.
Long term Growth and challenges
The long term growth of the sector is expectedto robust, with a CAGR of 15-20% for at leastthe next 5-10 years, with demand fuelled byhigher purchasing power, growth of the Indianfinancial sector, changing consumptionpatterns, higher investments and better
technology.
36%
7%
15%9%
3%
3%
17%
4%
6% FDI % share
Manufacture
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Organised retail in India has been growing at arapid pace. Despite its low current penetrationof around 8%, organised retail is expected toconstitute around 20% of the retail market inthe next 5-7 years. Also within organisedretail, food and grocery retail is expected togrow the least, due to lowest penetration oforganised retail, very low margins, affectingprofitability of new entrants struggling tobreak-even. On the other hand long run growthin apparel, footwear, jewellery, pharmacy,beauty and healthcare and consumerelectronics and durables are expected to bemore robust. The vertical-wise growthpredictions of the India retail sector are asunder.
The Indian online retail industry is expected todouble in the next 2-3 years and is expected togrow at a CAGR of around 20-25% at least forthe next 10 years.
With regards FDI in retail, Investor confidenceis still not high, this is proven by the fact thatIKEA, even after getting the cabinet approvalhas decided not to open its first store before2016. Thus just policy announcements are notadequate. Steps have to be taken to ensure apositive signalling effect, to encourageinvestment in the retail sector, one of thelargest contributors to the GDP. This is evenmore critical given Indias current accountdeficit, so as to at least ensure capital inflows,so as to strengthen the balance of paymentsposition and the depreciating rupee.
The retail sector in India faces hugechallenges from the point of view of financialconstraints and inferior supply chaininfrastructure. Financial constraints are facedmore by the retailers in the unorganised retailsector.
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Low profit margins, lack of credit and hugeinvestments needs are the 3 key problemsfaced by the retailers especially in the un-organised sector. With unorganised retailcurrently constituting a substantial 92% ofIndian retail, these problems need to beseriously addressed, or else the sector may getadversely affected making the businessesfinancially unviable with the entry of newplayers in organised retail. Protectionistpolicies should not be implemented, but the
government should ensure that this sector isgiven priority access to credit and shouldencourage banks and other financialinstitutions to extend credit to the unorganisedretail sector.
Supply chain challenges are a huge hindrance,especially in the food and grocery retailsegment. Supply chain losses are of around 20-30% are can be said to be one of the primecauses of food inflation in India. Also the low
margin based food and grocery retail verticalneeds a boost and supply chain infrastructuredevelopment can be factor reducingprocurement costs and thus increasing marginsand making food and grocery retail moreattractive. The assumption of improved supplychain with the entrance of foreign players viathe FDI route is also flawed. Pro-activeinvestments in supply chain need to beundertaken to encourage foreign players toinvest in the retail sector. Thus overcoming thefinancial and supply chain challenges wouldindeed further bolster the growth of the Indianretail sector, which plays a critical role inIndias growth story.
Data Sources: www.rbi.org, Bloomberg,
Reuters, www.michealpage.com
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MERGERS AND ACQUISITIONS
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OVERVIEW
The erratic pattern of the M&A industry sincethe financial crisis has led to lukewarmperformance throughout the bulge bracket,boutique and other firms across the globe. Abrief synopsis of the past 12 months (October12 September 13), gives the followingglobal picture.
Number of Deals 27059
Value $ 2.63 TrillionAverage Disclosed Deal
Size
$175.75
Million
Average Premium 28.31%
Without any surprise U.S. is at the heart ofdeals, while industry wise Telecom has been atthe core of consolidation both in terms ofacquirers and targets, clearly visible in thefollowing charts.
.
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Topping the M&A deal table of the 10 largestdeals (globally) is the Vodafone Verizondeal, with a whopping deal size over $130.1billion. Another news maker has been thestrategic deal between Microsoft and Nokia,poised to be a game changer for Microsoft. Ithas been discussed in greater detail in the nextsection.
The following page contains the table withreference to Oct- 12 to Sept- 13 for the top10.
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Following is the league table which is led by thebulge bracket firms