Edited-Copy of Principal Monthly Insight-31-05-2017 · • Index of Industrial Production (IIP)...

May 2017

Monthly Insight

Policy Rates Actual PreviousRepo Rate^ 6.25% 6.25%

Reverse Repo^ 6.00% 6.00%

CRR^ 4.00% 4.00%

Key IndicatorsIndex Of Industrial Production (IIP)

Wholesale Price Index Inflation(WPI)

Export (Y-o-Y)

Import (Y-o-Y)

Current Account Deficit ($ Billions)

Fiscal Deficit FYTD (INR Trillion)

Principal Monthly Insight

Economic Releases in May-2017

Previous

1.90%(Feb-17)

5.29%(Mar-17)

27.59%(Mar-17)

45.26%(Mar-17)

-3.4(Sep-16)

5.35(Mar-17)

Source: RBI, Reuters; ^Based on RBI Bi-monthly Monetary Policy Statement on 06-Apr-2017

2.70%(Mar-17)

3.85%(Apr-17)

19.77%(Apr-17)

49.09%(Apr-17)

-7.9(Dec-16)

2.06(Apr-17)

Period31-May-17

31-May-17

31-May-17

Actual

• In the Mar quarter of 2017, India’s Gross Domestic Product(GDP) at constant (2011-12) prices grew 6.1%, slower thanprovisional 7.0% rise in the previous quarter. In FY17, realGDP grew 7.1%. Gross value added (GVA) at basic constant(2011-12) prices grew at a slower pace of 6.6% in FY17compared with 7.9% in FY16. The base year of GDP has beenrevised from the year 2004-05 to 2011-12. Therefore,according to the new estimates, India’s real GDP grew 6.4%,7.5%, and 8.0% in FY14, FY15, and FY16, respectively.

• Government data showed that Indian has attained fiscaldeficit target of 3.5% of GDP in FY17. Fiscal deficitaccounted for 3.51% of GDP or Rs. 5.35 lakh crore comparedwith the revised target of Rs. 5.34 lakh crore for the fullfinancial year. Revenue deficit came in at 2.02% of GDP.Total expenditure stood at Rs. 19.75 lakh crore while receiptsstood at Rs. 14.4 lakh crore. Revenue from taxes surpassedthe government's estimate and stood at 101.2% of the revisedfull-year target. However, revenue from non-tax receiptsreached just 81.9% of the same.

• Index of Industrial Production (IIP) grew 2.7% in Mar 2017from 1.9% in the previous month. IIP was released under anew time series with the base year being revised from 2004-05to 2011-12. IIP in the same period of the previous year stoodat 5.5%.

• Consumer Price Index (CPI) based inflation under new baseyear 2011-12 grew 2.99% in Apr 2017, slower than a growthof 3.89% (revised from 3.81%) in the previous month and5.47% in the same month of the previous year. The consumerfood price index grew 0.61% in Apr 2017, slower than 2.01%in Mar 2017 and 6.40% in the same month of the previousyear.

• Wholesale Price Index (WPI) based inflation under new baseyear 2011-12 slowed to a four-month low of 3.85% in Apr2017 from 5.29% in the previous month. WPI in the samemonth of the previous year contracted 1.09%. Build upinflation rate in the financial year so far was -0.18%compared with a build up rate of 1.21% in the correspondingperiod of the previous year.

• India’s exports increased 19.77% YoY to $24.64 billion in Apr2017, but imports surged at a much faster rate by 49.07% to$37.88 billion, which led to rise in trade deficit. Trade deficitexpanded to $13.25 billion in Apr 2017 from $4.84 billion inApr 2016. Rise in imports was mainly contributed by higherpurchase of crude oil and petroleum products that grew30.12% to $7.36 billion from $5.66 billion in the year-agoperiod.

Indian Economy

-8.00

-3.00

2.00

7.00

Apr-15 Dec-15 Aug-16 Apr-17

Source: Office of the Economic Adviser, Ministry of Commerce & Industry

Monthly WPI Movement

Gro

wth

( in

%)

-1.70

1.30

4.30

7.30

Apr-16 Aug-16 Dec-16 Apr-17

WPI CPISource: MOSPI

WPI & CPI Movement over last 1-year

Gro

wth

(In

%)

-12.00

-4.00

4.00

12.00

Mar-16 Jul-16 Nov-16 Mar-17

IIP (%MoM) IIP (%YoY)Source: MOSPI

IIP Movement

Gro

wth

(In

%)

Principal Monthly Insight 1 | P a g e May 2017 ...

Index PE Ratio & Returns*Closing Values# 1 Year 3 Year 5 Year

Nifty 50 9,621.25 17.91 9.97 14.33

Nifty 50 PE 21.77 19.16 15.21 12.86

S&P BSE Sensex 31,145.80 16.79 8.73 13.93

S&P BSE Sensex PE 22.11 18.60 15.26 12.81


Source: NSE, BSE, * Returns less than 1 year are absolute, greater than 1 year are Compounded Annualized , # As on 31-May-2017

• During the month, key benchmark indices S&P BSE Sensexand Nifty 50 surpassed the 31,000 and 9,600 marks for thefirst time. Investor sentiment was buoyed by growingoptimism over favourable monsoon and its positive impacton the nation’s economy. Moreover, inflation and industrialoutput data with revised base year supported buying interest.Market participants also took positive cues from thegovernment’s decision to do away with Foreign InvestmentPromotion Board (FIPB) and proposing new mechanism toapprove overseas investment applications.

• Markets were hit following instances of geopoliticaltensions, both on domestic and global fronts. Besides,ambiguities around the U.S. President’s future kept investorswary. A mixed series of quarterly earnings numbers fromcompanies across different sectors too had a bearing onbuying interest during the month.

• S&P BSE Sensex and Nifty 50 rose 4.10% and 3.41% to closeat 31,145.80 and 9,621.25, respectively. However, broaderindices bucked the trend with S&P BSE Mid-Cap and S&PBSE Small-Cap falling by 1.17% and 1.90%, respectively.

• According to data from the National Securities DepositoryLtd, foreign portfolio investors were net buyers of domesticstocks worth Rs. 7,711.41 crore in May compared with netpurchase of Rs. 2,394.49 crore recorded in the previousmonth.

• Markets started on a positive note after manufacturingactivity in the country expanded for the fourth consecutivemonth in Apr 2017 as reported by the Nikkei IndiaManufacturing Purchasing Managers' Index (PMI) in its finalsurvey. The government’s move to deal with growing badloans further buoyed market sentiment. The Prime Ministergave nod to a new structure dealing with non-performingassets (NPAs) worth Rs. 6 lakh crore in the banking system.The structure consists of the circulation of an ordinance torevise the Banking Regulation Act, which would give morescope to the Central Bank and its oversight committees to acton behalf of banks during NPA-associated work.

• India Meteorological Department’s (IMD) latest monsoonforecast helped markets extended the rally. The favourablemonsoon forecast heightened chances of easing retail priceinflation, thereby increasing prospects of rate cut by theCentral Bank in the near future. Buying interest foundadditional support following the release of macroeconomicdata as IIP grew in Mar 2017, while the WPI-based inflationslowed to a four-month low in Apr 2017.

Indian Equity Market

-9.69%

-4.69%

-3.80%-1.90%

-1.51%

-1.44%

-1.17%

-0.49%

-0.48%

0.37%

2.68%

3.41%

4.10%

4.78%

4.83%

6.06%

6.35%

7.37%

-15% -10% -5% 0% 5% 10%

S&P BSE Health care

S&P BSE Power

S&P BSE PSU

S&P BSE Small cap

S&P BSE Capital Goods

S&P BSE Oil & Gas

S&P BSE Mid cap

S&P BSE Metal

S&P BSE Consumer Durables

S&P BSE Realty

S&P BSE-100

Nifty 50

S&P BSE Sensex

S&P BSE Teck

S&P BSE Bankex

S&P BSE Auto

S&P BSE IT

S&P BSE FMCG

Source: MFI Explorer

200

1,000

1,800

2,600

May-07 Nov-09 May-12 Nov-14 May-17

S&P BSE Mid cap S&P BSE Sensex S&P BSE Small cap

Growth of Rs 1,000 over Last 10-Yrs

Source : MFI Explorer

InR

s.

Growth of Rs 1,000 over Last 10-Yrs

Source : MFI Explorer

InR

s.

Monthly returns as on May 31, 2017

5

30

55

80


P/E

-S&

P BS

E Se

nsex

, N

ifty

50,

Nif

ty M

idca

p 50

Nifty 50 Nifty Midcap 50 S&P BSE Sensex

Domestic Benchmark Indices Trailing P/E

Source : Reuters, NSE



• Investors tracked developments on the Goods and Service Tax(GST) Bill as the GST Council declared the rates for a range ofgoods and services. The government’s decision of doing awaywith FIPB, which is expected to speed up the approvalprocedure of foreign direct investment proposals, furtherhelped sentiment.

• Geopolitical tensions kept markets on the toes. Buying interestwas also impacted when the Organization of the PetroleumExporting Countries (OPEC) and other non-OPEC producers’agreement to extend production-cut programme till Mar 2018fell short of market expectations.

• On the BSE sectoral front, the indices witnessed a mixed trend.S&P BSE FMCG was the top gainer followed by S&P BSE ITand S&P BSE Auto. Meanwhile, S&P BSE Healthcare was themajor loser, followed by S&P BSE Power and S&P BSE PSU.Buying interest was seen in bank stocks after the governmentapproved the Banking Regulation (Amendment) Ordinance,2017, thereby empowering the Central Bank to issue directionsto banks to resolve their stressed asset position.

• The Union cabinet has given approval to the Non-Performing Asset (NPA) resolution package. The package includes an ordinance thatseeks to enable the Central Bank to more effectively deal with NPAs. Furthermore, the cabinet also approved a new steel policy thatenvisions an investment of Rs. 10 lakh crore to upgrade its production capacity.

• The finance minister announced that the GST Council has finalised four tax brackets for services that range from 5% to 28% (5%, 12%,18%, and 28%). The government is planning to exempt approximately 100 items from the GST regime. Per the media reports, goods ofcommon use and consumed largely by the masses like primary produce, fruits and vegetables, flour, salt, milk, eggs, tea, coffee, and prasadsold at temples are expected to be a part of the exempted list.

• Securities and Exchange Board of India (SEBI) has brought in disclosure norms for issuance and listing of green bonds in order to helpcompanies raise funds through them for investment in renewable energy space. SEBI stated that the issuer of a green bond will have todisclose the environmental objectives of the issue of such securities in the offer documents. Also, the issuer will have to disclose use ofproceeds, list of projects to which green bond proceeds have been allocated in the annual report as well as the periodical filings made to thestock exchanges.

• In order to regulate index providers, SEBI has introduced new norms. The index providers design and develop benchmark indices such asSensex and Nifty, and also include subsidiaries of stock exchanges. Presently, they do not function under SEBI’s regulatory purview. Thenew norms include a code of conduct for index operators, making it compulsory for them to disclose while including or excluding a stockfrom the indices. Also, the norms would take into account issues like avoiding conflict of interest, creation of a robust audit mechanismand a framework to facilitate early detection of potential misconduct.

• SEBI in order to protect the interest of investors mandated that entities coming out with public offers, including initial share sales, will berequired to appoint a monitoring agency. The monitoring agency will keep a tab on the utilisation of the proceeds in case the offer size ismore than Rs. 100 crore.

• The Real Estate Regulation Act (RERA), which was passed by the Parliament last year, became effective from May 1. RERA is expected tobring in paramount change in the functionality of the real estate sector.

Regulatory Update

29,600

30,200

30,800

31,400

-1,300

300

1,900

3,500

1-May-17 11-May-17 21-May-17 31-May-17 S&P

BSE

Sens

ex In

dex

valu

e

Net

Inve

stm

ent b

y FI

I/FP

I &

DII

in R

s. C

r.

FII/FPI Net investment DII Net investment S&P BSE SensexSource: MFI Explorer , NSE

Source : Reuters

26,000

28,000

30,000

32,000

-22,000

-8,000

6,000

20,000

34,000

May-16 Sep-16 Jan-17 May-17

FII/FPI Net investment DII Net investment S&P BSE Sensex

Source: MFI Explorer , NSE

Net

Inve

stm

ent b

y FI

I/FP

I &

DII

in R

s. C

r.

S&P

BSE

Sens

ex In

dex

valu

e

FII/FPI, DII Investment & Sensex - May 2017

FII/FPI, DII Net Investment & Sensex Movement in last 12 Mths


Key Rates (%)Reverse Repo Rate

Repo Rate

CRR

SLR

Bank Rate

Debt Indicators (Yield %)Call Rate

FBIL 1 Mn Term Mibor

10-Yr Benchmark Bond

91-Day T-Bill#

182- Day T-Bill#

364-Day T-Bill#

Source: RBI

# Indicates Monthly Average cut off during Auction

6.47%

6.04%

6.25%

6.33%

6.41%

6.27%

May-17

6.00 6.00

6.25 6.25

4.00 4.00

20.50 20.50


Current^RBI Policy Rates

6.02% 6.03%

6.42%

6.96%

6.50 6.50

6.79%

6.46%

Previous

^Based on RBI Bi-monthly Monetary Policy Statement on 06-Apr-2017

Apr-17

• Bond yields fell during the month under review after retailinflation plunged to a 5-year low in Apr 2017, whichincreased hopes of a rate cut by the Monetary PolicyCommittee (MPC) in the near term. Market sentiment wasfurther boosted after government officials allayed concerns ofhigh inflation following the implementation of GST from Jul1. Fall in global crude oil prices also added to the gains.

• Yield on the 10-year benchmark bond (6.97% GS 2026) fell 17bps to close at 6.79% from the previous month’s close of6.96%. During the month, bond yields moved within a widerange of 6.75% to 6.99%.

• Bond yields witnessed some volatility initially during themonth. Bond yields rose initially after the Central Bankauctioned long-term treasury bills to reduce surplus liquidityfrom the banking system. Worries of a rate hike by the U.S.Federal Reserve (Fed) in Jun also weighed on the marketsentiment. However, bargain hunting by market participantscapped the gains.

• The trend reversed soon as bond yields came down followingfall in global crude oil prices. Market sentiment was furtherboosted after the outcome of the final round of the FrenchPresidential elections came along expected lines. Bond yieldsthereafter traded in a tight range after the governmentannounced the auction of a new 10-year paper. Lack ofdomestic cues also weighed on the market sentiment.

• Bond yields fell later after pricing of the new 10-year papercame in line with market expectations. The downtrendcontinued after retail inflation plunged to a 5-year low in Apr2017, which increased hopes of a rate cut by MPC in the nearterm. Markets also took heart after government officialsallayed concerns of high inflation following theimplementation of GST from Jul 1 and added that steps havebeen taken to ensure that domestic inflationary pressures donot go up. This led to hopes that MPC will be less hawkish inits upcoming monetary policy review in Jun. Gains wereextended after minutes of the U.S. Fed’s meeting in Maypointed to a near-term rate hike but at the same time signalledcaution going forward. The minutes pacified concerns of afaster pace of rate hikes during the remaining part of the year.

• However, further gains were capped on profit booking fromthe bond rally. Market participants also remained on thesidelines ahead of the upcoming monetary policy review andIMD’s next forecast for monsoon in Jun 2017. Worriesregarding the effects of GST and housing rent allowance ofseventh pay commission on inflation in the second half of theyear also kept market participants on the sidelines.

Indian Fixed Income

5.90

6.50

7.10

7.70


Source: CCIL

10-Yr Benchmark Bond Yield

Yie

ld (I

n %

)

-87

-58

-29

0

6.35

6.90

7.45

8.00

1 Yr 5 Yr 10 Yr 20 Yr 30 Yr

Cha

nge

in b

ps

Yie

ld (I

n %

)

India Yield Curve Shift (Y-o-Y)

Change in bps May-17 May-16Source: Reuters

-36

-24

-12

0

6.40

6.80

7.20

7.60

1 Yr 5 Yr 10 Yr 20 Yr 30 Yr

Cha

nge

in b

ps

Yie

ld (I

n %

)

India Yield Curve Shift (M-o-M)

Change in bps May-17 Apr-17Source: Reuters



• On the liquidity front, the overnight call rate tradedsignificantly below the policy repo rate for most of the monthunder review which ranged from 5.98% to 6.11%. Data fromthe Central Bank showed that banks’ net average lending tothe central bank through the LAF window stood at Rs.12,544.84 crore in May 2017, compared to the previousmonth’s average lending of Rs. 28,337.62 crore. However,Banks’ average borrowings under the Marginal StandingFacility (MSF) window fell to Rs. 929.62 crore in May 2017from the previous month’s average borrowing of Rs. 1,230.00crore.

• To suck out excess liquidity as mandated by the Central Bankin its monetary policy review on Apr 6, the central bankconducted variable reverse repo auctions of various tenors.Average net absorption of liquidity by the Central Bankthrough variable repo rate and reverse repo auctions stood atRs. 36,401.21 crore in May 2017 compared with Rs. 71,439.84crore in Apr 2017. Furthermore, the Central Bank sold 35Days and 77-Days cash management bills for a notifiedamount of Rs. 50,000 crore for which the entire amount wasaccepted. After taking into account the entire gamut of LAF,MSF, market stabilisation scheme, term repo, and reverserepo, the average net absorption of liquidity by RBI stood atRs. 49,006.60 crore in May 2017, compared to Rs. 94,358.90crore in Apr 2017

• The Central Bank conducted auctions of 91-, 182-, and 364-days Treasury Bills for a notified amount of Rs. 70,000 crorein May 2017 compared with Rs. 56,000 crore in the previousmonth. The cut-off yield stood in the range of 6.23% to6.48% during the month under review compared with that ofthe previous month when the cut-off yield was in the range of5.86% to 6.45%.

• The Central Bank also conducted auction of statedevelopment loans for 10 state governments for a totalnotified amount of Rs. 21,550 crore compared with theprevious month when the total notified amount was Rs.16,350 crore. The accepted amount stood at Rs. 21,625 crorecompared with the previous month when the amountaccepted was Rs. 16,450 crore. The cut-off yield ranged from7.42% to 7.61%, while in the previous month, the cut-offyield was in the range of 7.59% to 7.70%. Maharashtraattracted the minimum yield while Uttar Pradesh attractedthe maximum yield.

• The Central Bank also conducted auctions of eightgovernment securities for a notified amount of Rs. 60,000crore for which the entire amount was accepted. The cut offprice ranged from Rs. 89.19 to Rs. 104.11 while the cut offyield ranged from 6.66% to 7.53%.

20.00

22.00

24.00

26.00

2.00

5.00

8.00

11.00

May-07 May-09 May-11 May-13 May-15 May-17

Source: RBI Reverse Repo Repo CRR Bank Rate SLR

Movements of Key Policy Rates in India

Rep

o,R

ever

se R

epo,

CR

R, S

LR &

Ba

nk R

ate

(In

%)

SLR

(In

%)

10

50

90

130


5 Year Corporate Bond Spread (for AAA & AA bonds)

AAA Bond Spread (in bps) AA Bond Spread (in bps)Source: Reuters

In b

ps

15

60

105

150


10 Year Corporate Bond Spread (for AAA & AA bonds)

AAA Bond Spread (in bps) AA Bond Spread (in bps)Source: Reuters

In b

ps

-40,000

20,000

80,000

140,000

4.50

6.50

8.50

10.50


Call Rate Net Borrowings

Liquidity Monitor - Call Rate and Net Borrowings

Cal

l Rat

e (I

n %

)

Source: Reuters

LAF

(In

Rs.

Cr.

)


64.55 64.22 66.74 67.20

72.14 69.88 70.72 74.79

82.64 82.83 83.05 98.65

58.15 57.72 59.35 60.40

1 Wk Ago1 Mth Ago

6 Mths Ago

1 Year Ago

Crude Brent($/Barrel)

49.04 -7.35 -2.21 3.70 0.18

Gold ($/Oz) 1,268.09 0.79 0.03 8.13 4.40

Gold (Rs./10 gm) 28,839.00 0.48 -0.17 0.01 0.78

Silver ($/Oz) 17.29 0.57 0.56 4.89 8.17

Silver (Rs./Kg) 39,691.00 0.61 -0.88 -2.49 3.17

Performance of various CommoditiesReturns (in %)Value(as

of 31-May-2017)

Source: Reuters, MCX

Commodities


1 Mth Ago

3 Mths Ago

Movement of Major Currencies (Denominated in Indian Rupee)

Source: RBI

Currency

INR/1 USD

INR/1 EURO

INR/1 GBP

INR/ 100 YEN

1 Year Ago

Value(as of 31-May-

2017)

INR• Rupee fell after moving in a range during the month. The

Indian currency fell due to purchase of greenback by banksand importers. Market participants were concerned overongoing geopolitical tensions. Terror attack in Britain andpolitical uncertainties in Europe further dented marketsentiment. However, losses were limited due to selling of thegreenback by corporates and exporters and weaker thanexpected U.S. economic data. Gains in the domestic equitymarket, which boosted hopes of more foreign fund inflows,also restricted rupee’s fall.

Euro• Euro surged due to positive outcome of the French

Presidential elections. Some disappointing U.S. economicdata boosted the euro further. Worries of political turmoil inthe U.S. and doubts over U.S. President’s reform agenda alsokept the greenback under pressure. However, euro’s gainswere restricted after the release of U.S. initial jobless claims.U.S. economic growth for the Mar quarter of 2017 indicatedthe economy was expanding, increasing expectations for arise in interest rates in Jun 2017.

Currency

Crude• Brent crude prices initially remained weak because of

persisting concerns over supply glut, which dampenedinvestor confidence on OPEC's initiative to restrict oilproduction. However, downside was limited on expectationsthat members of OPEC would reach an agreement in Viennameeting, scheduled on May 25, to extend the production-cutdeal. But gains could not sustain as an agreement on supply-cuts between OPEC and some non-OPEC producers fell shortof market’s expectations. Concerns of a persistent globalsupply glut along with the U.S. and European politicalworries further dented sentiment.

Gold• Gold prices commenced the month on lower note as data

showed that non-farm private employment in the U.S. grewmore than expected in Apr 2017. Victory of the pro-EUcandidate in the French Presidential elections also hurt prices.However, later the trend reversed amid rising concerns overpolitical turmoil in the U.S. that further raised doubts onimplementation of economic stimulus by the U.S. President.Towards the end, prices remained steady overcomingconcerns over probable rate hike by the U.S. Fed in the nearfuture. The minutes of U.S. Fed’s latest meeting fueledspeculation about an interest rate hike in Jun 2017 and at thesame time hinted at slimming down the bank’s $4.5 trillionbalance sheet.

Commodity

63

65

67

69May-16 Sep-16 Jan-17 May-17

Rupee Versus Dollar during the year

Rup

eepe

r D

olla

r

Source: RBI

75

95

115

135


Movement of Commodity Prices Over 1 Year (Rebased to 100)

Gold Silver Brent CrudeSource:Reuters

In U

.S.D

olla

r


FSE DAX

Europe

1.42Germany

-1.19

4.10

-3.37

Shanghai SE Composite

S&P BSE Sensex

S&P/ASX 200

FTSE 100

CAC 40

2.36

SET IDX

JSX Composite

FTSE Straits Times

KOSPI

Hang Seng

3.68

1.16

Thailand

Indonesia

Singapore 1.11

Source: MFI Explorer & Reuters

6.44

4.25

S. Korea

Hong Kong

NIKKEI 225

India

Australia

4.39

0.31

U.K.

France

Japan

China


Performance of Major International Markets (as on May 31, 2017)

Asia Pacific-0.30

0.93

0.33

U.S.

U.S.

U.S.

United StatesNasdaq 100

S&P 500

DJ Industrial Average

1 MthCountryIndices

United States • Major U.S. markets closed positively after the U.S. Fed

decided to leave interest rates unaltered in May policymeeting but the minutes of the meeting hinted at a hike inrates in mid-Jun 2017 if economic conditions remainfavourable. However, geo-political tensions and a bunch ofdisappointing earnings figures from industry majors hurtsentiment.

Europe• European markets gained primarily over strong economic

data from the euro zone, Germany, and France. However,bourses were hurt following new poll results in the U.K.,suggesting the ruling party could stop short of an overallmajority in the upcoming elections. Euro zone financeministers failing to strike a deal with the InternationalMonetary Fund (IMF) on Greece’s debt relief and geopoliticalworries added to the woes.

Asia• Most of the major Asian markets went up on Bank of Japan's

Mar 2017 monetary policy meeting minutes indicating theboard members expected consumer prices to hit the centralbank's 2% inflation target even if the bank continued withquantitative easing. Expectations of more liquidity infusionby the Chinese central bank also supported sentiments.

• Yield on the 10-year U.S. Treasury bond fell 8 bps during themonth to close at 2.20% compared with the previous month’sclose of 2.28%. The paper moved in a range of 2.20% to2.41%.

• U.S. Treasury prices fell initially after the U.S. Treasurysecretary indicated that the U.S. government is consideringissuing ultra long-term bonds and the release of upbeat U.S.labour market data for Apr 2017.

• However, the trend reversed after U.S. consumer priceinflation, retail sales and housing starts data for Apr 2017came below market expectations, which scaled backexpectations of a strong U.S. economic rebound in the secondquarter and revived appetite for U.S. Treasuries.

• U.S. Treasury price rose further following geo-politicalturmoil in the U.S. Gains were extended as investors wereworried regarding U.S. President’s reform agenda and afterthe release of minutes of latest U.S. monetary policy meetingthat indicated a gradual approach on raising interest rates.Also, downgrade of China’s credit rating and month-endbuying of U.S. Treasuries added to the gains.

Global Equity Market

Global Fixed Income - U.S.

-13

-1

11

23

0.60

1.50

2.40

3.30

1 M

onth

3 M

onth

s

6 M

onth

s

1 Y

ear

2 Y

ears

3 Y

ears

5 Y

ears

7 Y

ears

10 Y

ears

30 Y

ears

Cha

nge

in b

ps

Yie

ld (I

n %

)

U.S. Treasury Yield Curve Shift (M-o-M)

Change in bps 31-May-17 30-Apr-17Source: Reuters

1.20

1.70

2.20

2.70


Yie

ld (

In %

)

U.S. 10 Year Treasury Yield

Source: Reuters

Movement during the Month



Decoded: Payments Banks

Investment Classroom

Payments Banks

Payments banks is a new concept in the Indian banking industry that was introduced by the Reserve Bank of India (RBI) in 2014.

What is Payments Banks?

A Payments Banks is a bank with restricted functions and does not involve any credit risk. It can carry out most banking operations likeaccepting demand deposits; offering remittance services, mobile, payments/transfers/purchases, ATM/debit cards; net banking; third party fundtransfers; and accepting utility bills. However, it can't advance loans or issue credit cards; cannot form subsidiaries to undertake non-bankingactivities, cannot accept NRI deposits. Also, the deposits cannot exceed Rs. 1 lakh per customer.

There are other pre-requisites as well- the bank should be fully networked from the onset, 25% of its branches must be in the unbanked ruralareas, it must use the term "payments banks" in its name to differentiate it from other types of banks.Now, let’s see the things payments banks cannot do:

Background

RBI in 2013 made a committee headed by Dr. Nachiket Mor to study 'Comprehensive financial services for small businesses and low incomehouseholds' in order to look for measures to achieve financial inclusion and increase access to financial services in a tech-friendly environment,such as digital banking.

One of the key recommendations of the committee was the formation of a new category of bank called payments banks. In 2014, RBI releaseddraft guidelines for payments banks, seeking comments from interested entities and the general public. In 2014-end, RBI released the finalguidelines for payments banks. By early 2015, the central bank released the list of entities that had applied for a payments banks licence.

Players

In Aug 2015, RBI gave "in-principle" licences to 11 entities (out of 41 that had applied) to launch payments banks:

• Aditya Birla Nuvo• Airtel M Commerce Services• Cholamandalam Distribution Services• Department of Posts• FINO PayTech• National Securities Depository• Reliance Industries• Sun Pharmaceuticals• Paytm• Tech Mahindra• Vodafone M-Pesa

Out of them, three surrendered their licenses- Cholamandalam Distribution Services, Sun Pharmaceuticals, and Tech Mahindra. Three bankshave already started operations- Paytm Payments Banks, Airtel Payments Banks, and India Post Payments Banks.

Scope and future

The main objective behind the formation of payments banks was to extend financial services to small businesses, low-income households, andmigrant labour workforce, even to the remote areas of the country.

The companies that made the cut for starting payments banks were selected carefully keeping the reach factor in mind. Thus, mobile firms,postal department, and supermarket chains, among others, were selected that cater to individuals and small businesses with a wide reach. TheDepartment of Posts’ reach is into every village and will help connect farmers to banks.

Payments banks can be joined with one’s savings bank account via IMPS and NEFT transfers. The payments banks’ ATM or debit cards willwork on all banks' machines.The concept is at a nascent stage and RBI will strengthen the system as things unfold and learnings come along the way. It would mean moreplayers will enter the field, while some may fall by the side.



Source for data, graphs and analysis, unless otherwise specified: ICRA Online Research

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Edited-Copy of Principal Monthly Insight-31-05-2017 · • Index of Industrial Production (IIP)...

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