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Editorial

Season’s Greetings!

In this edition we have Mr. Shantanu Mitra – MD & CEO, Fullerton India, articulating

his thoughts on NBFCs. He presents his views on how NBFCs are fueling economic

growth. We thank Mr. Mitra for his contribution to the newsletter.

For this month, APAS column has focused on monetary policy framework globally. It

talks about the Indian monetary policy and its transformation and the adaption of CPI

from WPI.

The economic indicators showed mixed performance. Manufacturing PMI dipped from

50.3 in November to 49.1 in December. India's core sector rose by 0.9% in December.

India's Index of Industrial Production (IIP) for the month of November has contracted

3.2% versus 9.8% growth in October. PMI services and composite PMI were

respectively at 53.6% and 51.6% from 50.1% and 50.2% in the previous month. Inflation

rose to 5.61% in December from 5.41% in November. Deflationary trend eased in

December with WPI inflation moving up to (-) 0.73% from (-) 1.99% in November.

The Reserve Bank of India announced sixth bi-monthly monetary policy statement,

2015-16. It released the amended circular on Gold Monetization Scheme. It also

released a circular on IFSC Banking Units (IBU’s) – Permissible activities. This newsletter

also presents a roadmap drawn by the government of India for implementation of

Indian accounting standards merged with International financial reporting standards.

This newsletter covers the 15th issue of MFIN Micrometer. It provides an overview of

the Indian microfinance industry, as on 30th September, 2015.

IRDAI released an exposure draft capping rewards for Individual insurance agents.

On the infrastructure front we have, the approval for Highway Annuity Model (HAM)

by the cabinet for implementing highway projects. Prime Minister Mr. Narendra Modi

with the president of France Mr. Francois Hollande laid the foundation of International

Solar Alliance (ISA).

In the capital markets, there was an announcement from the regulator on the buyback

of IIB’s linked to WPI.

We hope that this newsletter is insightful and welcome your inputs and thoughts and

encourage you to share them with us.

Ashvin Parekh

Table of Contents

Guest Column

Mr. Shantanu Mitra – MD & CEO –

Fullerton India

NBFCs fueling economic growth in

India

APAS Team

Fundamentals of Monetary Policy Framework

Economy

IIP update – November

Inflation update - December

PMI update – December

Core Sector update – December

Banking Sector

Sixth Bi-monthly Monetary Policy

Statement, 2015-16

Gold Monetisation Scheme 2015,

Amended

Setting up of IFSC Banking units –

Permissible activities

Roadmap drawn for

implementation of Indian

Accounting Standards

Microfinance

Micrometer – Issue 15

Insurance

IRDAI capping rewards for agents,

intermediaries.

Infrastructure

Hybrid Annuity Model for

implementing highway projects

International Solar Alliance

Capital Markets

Announcement of buyback if IIPs

linked to WPI

Capital Market Snapshot

Economic Data Snapshot

Draft regulations for Foreign Re-Insurers

GI Industry – Statistics

Ashvin Parekh – Managing Partner, APAS

Providing inclusive financial services, and stimulating

economic growth across the vast geography that is

India has been a long-standing priority and a

challenge. The hinterland of India comprises over

650,000 villages, is inhabited by over 850 million

potential consumers, and contributes to about half of

India’s GDP – a segment that has grown at a

compounded rate of 6.2% since 2000.

However, this segment remains substantially under-

penetrated, with the only 7.8 bank branches per

100,000 persons in rural and semi-urban areas,

against 18.7 bank branches in urban and metropolitan

areas. The Reserve Bank of India (“RBI”) has

undertaken a variety of initiatives – through the

introduction of Business Facilitators and Business

Correspondents, the launch of ‘no frill’ Basic Saving

Bank Deposit accounts, deregulation in the opening of

ATMs and allocation of rural bank licenses – to

develop banking in these areas. Even so, these

initiatives have primarily served to bring deposits and

savings into the formal banking system; provision of

credit and financing business and consumption needs

of the growing rural and semi-urban segments

remains marginal, with over 61% of households

sourcing cash loans from informal non-institutional

agencies.

It is here that the Non-Bank Finance Companies

(“NBFCs”) play an important role. NBFCs are vital

financial intermediaries and have driven the last mile

transmission of credit to sectors that have not had

meaningful access to formal banking credit. Over the

last few decades, they have developed and supported

vital infrastructural requirements driving economic

growth – especially in areas of transportation

(commercial vehicle and auto finance), rural industry

(tractors, commodities, small equipment) and rural

small-sector finance. Additionally, in the urban sector,

they have provided valuable credit to the small-scale

industry, and middle-class consumption financing.

A low-cost distribution infrastructure, ability to

provide credit through a deep understanding of the

market and the ability to deliver innovative solutions

has meant that this has both fuelled the economy and

Mr. Shantanu Mitra, Managing Director & CEO – Fullerton India

has helped provide profitable employment within the

industry.

The quality of the NBFC industry, too, has improved

substantially. Increased regulatory controls, tighter

accounting, provisioning, liquidity and capital

adequacy standards, a consolidation of the market

and an increasing presence of institutional investors

in major NBFCs has helped increase NBFCs’ financial

strength and stability, and today, the industry

represents a credible financing alternative.

The operating models in the industry are changing –

credit is delivered through a mix of traditional

underwriting policies and an intelligent use of

analytics based out of experience in providing credit

and observation of behaviours across credit cycles.

Technology is a key secondary differentiator – most of

the players operate to a fully networked backbone,

with mobility solutions across distribution and

collections channels, and a choice of platforms

(internet, mobile, voice, physical) for customers to

interact and find solutions to their financing and

servicing needs – this has both improved the quality

of the customer experience and driven down the cost

of delivery.

But above all, this is a people business. The success of

a company depends on the quality of its talent, the

culture and the environment. The truly differentiated

players operate with a strong mix of business, process

and risk professionals hired from foreign and

domestic banks and leading finance industry players

driving the business. Institutions that operating in a

culture that underpins integrity, meritocracy,

teamwork, process discipline and regulatory

compliance attract and retain better talent that helps

them leverage emerging opportunities.

The market is undergoing tectonic change –

digitization and disintermediation is gathering

momentum; financial technology solutions (FinTech)

is disrupting the financial ecosystem and newer

technologies such as BlockChain present both risks

and opportunities.

It is in riding these opportunities that progressive

NBFCs will need increasingly focus on – NBFCs have

the unique financial intelligence and insights that the

disrupters lack; adoption of these new technologies,

newer partnerships and leveraging mutual strengths

are opportunities that can further enhance the reach

and relevance of NBFCs, and more importantly

provide cheaper, higher quality solutions to

customers. These are exciting times for the industry,

and we are excited by the opportunities that the

market and the emerging trends have to offer us.

In the global context, slowdown of major economies,

weakening of China, plunge in manufacturing activity

coupled with a steep fall in commodity prices are

everyday news, and the situation is here to stay for

quite some time. Amidst this turmoil, India has been

the ray of hope with its sustained growth. To

capitalize this trend, RBI has maintained that an

effective monetary policy is vital to economic

performance, among other things.

Price stability refers to avoidance of prolonged

inflation and deflation and it has been foremost

priority for central banks of major economies in their

monetary policy. There have been claims that a loose

monetary policy was one of the main factors leading

to the debacle of 2008 crisis. Even though, this is

debatable, it cannot be ruled out. Post crisis, there has

been a renewed effort by central banks with the

support of multilateral agencies in bringing more

focus to monetary policy.

The monetary policy strategies utilize nominal anchor

to achieve its objectives, broadly there are three types

of nominal anchors 1) exchange rate 2) monetary

aggregates 3) inflation. Exchange rate is considered

the oldest form of nominal anchor, over the years it

has lost its sheen due to the exposure of economy to

external shocks and its vulnerability to speculative

attacks. Monetary aggregates, referring to the total

value of money supply within an economy, as an

anchor, has also been burdened with instability and

the unpredictability of the demand for money.

Inflation as an anchor has been successful, with strong

empirical and theoretical proof that low and stable

inflation is a suitable condition for economic growth.

Since 1980s, central banks of several countries have

adopted inflation as its nominal anchor. Inflation’s

qualities of having as domestic orientation and being

easily understood by the larger public, makes it stand

apart even though it is believed to limit the ability to

respond to financial crisis and potential instability due

to supply side shocks.

Adoption of inflation targeting has helped economies

move towards their goal of transparency. The benefits

of inflation targeting are that with a set objective the

central banks have more clarity and policies

implemented are in line with the targets. Second,

there is more discipline in achieving those targets and

scope for evaluation by other agencies and general

public. It has been considered more of a rule based

approach compared to other discretionary policies

and rules out decision made on individualistic beliefs.

India’s monetary policy

The Indian monetary policy has been transforming. It

has undergone three major changes over the past.

Prior to 1980s, the Indian economy was virtually

closed and was driven by subsidies and governmental

control. At that time ‘exchange rate’ was set as the

nominal anchor. The formal change to ‘monetary

targeting with feedback’ came in 1985 based on the

recommendations of the Chakravarty Committee. In

this approach, broad money became the intermediate

target and reserve money the main operating

instrument. During this period targets were rarely

met and the major drawbacks were the absence of

control of RBI’s credit to the government, which

accounted for the bulk of reserve money creation.

Structural changes and the liberalization in the 1990s

led to a shift in financing patterns in India. Interest

and exchange rates were increasingly market

determined, and the RBI could move away from direct

to indirect market based instruments leading to the

adoption of the ‘multiple indicator’ approach on 1st

April 1998. Factors considered under this approach

were money, credit, output, trade, capital flows, fiscal

position, rates of return in different markets, inflation

and exchange rate. Inflation was calculated using

Whole sale price index (WPI). The constituents of WPI

are categorized into three groups; Primary articles

20.12% (mostly food articles), Fuel &Power 14.91%

and manufactured products 64.97% - Metals & Alloys,

Food products, Machinery & tools etc.

This approach worked well from 1999 to 2009, as

reflected in an average GDP growth rate of 7.1%

associated with average inflation of about 5.5% in

terms of both the CPI & WPI.

Precedence was given to WPI over CPI due to multiple

reasons. First, at that point CPI was measured for four

different classes: CPI – Industrial workers, Agricultural

laborers, Urban non manual employee and Rural

laborers and then aggregated, while WPI is computed

on an all-India basis. Secondly, WPI was available with

a shorter lag than the CPIs. Third, WPI had a broader

coverage than the CPIs in terms of the number of

commodities, quotations, inclusion of non -

agricultural products etc.

But, in recent years high inflation and weakened

growth came to co-exist and use of multiple indicators

is highly criticized as it leaves ambiguity on what the

RBI accounts while taking policy decisions.

Ministry of Statistics and Programme Implementation

(MOSPI) in 2012 revised CPI and is now calculated in

terms of three parameters:

CPI for the entire urban population viz CPI

(Urban);

CPI for the entire rural population viz CPI

(Rural)

CPI Combined (CPI-C) for Urban + Rural will

also be compiled based on above two CPIs

The primary constituents of CPI are Food &

Beverages 45.86%, Housing 10.07%, Fuel &

Power 6.84%, Pan, tobacco &intoxicants

2.38%, Clothing & Footwear 6.53%,

Miscellaneous 28.32%.

In light of the drawbacks of multifactor approach and

recommendation from the Urjit Patel Committee

report, the use of inflation targeting was examined.

Officially on 1st April, 2014 the RBI adopted Inflation

targeting as its key strategy in monetary policy using

CPI-C as the metric.

Almost all central banks in advanced and emerging

economies use CPI as their primary price indicators.

The widespread use of CPI as the major price

indicators reflects its advantages – it is familiar to

large segments of the population and often used in

both public & private sector as a reference in the

provision of government benefits or in wage contracts

and negotiations.

The true inflation that consumers face is in the retail

market, price indices that relate to the consumer

expenditure are the close indicators of cost of living

which is communicated by the CPI. Importantly, CPI

includes cost of services, which accounts for more

than 60% of India’s GDP which WPI does not. Food

products also play an important role in CPI. The lag in

the data release of the CPI-Combined is only 12 days

as against one month for CPI-IW.

Over the years, RBI tried to adopt approaches that

best reflect price movements and have embraced

predictable policy framework that is rule based while

leaving room for some discretion in practice.

-APAS

IIP (Index of Industrial Production) – November

India's Index of Industrial Production (IIP) for the

month of November has contracted 3.2 percent versus

9.8 percent growth in October. It represents a four-

year low.

The core production and investment indicators too

have fallen sharply in November. The manufacturing

sector posted a contraction of 4.4 per cent in

November as against a growth of 10.6 per cent in

October. This decline has reflected in other segments

such as electricity (fell from 9 per cent to 0.7 per cent)

and mining (fell from 5.2 per cent to 2.3 per cent).

Within manufacturing, consumer non-durables is to be

blamed, which has fallen by 4.7 percent. But consumer

goods as a whole has seen 1.3 percent growth on the

back of durables doing well. Consumer durables has

clocked a 12.5 percent growth. Capital goods too has

done badly, contracting 25 percent.

Some of the important items showing high positive

growth during the current month over the same month

in previous year include Gems and Jewellery, Sugar

Machinery, PVC Pipes, Lubricating oil, wood furniture,

Transformers (small), Polypropylene (including co-

polymer) and Sugar.

Some of the other important items showing high

negative growth are: Cable, Rubber Insulated, Heat

Exchangers, Polythene Bags including HDPE & LDPE

Bags, Tractors (complete), Conductor, Aluminium, Rice

and Three-Wheelers (including passenger & goods

carrier.

4.2

6.4

3.6

9.8

-3.2

Jul-15 Aug-15 Sep-15 Oct-15 Nov-15

IIP (%YoY)

Quarterly evaluation of IIP

3.83

1.13

0.43

3.233.53

4.73

Q1 14-15 Q2 14-15 Q3 14-15 Q4 15-16 Q1 15-16 Q2 15-16

IIP

%

Quarter

IIP Trend Mining activity recovered during 2014-15 from a

three-year slump, buoyed by a sharp increase in

the production of coal. Weakness in consumer

spending, sluggish investment activity and poor

external demand operated as drags on

manufacturing activity during 2014-15.

During April- June 2015, however, the growth in

IIP decelerated mainly on account of a sluggish

performance in capital goods, electricity and

food products.

IIP has experienced a downfall from 3.83% to

0.43% in Q1 to Q3 (14-15) respectively. Further

IIP rose to the level of 4.73% in 2015-16.

Consumer Price Index - December

CPI inflation rose for a fifth straight month high to

5.61 percent in December from 5.41 percent in

November.

The corresponding provisional inflation rate for rural

area was 6.32% and urban area 4.73% in December

2015 as against 5.95% and 4.71% in November 2015.

The core CPI inflation rose to 4.5% in December 2015

from 4.2% in November 2015.

Among the CPI components, inflation of food and

beverages increased to 6.3% in December 2015 from

6.1% in November 2015 contributing to the rise in CPI

inflation. Within the food items, the inflation moved

up for vegetables to 4.6%, pulses & products 45.9%,

cereals & products 2.1%, spices 10.8%, meat & fish

6.6% and oils & fats 7.1%. On the other hand, inflation

of fruits eased to 0.6% in December 2015.

The inflation for housing increased to 5.1%, while that

for miscellaneous items moved up to 4% in December

2015. Within the miscellaneous items, the inflation

for transport & communication rose to 1.3%, while

eased for personal care to 3.6% and education to 5.6%

in December 2015.

The inflation for clothing and footwear declined to

5.7% in December 2015, while the CPI inflation of fuel

and light rose to 5.4% in December 2015.

0

1

2

3

4

5

6

Aug-15 Sep-15 Oct-15 Nov-15 Dec-15

CPI (%, YoY)

Quarterly evaluation of CPI

CPI moderated significantly since the second

quarter of 2014-15. It declined to an all-time low

of 5% in Q3 of 2014-15 after having remained

stubbornly sticky at around 9-10% for the last two

years.

During the third quarter of 2014-15, the CPI food

inflation declined considerably due to seasonal

softening of food and vegetable prices after the

late arrival of monsoon exerted some pressure on

vegetable prices during June-August, 2014. CPI

inflation in the fuel and light group registered a

consistent decline during 2014-15, touching 3.4%

in the third quarter following the sharp decline in

International Crude Oil prices.

CPI rose in December 2015, reaching the highest

since September 2014, in line with market

expectations.

India’s CPI continues to be relatively high and

“sticky”, despite the sharp fall in commodity

prices globally, especially crude oil.

8.117.38

4.97 5.22 5.09

3.95

5.34

Q1 14-15 Q2 14-15 Q3 14-15 Q4 14-15 Q1 15-16 Q2 15-16 Q3 15-16

CP

I %

Quarter

CPI Trend

WPI (Wholesale Price Index) – December

The country's wholesale price inflation fell for the

14th consecutive month in December.

Data released by the commerce and industry ministry

showed inflation, as measured by the wholesale price

index, declined an annual 0.73% in December

compared to a dip of 1.99% for the previous month

and a contraction of 0.50% during the corresponding

month of the previous year. The fuel and power fell

9.2% year-on-year in December reflecting the sharp

decline in global crude oil prices. But the increase in

food inflation stood out.

In December food inflation rose an annual 8.2%, rising

from November's 5.2% largely driven by a sharp spike

in price of pulses which rose 55.6% year-on-year in

last month. Prices of vegetables also firmed up rising

an annual 20.6% during the month, while onion prices

shot up an annual 26%. Potato prices fell nearly 35%

year-on-year during December.

The government also revised the October

WPI inflation upwards to -3.7 per cent from -3.81 per

cent due to revisions in prices of fish, onions and

crude. The declining deflation in wholesale prices is

consistent with the rise in retail inflation.

Quarterly evaluation of WPI

WPI has started showing a declining trend

during the year 2014-15 (April-December).

During the first quarter of 2014-15, WPI

inflation stood at 5.8% as mainly food and

fuel prices were high. In the second and

third quarters of 2014-15, WPI inflation

declined to 3.8% and 0.5% respectively.

Average WPI inflation declined to 3.4% in

2014-15. The WPI inflation even breached

the psychological level of 0% in November,

2014 and January, 2015. The decline was

majorly caused by lower food and fuel

prices.

However in 2015-16, WPI has been in

negative zone for all three quarters ending

December 2015.

Softening in oil prices is considered as the

cause for WPI to further go down in

December 2015 (i.e. -0.73%).

-6

-5

-4

-3

-2

-1

0

Jul-15 Aug-15 Sep-15 Oct-15 Nov-15

WPI (%YOY,2015-16)

5.62

3.77

0.53-1.59 -2.47

-4.51

-2.18

Q1 14-15 Q2 14-15 Q3 14-15 Q4 14-15 Q1 15-16 Q2 15-16 Q3 15-16

WP

I %

Quarter

WPI Trend

PMI update

Service PMI – December

Rising from November’s five-month low of 50.2 to

51.6 in December, the seasonally adjusted Nikkei

India Composite PMI Output Index was indicative of a

rebound in growth of private sector activity. Whereas

manufacturing production decreased for the first time

since October 2013, services activity increased at an

accelerated pace.

The seasonally adjusted Nikkei Services Business

Activity Index climbed to a ten-month high of 53.6 in

December (November: 50.1). This indicated of a solid

expansion in output across the sector. Sub-sector

data indicated that output rose in four of the six broad

areas of the service economy, the exceptions being

Hotels & Restaurants and Transport & Storage. The

best performing categories in December were ‘Other

Services’ and Financial Intermediation.

Leading services activity to increase was a solid rise in

incoming new work, one that was faster than that

seen in November. Anecdotal evidence highlighted

strengthening demand conditions. Conversely,

manufacturing order books decreased, with panellists

indicating that demand had been suppressed by the

Chennai floods. Across the private sector as a whole,

new business inflows expanded at a faster pace that

was, however, modest.

After hiring workers in the previous month, service

companies left payroll numbers unchanged in

December. Evidence suggested an increasing degree

of cost consciousness. In contrast, goods producers

took on additional staff, although the rate of job

creation was only marginal. At the composite level,

staffing levels were broadly unchanged.

Half yearly evaluation of Service PMI

A stronger rise in new business and an

improvement in year-ahead expectations at

service providers are positive developments, but

the overall health of the economy remains fragile

amid a weak manufacturing sector.

Services PMI in India averaged 51.44 Index Points

from 2012 until 2015, reaching an all-time high of

57.50 Index Points in January of 2013 and a

record low of 44.60 Index Points in September of

2013.

While manufacturing production dropped at

solid pace, India’s services activity growth

quickened in December. Overall, it continues to

portray a struggling economy, weighed down by

weak underlying demand. Firm’s reluctance to

hire was evident throughout 2015, with

meaningful job creation last recorded in 2013.

Source: www.tradingeconomics.com

Manufacturing PMI - December

Indian manufacturers saw business conditions

deteriorate at the end of 2015. December’s incessant

rainfall in Chennai impacted heavily on the sector,

with falling new work leading companies to scale back

output at the sharpest pace since February 2009.

Inflation rates of both input costs and output charges

were at seven month highs.

The seasonally adjusted Nikkei India Manufacturing

Purchasing Managers’ Index dipped from 50.3 in

November to 49.1 in December. This pointed to a

deterioration in operating conditions across the

sector, with the PMI posting below the no-change

level of 50.0 for the first time since October 2013.

Consumer goods was the only category to see

improving business conditions in December as

production and new orders rose. Conversely,

incoming new work and output fell in both the

intermediate and investment goods market groups.

Having risen for 25 straight months, total

manufacturing production in India fell during

December. Furthermore, the rate of contraction was

the sharpest in almost seven years. Also, panellists

linked the decline in output to falling new orders and

the Chennai floods.

Ending a 25-month sequence of growth, incoming

new work decreased in December. New business from

abroad increased in December. Despite being

modest, the rate of expansion was the quickest since

August. The weaker rupee led to improved pricing

power in external markets.

Half yearly evaluation of Manufacturing PMI

Manufacturing PMI contracted for the first

time since October 2013, as incessant rainfall

in Chennai impacted heavily on the sector.

Meanwhile, falling new work prompted

companies to scale back output at the

sharpest pace since February 2009. On the

price front, inflation rates of both input costs

and output charges were at seven month

highs.

Manufacturing PMI in India averaged 51.96

from 2012 until 2015, reaching an all-time

high of 55 in June of 2012 and a record low of

48.50 in August of 2013.

PMI has slipped below the crucial level of 50.0

for the first time since October 2013. The rate

of decline was the sharpest in almost seven

years.

Source: www.tradingeconomics.com

Core Sector Growth – December

The combined output of eight crucial infrastructure

sectors rose by a slight 0.9% in December after

contracting 1.3% in the month before. This was the

first time in seven months or only the second time in

FY16 that it had fallen after maintaining steady

growth at 3.2% in the two months before

Data released by the ministry of commerce & industry

showed the eight core industries — coal, crude oil,

natural gas, refinery products, fertilizers, steel,

cement and electricity — grew a cumulative 1.9% in

the months up to December in the current financial

year against 5.7% in the corresponding period of the

previous year.

The December figures of the core sector were pulled

down by the continued and accelerating decline in

crude oil, natural gas which went down 4.1 and 6.1

per cent, respectively. However, coal production and

electricity generation both recovered significantly to

manage a slight uptick in overall figures. It went up by

6.1% and 2.7% respectively. Refinery products,

fertilizers and cement increased by 2.1%, 13.1% and

3.2% respectively. Steel production declined by 4.4%

in December 2015.

Monthly evaluation of Core Sector

The growth rate of the core sector for 2014-

15 was a mere 3.5%, even lower than the

4.2% growth notched up in the previous

year.

There has been a continuous slide in core

sector growth from 6.7% in November 2014

to 2.4% in December, 1.8% in January, 1.4%

in February and to a negative 0.1% in

March. It continued to remain in a negative

zone in April.

However, it continued to expand for six

months, before it contracted in Nov 2015 to

a negative 1.3% mainly driven by a decline in

steel production. During April-December

2015 period this fiscal, the output of these

eight sectors slowed to a 1.9% growth from

5.7% growth in the same period last fiscal.

1.831.45

-0.09 -0.42

4.4

3

1.1

2.63.2 3.2

-1.3

0.9

Co

re s

ect

or

dat

a %

Month

Core sector Trend - Monthwise

Sixth Bi-Monthly Monetary Policy Statement for the year 2015-16

The Reserve Bank of India announced Sixth Bi-

monthly Monetary Policy Statement, 2015-16 on 2nd

February, 2016. On the basis of an assessment of the

current and evolving macroeconomic situation, RBI

has decided to:

keep the policy repo rate under the liquidity

adjustment facility (LAF) unchanged at

6.75%;

keep the cash reserve ratio (CRR) of

scheduled banks unchanged at 4.0% of net

demand and time liability (NDTL);

continue to provide liquidity under overnight

repos at 0.25% of bank-wise NDTL at the LAF

repo rate and liquidity under 14-day term

repos as well as longer term repos of up to

0.75% of NDTL of the banking system through

auctions; and

continue with daily variable rate repos and

reverse repos to smooth liquidity.

Consequently, the reverse repo rate under the LAF

will remain unchanged at 5.75%, and the marginal

standing facility (MSF) rate and the Bank Rate at

7.75%.

Assessment (Highlights) of RBI

Since the fifth bi-monthly statement of

December 2015, global growth has slowed.

Activities in major emerging market

economies (EMEs) has weakened. World

trade has remained subdued. Manufacturing

activity is sluggish, however, reflecting

retrenchment in oil and gas drilling activity

and declining exports. EME commodity

exporters confront recessionary conditions,

falling currencies and sluggish exports.

Capital outflows from China triggered sell-

offs across AEs and EMEs, exacerbating

currency declines and heightening volatility.

Crude oil prices fell below US $ 30 per barrel

– a 12-year low –on expectations of Iran

which added to the supply glut.

On the domestic front, economic activity lost

momentum in Q3 of 2015-16, pulled down by

slackening agricultural and industrial

growth. Rural incomes will continue to be

supported by allied activities such as dairy

and horticulture, which now contribute as

much to GDP as food grains. However, in the

first two months of Q3 of 2015-16, industrial

activity slowed in relation to the preceding

quarter. This reflects weak investment

demand with the deceleration of capital

goods production. Due to low capacity

utilization, there has been a decline in new

investment intentions.

The Reserve Bank’s industrial outlook survey

suggests a modest expansion of activity likely

in Q4.

Lead indicators of the service sector are

mixed. Construction activity is still tepid, as

evidenced by weak growth in cement

production. The pick-up in road construction

bodes well for future activity. Railway freight

growth is still weak, though it may reflect

lower transport needs for inputs like coal,

and competition from roadways.

Liquidity conditions have tightened in the

second half of December with advance tax

outflows. It spilled over to January 2016 with

the back of seasonal pickup in demand for

currency, restrained spending by the

government and a pick-up in bank credit

growth, in relation to deposit

mobilization. To mitigate these, RBI injected

liquidity through variable rate term repos of

varying tenors ranging from overnight to 56

days, besides provision through the regular

liquidity windows.

The average daily liquidity injection

(including variable rate overnight and term

repos) increased from ₹ 1,200 billion in

December to about ₹ 1,345 billion in January.

In addition, the Reserve Bank also injected ₹

200 billion through open market purchase

operations on December 7 and January 20. In

response, money market rates remained

close to the policy rate with a marginal

downside bias. Bank credit in the form of

personal loans and non-bank flows from both

domestic and foreign sources grew strongly.

India’s exports remained in contraction

mode for the thirteenth successive month in

December. In volume terms too, the rate of

decline appears to be moderating.

The trade deficit widened during December

in relation to preceding months, though the

overall current account deficit is likely to

remain well contained and easily financed.

Net foreign direct investment (FDI) and non-

resident deposits have remained robust in

relation to last year. The persisting decline in

oil prices may, however, impact the flow of

remittances from the Gulf region where fiscal

positions are deteriorating rapidly. Portfolio

investment also recorded some outflows

since November. Nevertheless, as on January

22, 2016, foreign exchange reserves stood at

US$ 347.6 billion – an accretion of US$ 5.9

billion during the current financial year so far.

Structural reforms in the forthcoming Union

Budget that boost growth while controlling

spending will create more space for

monetary policy to support growth, while

also ensuring that inflation remains on the

projected path of 5% by the end of 2016-17.

Gold Monetization Scheme, 2015 (Amended)

Under section 35A of the Banking Regulation Act,

1949, the Reserve Bank of India directed that the

Reserve Bank of India (Gold Monetisation Scheme,

2015) to be modified.

The Amended circular on Gold Monetisation Scheme,

2015, details the modifications including the

following - In order to make Gold Monetisation

Scheme more customer-friendly the depositors will

be able to withdraw medium-term (5-7 year) and

long-term government deposits (12-15 years) pre-

maturely after the minimum lock-in period, though

with a penalty. The rate of interest on the deposits

will be decided by government and notified by the

RBI from time to time. The current rate of interest as

notified by the government on medium term deposit

s 2.25% per annum and on long term deposit is 2.50%

per annum. However, there will be penalty on

premature withdrawal.

Further in the case of large tenders of gold, the RBI

said the metal can be deposited directly with refiners

wherever they have the assaying capacity. The

government will pay the participating banks a total

commission of 2.5% (1.5% handling charges and 1%

commission) in the first year.

The RBI further said the principal and interest on

Short Term Bank Deposit (STBD) would be

denominated in gold. In the case of Medium and Long

Term Government Deposit (MLTGD), the principal

will be denominated in gold.

Resident Indians (Individuals, HUFs, Proprietorship &

Partnership firms, Trusts including Mutual

Funds/Exchange Traded Funds registered under SEBI

(Mutual Fund) Regulations and Companies) can make

deposits under the Gold Monetisation Scheme.

Joint deposits of two or more eligible depositors are

also allowed under the scheme and the deposit in

such case would be credited to the joint deposit

account opened in the name of such depositors. All

deposits under the scheme would be made at the

Collection and Purity Testing Centre (CPTC).

The government will notify the list of BIS certified

CPTC / refiners under the Scheme and would be

communicated to the banks through Indian Banks’

Association (IBA).

Setting up of IFSC Banking units – Permissible Activities

The Reserve Bank of India had issued a Circular dated

1st April, 2015, regarding setting up of IFSC Banking

Units (IBUs).

Further based on the feedback and requests received

from various stakeholders, certain provisions of the

directions have been reviewed and are modified -

Setting up of IFSC Banking Units (IBUs) – Permissible

activities.

RBI has allowed local banking units to open foreign

currency current accounts for companies and non-

resident Indians (NRIs) in the Gujarat based

international financial services centre (IFSC),

changing an earlier policy that did not allow for

any savings or current accounts in this centre.

However, these banking units will not be able to raise

deposits from retail customers like high net worth

individuals (HNIs).

RBI has also done away with the limit for raising

short-term liabilities for banks. However, these units

will have to maintain a liquidity coverage ratio (LCR)

on par with onshore banks. Liquidity coverage ratio is

the percentage of liquid assets a bank should hold in

order to meet its short-term obligations.

Also, with a view to providing greater flexibility to the

IBUs in their business transactions, it has been

decided that exposure ceiling for IBUs shall be 5% of

the parent bank’s Tier-I capital in case of a single

borrower and 10% of parent bank’s Tier-1 capital in

the case of a borrower group.

Roadmap drawn-up for implementation of Indian Accounting Standards (Ind AS) converged with

International Financial Reporting Standards (IFRS)

The government issued the roadmap for the

implementation of the Indian Accounting

Standards (Ind-AS) for commercial banks, non-

banking financial companies (NBFC) and insurance

companies. The Ind AS would be applicable to both

consolidated and individual financial statements.

Regional rural banks and urban cooperative banks

wouldn't need to implement these standards at

present. Scheduled commercial banks, all-India term-

lending refinancing institutions (such as Exim Bank,

NABARD,NHB and SIDBI) and insurance companies

would be required to prepare Ind-AS based financial

statements for accounting periods beginning from

April 1, 2018 onwards. Similarly, the holding,

subsidiary, joint venture or associate companies of

the commercial banks would also be required to

prepare Ind-AS based financial statements from the

financial year 2018-19.

NBFCs, having net worth of Rs. 500 crores or more,

would also need to need to prepare such financial

statements from 2018-19. Just like commercial

banks, the holding, subsidiary, joint venture or

associate companies of NBFCs would also be applying

these accounting norms from 2018-19. Listed NBFCs

and the ones which are in the process of listing in

India or outside India, would need to prepare Ind-AS

compliant financial statements from 2019-20. Here

too, the Ind AS would be applicable to both

consolidated and individual financial statements.

Unlisted NBFCs, which have a net worth between Rs

250 crores and Rs. 500 crores, would need to apply

Ind-AS from 2019-20. NBFCs, commercial banks and

insurance companies would not have the choice of

voluntarily preparing the Ind-AS compliant financial

statements.

This is the fifteenth issue of the Micrometer. It

provides an overview of the Indian Microfinance

Industry, as of 30th Sep, 2015 and a comparative

analysis with the corresponding quarter of previous

fiscal year (Q2 FY 14-15) and previous quarter (Q1 FY

15-16).

Key highlights include:

As of 30th Sep 2015, MFIs provided

microcredit to over 2.63 Cr clients, an

increase of 28% over Q2 FY 14-15

The aggregate gross loan portfolio (GLP) of

MFIs stood at Rs. 36,660 Cr (excluding non-

performing portfolio i.e. PAR > 180 days in

Andhra Pradesh). This represents a Y-O-Y

growth of 76% over Q2 FY 14-15 and an

increase of 16% over the last quarter

Disbursements (loan amount) in Q2 FY 15-16

increased by 66% compared to Q2 FY 14-15

Total number of loans disbursed by MFIs

grew by 44% in Q2 FY 15-16 compared with

Q2 FY 14-15

Portfolio at Risk (PAR) figures remained

under 1% for Q2 FY 15-16

Average loan amount disbursed per account

is now Rs. 16,738 The figure for Q2 FY 14-15

was 14,590

MFIs now cover 30 states/union territories

In terms of regional distribution (for GLP),

south is 36%, east at 15%, north at 24% and

west at 25%

Productivity ratios for MFIs continued to

move upwards. Average GLP per branch is

now at Rs. 4.25 Cr, up by 51% over Q2 FY 14-

15 and average GLP per loan officer is now

Rs. 81 Lakhs, 36% more from the last year i.e.

Q2 FY 14-15

Insurance (credit life) to over 2.33 Cr clients

with sum insured of Rs. 38,970 Cr was

extended through MFI network

Pension accounts were extended to over 16

Lakhs clients through MFI network

Capping rewards for agents, brokers and other intermediaries

Insurance regulator IRDAI issued an Exposure draft

capping the reward for individual insurance agents at

20 percent of first year commission and 40 percent

for intermediaries in an effort to provide level-playing

field across segments. The reward for individual

agents is over and above their commission or

remuneration.

As per the media reports, around 20 lakh insurance

agents and 10,000 insurance intermediaries working

for 24 life insurance companies are likely to be

affected by this regulation. Insurance intermediaries

include corporate agents, insurance brokers, web

aggregators, insurance marketing firms or any other

entity as may be recognized by IRDAI.

Corporate agents, brokers and other insurance

intermediaries are likely to get much higher rewards

than individual agents. Justifying higher rewards for

insurance intermediaries compared to insurance

agents, the draft said the former has higher

establishment costs and compliance requirements.

These regulations will be effective from 1st April,

2016. Every insurer shall have a Board approved

policy for payment of commission or remuneration to

insurance agents and insurance intermediary.

Hybrid Annuity model for implementing highway projects

The cabinet committee on Economic Affairs, chaired

by Prime Minister Narendra Modi, has given its

approval for the Hybrid Annuity Model (HAM) as one

of the modes of delivery for implementing the

Highway Projects.

The main object of the approval is to revive highway

projects in the country by making one more mode of

delivery of highway projects.

The HAM is a mix of engineering, procurement and

construction (EPC) and build-operate-transfer (BOT)

formats, with the government and the private

companies sharing the total project cost in the ratio

of 40:60 respectively.

By adopting the Model as the mode of delivery, all

major stakeholders in the PPP arrangement - the

Authority, lender and the developer, concessionaire

would have an increased comfort level resulting in

revival of the sector through renewed interest of

private developers/investors in highway projects and

this will bring relief thereby to citizens / travelers in

the area of a respective project.

It will mainly facilitate uplifting the socio-economic

condition of the entire nation due to increased

connectivity.

The need for improved road connectivity was a

continuing imperative, the Ministry of Road

Transport & Highways (MoRTH) including its

implementing agencies like the National Highways

Authority of India (NHAI) had to increasingly resort to

the public funded Engineering, Procurement and

Construction. Restriction of the financial resources

available with the government is an inherent

limitation in implementing projects on EPC model.

An important feature of the Hybrid Annuity Model for

highways development is the rational approach

adopted for allocation of risks between the PPP

partners - the Government and the private partner

i.e. the developer/investor. While the private partner

continues to bear the construction and maintenance

risks as in BOT (Toll) projects, it is required only to

partly bear financing risk. Further, the developer is

insulated from revenue/traffic risk and the inflation

risk, which are not within its control.

International Solar Alliance The Prime Minister of India Shri Narendra Modi, and

the President of France Mr. Francois Hollande, jointly

laid the foundation stone of the International Solar

Alliance (ISA) Headquarters and inaugurated the

interim Secretariat of the ISA in National Institute of

Solar Energy (NISE), Gwalpahari,

Gurgaon. International Solar Alliance is the India’s

“gift” to the world.

ISA will be India’s first international and inter-

governmental organization. It will be dedicated to

promotion of solar energy for making solar energy a

valuable source of affordable and reliable green and

clean energy in 121 member countries. It’s a part of

Prime minister’s vision to bring clean and affordable

energy within the reach of all and create a sustainable

world. It will accelerate development and deploy

solar energy.

Government of India has offered training support for

ISA member countries at NISE. Locating ISA in NISE

campus is a great value addition and both the

institutions will immensely benefit from each other’s

presence and establish vibrant linkages.

Indian Renewable Energy Development Agency

(IREDA) and Solar Energy Corporation of India (SECI)

announced contribution of US $ 1 million each to the

ISA corpus fund.

ISA will also contribute towards the common goal of

increasing utilization and promotion of solar energy

and solar applications in its member countries. The

Paris declaration on International Solar Alliance

states that the countries share the collective

ambition to undertake innovative and concerted

efforts for reducing the cost of finance and cost of

technology.

Finance Ministry announced buyback of IIBs linked to WPI

The finance ministry announced the buyback of

Inflation Indexed Bonds (IIBs) linked to the wholesale

price index (WPI). The government would repurchase

1.44% Inflation Indexed Government Stock-2023

through reverse auction for an aggregate amount of

Rs 6,500 crore (face value).

Sources: National Stock Exchange

Sources: Bombay Stock Exchange

The rupee, which performed relatively well against

most of its Asian peers in last two years, suddenly lost

its way and fallen 3% in January alone. The domestic

currency has fallen against the greenback in the past

three consecutive sessions to rule below the 68

mark. The rupee's performance in January was worst

for any major emerging market currency in Asia this

year. On 28th Jan, the domestic currency extended for

the third session and weakened by 15 paise to hit a

fresh 29-month low of 68.20 against the dollar.

Crude oil fell in Asian trade on 14th January 2016,

with Brent marking another 12-year low amid gloom

over a world awash with supply and concerns about

global economic growth hitting equity markets.

Sources: APAS Business Research Team

Sources: APAS Business Research Team

Sources: APAS Business Research Team

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21

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23

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25

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27

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29

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CNX Nifty (Jan-2015)

25623

24852

246822418824062

24486

24871

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BSE Sensex (Jan-2015)

7.72

7.747.74

7.76

7.76

7.817.81 7.79

7.80

7.78

7.66

7.68

7.70

7.72

7.74

7.76

7.78

7.80

7.82

GIND10Y (Jan-2015)

66.4866.76

67.7867.55

68.14

65.00

65.50

66.00

66.50

67.00

67.50

68.00

68.50

$/₹ (Jan-2015)

16.84

18.96 18.61 18.82 17.90

0.00

5.00

10.00

15.00

20.00

25.00

Indian VIX (Jan-2015)

* The Economist poll or Economist Intelligence Unit estimate/forecast; ^ 5 year yield

Quarter represents a three month period of a financial year

Countries GDP CPI Current Account

Balance Budget Balance

Interest Rates

Latest 2015* 2016* Latest 2015* % of GDP, 2015* % of GDP,

2015* (10YGov), Latest

Brazil -4.5Q3 -3.4 -2.6 10.7 Dec 9.6 -3.7 -6.0 16.6

Russia -4.1 Q3 -3.8 -0.3 12.9 Dec 15.3 5.2 -2.8 10.8

India 7.4 Q3 7.2 7.5 5.6 Dec 5.0 -1.1 -3.8 7.76

China 6.8 Q4 6.9 6.4 1.6 Dec 1.5 3.0 -2.7 2.68^

S Africa 1.0 Q3 1.4 1.5 5.2 Dec 4.7 -4.1 -3.8 9.71

USA 2.1 Q3 2.5 2.4 0.7 Dec 0.2 -2.5 -2.6 2.04

Canada 1.2 Q3 1.1 1.9 1.4 Nov 1.2 -3.3 -1.8 1.16

Mexico 2.6 Q3 2.5 2.8 2.1 Dec 2.7 -2.6 -3.4 6.26

Euro Area 1.6 Q3 1.5 1.7 0.2 Dec 0.1 3.0 -2.1 0.49

Germany 1.7 Q3 1.5 1.7 0.3 Dec 0.2 8.1 0.7 0.49

Britain 2.1 Q3 2.4 2.2 0.2 Dec 0.1 -4.4 -4.4 1.80

Australia 2.5 Q3 2.3 2.5 1.5 Q3 1.6 -4.3 -2.4 2.66

Indonesia 4.7 Q3 4.7 5.0 3.4 Dec 6.2 -2.0 -2.0 8.59

Malaysia 4.7 Q3 5.4 6.1 2.7 Dec 2.5 2.5 -4.0 4.05

Singapore 2.0 Q4 2.9 3.0 -0.8 Nov 0.2 21.2 -0.7 2.38

S Korea 2.7 Q3 2.6 2.6 1.3 Dec 0.7 8.0 0.3 2.01

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