Follow us on

FORESIGHT

Ashvin Parekh - Managing Partner, APAS

Season’s greetings, We have Mr. Paresh Sukthankar taking a view on the performance of the

banking sector in our ‘Guest Column’ this month. He attributes the stress in

the quality of the assets largely to the economic conditions and sets out key

measures in the changed economic outlook for the banking sector. We are

thankful to Mr. Sukthankar for providing his valuable insight to our readers.

The first 100 days of the new Government has brought some cheer to the

economy. The indicators suggest a growth in GDP of appreciable amount.

Manufacturing and Mining have contributed largely to the growth. Inflation

eased during the month from WPI point of view. CPI however was up from

7.46% to 7.9%.

The banking regulator has proposed a restricted limit of 25% on group

exposures. This is step ahead in restricting the default risk and diversify it.

In a separate measure it now requires the Asset Reconstruction Companies

(ARCs) to invest 15% in Security Receipts (SRs). This is to check the rush

made by the banking companies to sell their assets to ARCs. From April

2015 the banks will have to follow stricter norms for financing

infrastructure assets. The banks will have to provide 15% for the

restructured loans compared to 3.5% as of today.

The capital market regulator has announced guidelines on REITs. The

reform is aimed at creating an asset class for retail investors and also

reduced risks by imposing adequate restrictions and controls. This is viewed

as a far reaching reform by the industry.

We welcome your inputs and thoughts and encourage you to share them

with us.

Ashvin Parekh

Volume No. 8 August 2014

May, 2014 December 2, 2013

Table of Contents

Guest’s Column

The Banking Industry – Better Times

Ahead? by Mr. Paresh Sukthankar –

Deputy MD – HDFC Bank Ltd.

Economy

GDP update – 1QFY15

Core sector growth update – Aug

IIP update – June

Inflation update – July

PMI update – July

Banking Sector

RBI proposed to restrict banks’ group

exposure limit at 25%

RBI tightened norms for lending

against shares

ARCs to invest 15% in SRs

RBI’s Monetary Policy Review

Capital Markets

Norms for investment in INVITs, REITs

Easier registration system for brokers

Parliament passed The Securities Laws

(Amendment) Bill, 2014

Infrastructure Updates

Norms for refinancing of infrastructure loans tightened

Cabinet approved raising FDI cap in defense to 49%, opened up railways

Capital Market - Snapshot Economic Data Snapshot

Contact Us 022-6789 1000

info@ap-as.com

www.ap-as.com

The Banking Industry – Better Times Ahead?

Mr. Presh Sukthankar – Deputy MD – HDFC Bank Ltd.

The banking sector in India has been receiving

more than its usual share of attention in the

recent past. Over the last few years, with

growth rates in the real side of the economy

dropping from 9% to below 5%, the impact of

this on the banking sector was inevitable. A

tight monetary policy in the wake of continued

inflationary pressures, and higher volatility in

exchange rates and international capital flows

due to a combination of global and domestic

factors, only exacerbated the challenges for the

banking system over the last year.

So what is the outlook for the banking industry

in the next year or two? For starters, it does

appear that the macro-economic pressures,

both domestic and international, seem a little

less pronounced than a year back. There are,

of course, still some known unknowns at this

stage like the final impact of the poor monsoon

on this year’s GDP growth and the potential

vulnerability of exchange rate and foreign

capital inflows when US interest rates start

moving up in 2015. Nonetheless, with the

economy expected to grow at 5.3 – 5.5% this

fiscal year and probably closer to 6.5 % by

March 2016, banking industry loan growth

which has been languishing in the 12 – 13%

range could well pick up to around 14 - 15% for

the year ending March 2015 and to around 16 -

17% for the following year. To the extent the

pickup in economic growth rate is predicated on

recovery in the investment cycle, demand for

credit and banks’ incremental appetite for

lending will be closely linked to new capex

commitments on the ground. While some

brown field expansions may get kicked off in a

couple of quarters, larger greenfield projects

may take a little longer than that, and

therefore, loan growth may take that much

longer to pick up. Besides, debt raising for

new projects will have to be preceded by equity

raising, given that corporate balance sheets are

fairly stretched for many players in the

infrastructure and some other capital intensive

sectors.

The other area that has been the subject of

much discussion in the banking industry is asset

quality. Gross nonperforming assets (NPAs)

and restructured loans in the Indian banking

system have almost doubled in the last four

years and the total stressed assets (NPAs +

restructured) are around 11% of bank loans.

While roughly half of this deterioration is

viewed as a cyclical phenomenon linked to the

sharp decline in GDP growth, the rest of the

stress is attributed to project or customer

specific issues. In either case, a reasonable

expectation would be that the worst is behind

us. The cyclical uptick in the economy leading

to better cash flows for borrowers and better

asset quality for banks would, however, be a

gradual, protracted process. Quicker

reduction in stress could come from raising of

equity or selling of assets by highly leveraged

corporates and from stalled projects getting

commissioned. Recent regulatory changes

facilitating better information sharing amongst

banks and nudging banks to take a tougher

stance against recalcitrant promoters should

also lay the ground for improvements in asset

quality going forward.

Guest Column

Ultimately, the banking and financial services

industry cannot be at a disconnect with the real

economy. The good news is that through all

the global and domestic turmoil of the last few

years, even though the Indian banking industry

took a few blows on the chin, the sector has not

once been exposed to any meaningful systemic

risk. That is more than what can be said for

the banking industries in several other

developing and developed countries. While,

therefore, banks in India will need to continue

to invest and focus on customer centricity,

technology, risk management, and

capitalization levels, they remain fairly well

positioned to be able to play their role and

contribute to higher economic growth and

greater financial inclusion in the coming years.

Gross Domestic Product (GDP) – Q1FY15

Indian economy expanded 5.7% in the first

quarter of FY15, the highest in nine quarters,

against a growth of 4.6% in Q4 of FY14. The

economy grew 4.7% in the year-ago period. The

economy grew at its highest pace since the

fourth quarter of FY12.

The revival in the first quarter was expected to

be led by industry. Manufacturing, coming off a

low base, was expected to push industries and

it did not disappoint. The manufacturing sector

grew at 3.5%, against a 1.2% contraction

year-on-year.

The mining sector too grew at 2.1% versus

-3.9% YoY. But all eyes were on agricultural

growth, which was expected to disappoint

considering the fact that the first quarter is

generally a lean period for agriculture. But that

too surprised on the positive – the sector grew

at 3.8% versus 4% YoY.

In the quarter under review, trade, hotels

sector grew at 2.8% versus 1.6% (YoY).

Construction sector growth came in at 4.8%,

against 1.1% in the year-ago period. Electricity

sector expanded 10.2% versus 3.8% (YoY). The

construction sector in the first quarter grew at

4.8% versus 0.7% (QoQ).

Data released by the Central Statistics Office

(CSO) showed private final consumption spend

stood at ₹ 9.3 lakh cr. versus ₹ 8.8 lakh cr.

year-on-year, while the government of India

final consumption spend came in at ₹ 1.8 lakh

cr. against ₹ 1.7 lakh cr. First quarter financial

services growth stood at 10.4% versus 12.9%

(YoY).

Core sector growth update – August

Eight infrastructure industries posted a 7-month

high growth rate of 3.7% in August on the back

of good performance by power, cement, steel

and fertilizer sectors. The growth of the core

sectors was, however, lower as compared to

6.1% recorded in the same month last year.

The core industries, which also include coal,

natural gas, refinery products and crude oil,

having a weight of about 38% in the Index of

Industrial Production (IIP), grew at 3.7% January

this year. The growth in output of the core

sectors remained below this mark till July.

Economy

During the April-August period of 2013-14 fiscal,

the growth of core industries has slowed to

2.3% from 6.3% in the same period during

2012-13.

Power generation grew by 6.7% in August as

against a meagre 1.9% in the same month last

year. It registered a cumulative growth of 4.1%

during April to August this fiscal, compared to

4.9% in the same period in 2012-13.

Cement production grew by 5.5% in August

compared to 0.4% in the same month last year.

However, growth in the sector slowed down to

3.2% in April-August period this fiscal,

compared to 8.3% in 2012-13.

The output of steel also grew by 4.3% in August

as compared to 2.9% in the same month last

year. The production was up by 4.1% in

April-August period, compared to 2.8% in same

period in previous fiscal.

The fertilizer production grew by 1.7% in August

as against a contraction of 2.1% in the same

month last year. During the April-August period,

the output grew by 1.8% compared to a

contraction of 7.9% in the same period last

fiscal.

IIP update – June

Sources: APAS BRT

Growth rate of industrial production slowed to

3.4% in June, as against 5% in May, mainly

owing to lower output of consumer goods. IIP

for May was revised to 5% from the provisional

estimates of 4.7% released last month.

The factory output number has remained in the

positive territory for the third month in a row

mainly due to a better show by manufacturing,

mining and power sectors and higher output of

capital goods.

The output, as measured by the Index of

Industrial Production, had contracted by 1.8% in

June, 2013. During the April-June period of the

current fiscal, IIP has recorded a growth of

3.9%, as against contraction of 1% in the first

quarter of 2013-14.

According to the IIP data, output of consumer

goods contracted by 10% in June compared to

the contraction of 1.5% a year ago. For the

April-June quarter, the segment shows a

contraction of 3.6%, compared to a decline of

2.1% in the same period of 2013-14.

The consumer durables segment declined by

23.4% in June, as against a dip of 10.1% a year

ago. For April- June, it declined by 9.6% as

against a dip of 12.7% in the first quarter of last

fiscal.

Similarly, the consumer non-durable goods

output grew at a meagre rate of 0.1% in June

compared to 6.2% in same month last year.

During April-June, the segment grew at 0.7%

compared to 7.1% in same period last fiscal.

Manufacturing, which constitutes over 75% of

the index, grew 1.8% in June, compared to

decline in output by 1.7% a year ago. For

April-June, the sector grew at 3.1% growth,

compared to the contraction of 1.1% in the

year-ago period. Overall, 15 of the 22 industry

groups in manufacturing showed positive

growth in May.

Inflation update – July

Sources: APAS BRT Consumer Price Index (CPI): India’s retail

inflation inched up to 7.96% in July, mainly due

to higher prices of food items such as

vegetables, fruits and milk. Retail inflation

measured on consumer price index (CPI) in June

was 7.46% (revised upwards from 7.31%). It was

at 9.64% in the same month a year ago.

Food inflation in July this year rose to 9.36% as

against 7.97% in June, according to the

government data released today. Vegetables

were costlier in July with a double-digit price

rise of 16.88%, a steep rise from 8.73% in June.

Fruit prices went up to 22.48% in July as against

20.64% in June. The rate of price rise in pulses

was 5.85%. Inflation in milk and milk products

stood at 11.26% during the month under

review.

Amongst others, food and beverages saw a

prices rise of 9.16% and non-alcoholic

beverages prices at 6.35%. Inflation in cereals,

however, eased marginally in July to 7.45% as

against 7.6% in the previous month. Other

protein rich items such as eggs, fish and meat

too witnessed lower inflation in July over the

previous month.

Inflation in rural and urban areas in July was

8.45% and 7.42%, respectively. In June, it was

7.87% and 6.82%

Wholesale Price Index (WPI): Wholesale

inflation eased to a five-month low to 5.19% in

July from 5.43% in June. The reason for

divergence between CPI and WPI in July is

seasonal exclusion of tomatoes in wholesale

price index from April to July.

Sources: APAS BRT

July PMI update – Manufacturing

India's manufacturing activity rebounded to a

17-month high in July in response to a surge in

production backed by new orders. The HSBC

Manufacturing Purchasing Managers' Index

(PMI), a survey-based measure of

manufacturing activity, rose to 53 in July from

51.5 in June.

"A flood of new orders from both domestic and

external sources has led to a surge in activity,"

said HSBC. The sub-index for new orders, one of

the 11 components that makes up the PMI, rose

to its highest in since February last year to 55.9,

the biggest monthly rise in eight months.

The strong PMI adds to rising evidence that the

economy was turning around from two

consecutive years of sub-5% growth.

"A steep jump in output and domestic orders

from a post-election boost to sentiment

explains the rise," HSBC said in a statement

attributing most of the rise to domestic

demand.

Service PMI

Growth in India’s services sector eased in July as

new orders slowed. The HSBC Services

Purchasing Managers’ Index (PMI), compiled by

Markit, fell to 52.2 in July from June’s 17-month

high of 54.4.

“Growth in the services sector softened in July

after a big jump in the previous month.

Nevertheless, the sector recorded its third

consecutive month of expansion,” HSBC said.

While order books were not in as bad a shape

among Indian firms, some businesses did defer

hiring plans. The employment PMI dipped

below the break-even mark to 49.8 from July’s

50.1. The services PMI data also showed input

costs rose at a slower rate in July and that firms

were able to pass on a slightly bigger portion to

customers by raising prices.

“Final prices were marked up at a faster pace to

reflect rising costs, underscoring the need for

the Reserve Bank of India to remain cautious

about inflation risks,” HSBC said.

RBI proposed to restrict banks’ group exposure limit at 25%

The Reserve Bank of India proposes to cut

banks' group exposure limit by as much as 15

percentage points to reduce the systemic risk

posed by lending too much to any single

business house.

This means that credit to any particular group

will have to be restricted to 25% of a bank's

capital, down from 40% now. It's not clear

whether such a move will have any impact on

borrowings by conglomerates, but the move

should act as a protection against banks facing

financial trouble in the event of borrowers

being unable to repay their loans or collapsing.

"Our current exposure limits to a group of

borrowers is much higher at 40% of capital

funds (plus 10% for infrastructure finance)," RBI

said in its annual report-2013-14 on August

22nd. "It is proposed to review the exposure

norms in 2014-15, to gradually align them with

the revised global standards." It should be

noted that RBI's 40% limit can be raised to as

much 55%.

RBI tightened norms for lending against shares

The Reserve Bank of India (RBI) has placed

restrictions on loans given against shares by

non-banking finance companies (NBFCs), citing

volatility in the capital market because of NBFCs

selling shares held by them. The central bank

has asked NBFCs to maintain a loan-to-value

ratio, or the amount loaned out against the

value of the collateral, of 50% with immediate

effect. Also, NBFCs with assets worth Rs.100 cr.

and above will be allowed to accept only group

1 shares as collateral while giving loans of Rs.5

lakh and above. Group 1 shares are those that

are traded on at least 80% of the days for the

previous 18 months on the stock exchanges,

and their average cost incurred due to a price

decline is less than 1%.

These new restrictions were required to avoid

volatility in the capital markets and because

“default by borrowers can and has in the past

lead to offloading of shares in the market by the

NBFCs, thereby creating avoidable volatility in

the market,” the RBI said in a notification.

Banking Sector

Asset Reconstruction Companies (ARCs) to invest 15% in Securities Receipts (SRs)

The Reserve Bank of India (RBI) has notified to

the asset reconstruction companies (ARCs) to

invest at least 15% in securities receipts (SRs)

issued by them on the purchase of distressed

assets from banks.

The new norms are aimed at checking a sudden

spurt in the sale of bad loans to ARCs at

unrealistic prices and making securitization

companies (SCs) and ARCs more accountable.

Earlier, it was mandatory for ARCs to invest and

hold at least 5% of the securities receipts issued

by them against the assets acquired on an

ongoing basis.

Typically, the fee earned is in the range of

1.5-2%, which is sufficient to compensate the

initial investment of 5% in securities receipts

and generates healthy returns as well. Only

after management fees are paid can recoveries

be used for redemption of securities receipts.

Therefore, management fees paid on the

inflated value of securities receipts can turn out

to be a very high-cost solution for the banks.

However, under the new norms, the RBI said,

"The management fees should be calculated

and charged as percentage of the net asset

value, or NAV, at the lower end of the range of

the NAV specified by the credit rating agency

(rather than on the outstanding value of SRs as

at present), provided that the same is not more

than the acquisition value of the underlying

asset.''

RBI has also asked securitization companies and

ARCs to put the names of wilful defaulters on

their website. Securitization companies and

ARCs will also get a seat in the joint lenders'

forum that looks at accounts where interest and

outstanding are overdue for more than 60 days.

In the first quarter of this year, banks offloaded

₹ 30,000 cr. of outstanding loans classified as

stressed loans.

Most public sector banks are selling bad loans

to ARCs ahead of the tighter provisioning norms

kicking in from next April that the central bank

had announced in May last year when it had

more than doubled the provisioning for

restructured loans to 5% from 2%. ARCIL the

largest ARC, has also been one of the most

active in the auctions along with Edelweiss and

JM ARC.

Central Bank’s Third Bi-Monthly Monetary Policy Review, 2014-15

As widely expected the Indian central bank,

Reserve Banks of India (RBI), in its third

bi-monthly policy announcement held on

August 5, 2014 kept the repo rate unchanged at

8%. The apex bank also kept the Cash Reserve

Ratio (CRR) unchanged at 4%. Consequently,

the reverse repo rate remained unchanged at

7% and marginal standing facility (MSF) rate as

well as bank rate at 9%.

However RBI further cut Statutory Liquidity

Ratio (SLR) by 50 basis points to 22%. “With the

Union Budget for 2014-15 renewing

commitment to the medium-term fiscal

consolidation roadmap and budgeting 4.1% of

GDP as the fiscal deficit for the year, space has

opened up further for banks to expand credit to

the productive sectors in response to its

financing needs as growth picks up. Accordingly,

the SLR is reduced by a further 0.5% of NDTL”

RBI said.

RBI mentioned that Emerging Markets (EMs)

remained vulnerable to changes in investor risk

appetite driven by any reassessment of the

future path of US monetary policy or possible

escalation of geopolitical tensions. The

sentiments on domestic economic activity are

reviving and key industrial and export data

suggest that the economy is getting back on

track. It is maintaining its growth outlook for

the current fiscal at 5-6%.

RBI acknowledged that the retail inflation

measured by CPI has eased for the second

consecutive month in June, with a broad-based

moderation accompanied by deceleration in

momentum.

The bank sees upside risks in the form of the

pass-through of administered price increases,

continuing uncertainty over monsoon

conditions and their impact on food production,

possibly higher oil prices stemming from

geo-political concerns and exchange rate

movement, and strengthening growth in the

face of continuing supply constraints.

RBI said that it will continue to monitor inflation

developments closely, and remains committed

to the disinflationary path of taking CPI inflation

to 8% by January 2015 and 6% by January 2016.

"RBI won't hold rates any longer than

necessary. We will have room to cut rates if

disinflation continues," said RBI.

SEBI issued guidelines for investment in INVITs, REITs

The Securities & Exchange Board of India (SEBI)

has issued final guidelines for infrastructure

investment trusts (INVITs) and real estate

investment trusts (REITs), instruments expected

to help these sectors raise resources to meet a

funds crunch.

The Union Finance Minister had, in his budget

speech had announced pass-through status for

the purpose of taxation to these two

instruments to make them attractive to

investors. Trusts are like mutual funds that raise

resources from many investors to be directly

invested in realty or infrastructure projects.

The pass-through status means that the return

from investments through these instruments

will be taxed only in the hands of investors and

the trusts will not have to pay tax on income.

Once the relevant changes in other regulations

are made, overseas investors will be able to

bring funds into India through these vehicles,

reducing the need for bank funds for these

sectors. INVITs will allow infrastructure

developers to monetize specific assets, helping

them use proceeds for completing projects of

theirs stalled for want of funds.

Key salient features of the REIT Regulations, as

approved by the Board, include the following:

REIT shall invest in commercial real estate

assets, either directly or through SPVs. In

such SPVs a REIT shall hold or proposes to

hold controlling interest and not less than

50% of the equity share capital or interest.

Further, such SPVs shall hold not less than

80% of its assets directly in properties and

shall not invest in other SPVs.

Once registered, the REIT shall raise funds

through an initial offer. Subsequent raising

of funds may be through follow-on offer,

rights issue, qualified institutional

placement, etc. The minimum subscription

size for units of REIT shall be ₹ 2 lakhs. The

units offered to the public in initial offer

shall not be less than 25% of the number of

units of the REIT on post-issue basis.

Capital Markets

For coming out with an initial offer, the

value of the assets owned/proposed to be

owned by REIT shall be of value not less

than ₹ 500 cr. Further, minimum issue size

for initial offer shall be ₹ 250 cr.

Not less than 80% of the value of the REIT

assets shall be in completed and revenue

generating properties. Not more than 20%

of the value of REIT assets shall be invested

in following:

o Developmental properties

o Mortgage backed securities

o Listed/ unlisted debt of

companies/body corporates in real

estate sector

o Equity shares of companies listed on a

recognized stock exchange in India

which derive not less than 75% of their

operating income from Real Estate

activity

o Government securities

o Money market instruments or Cash

equivalent

SEBI board cleared one-time registration system for brokers

Seeking to simplify procedural requirements,

SEBI in its board meeting on August 10th has

cleared a proposal for putting in place a

one-time registration process for stock brokers

and clearing entities that would allow them to

operate across bourses. The proposal, which

would replace the current practice of requiring

separate registration certificate to trade in each

stock exchange, was discussed and approved at

a meeting of SEBI board.

The new system would ensure cost efficiency,

avoidance of multiple due diligence process and

prevent duplication of registration process.

Under the new norms, stock brokers and

clearing members would be required to have

only single certificate of registration issued by

the Securities and Exchange Board of India

(SEBI). The exchanges will develop the

mechanism to ensure appropriate due diligence

while granting approvals, coordination and

sharing of information among themselves about

their members.

A simple one time process in entire life time of

a stock broker would help SEBI prevent

duplication of registration process for each

stock exchange. The process would also

decrease the number of registration

applications received by SEBI and in turn help

the regulator save costs and utilize the

resources for better supervision and monitoring

of the market intermediaries.

The new norms also have a provision for SEBI

suspending brokers from the stock exchanges in

case of violations. Besides, as currently

practiced, the fees paid by the stock brokers

would be based on their turnover on stock

exchanges under the proposed norms.

In September, last year, the market regulator

had introduced a common registration

certificate for stock brokers to function in

different market segments within a stock

exchange.

Under this system, an entity is issued a

certificate with a unique registration number

for each stock exchange or clearing corporation,

as case may be, irrespective of number of

market segments.

Further, if the entity is already registered with

any segment of a stock exchange then for

operating in any other segment it need not

apply to SEBI but can directly seek approval

from the bourse or clearing corporation

concerned.

Parliament passed Bill to give teeth to SEBI to tackle ponzi menace

The crucial Securities Laws (Amendment) Bill,

2014, aimed at tackling the ponzi (fraudulent

investment schemes involving money

circulation) menace has been approved by the

parliament, with government saying that it will

soon announce a financial scheme which will

discourage people from being allured by

fraudulent operators.

The new law will empower SEBI investigators to

conduct searches and seek information from

suspected entities, both within and outside the

country. However, as a safeguard, any search

operation can be conducted only after approval

of a designated court in Mumbai, where SEBI

headquarters is based.

Norms for refinancing of infrastructure loans tightened

The Reserve Bank of India (RBI) has tightened

norms for refinancing of infrastructure loans

which banks want to be tagged as standard

assets. From April 2015, the moment a loan is

restructured banks will have to classify them as

bad loan. However, RBI made an except to the

rule by allowing banks to classify infrastructure

loans as standard assets if half of the

outstanding loans are refinanced by new set of

lenders in form of take-out financing.

RBI said that an infrastructure loan that is

refinanced can be tagged as standard assets

provided promoters are willing to invest more

equity in the project and the standard tag will

be applicable only if the project has started

commercial operation. Further the RBI has

stated that this dispensation would be only for

infrastructure loans above ₹ 1000 cr. and that

the loan should be not restructured in the past.

RBI revised it norms after bankers represented

to them that it is difficult to adhere to take out

norm of 50% because a significant number of

banks are already part of the consortium or

multiple banking arrangement of such project

loans.

In this respect, RBI has reduced the ratio by

stating that at least 25% of the outstanding

loans should be refinanced by a new set of

lenders. Further, RBI has said that a project

would not classified as restructured provided it

has started commercial operation after

achieving Date of Commencement of

Commercial Operation (DCCO).

In July this year, RBI gave more flexibility to

banks in structuring infrastructure loans since a

majority of the loans were disbursed for a

shorter tenure even as it is known that

companies do take longer time to execute

infrastructure projects.

From April 2015, banks will have to make a

provision of at least 15% on the loans that are

restructured against 3.5% now. They fear that

the huge provisioning requirement will eat into

their profits and thus want to avoid loans being

tagged as restructured.

As per RBI data, banks’ exposure to

infrastructure sector stood at ₹ 8580 bn as on

June 27, 2014 against ₹ 7297 bn a year ago. The

revised norm is significant for banks since it is

estimated that a huge sum of stress loan -

restructured loans and loans on which

companies have defaulted - is from

infrastructure sector.

Infrastructure Sector

Cabinet approved raising FDI cap in defense to 49%, opened up railway’s infrastructure

The Union Cabinet has allowed foreign

investment in the Railways for the first time and

raised limit for such investment in the defense

sector, steps intended to raise funds for

expansion of the Railways and encourage

domestic manufacture of arms.

100% foreign investment in railway

infrastructure projects will be allowed while in

the case of defense the limit has been raised to

49% from the current 26%, subject to the Indian

owners exercising management control.

The FDI hike in defense is intended to cut

imports by indigenizing defense production as

India is one of the world's largest arms

importers.

Foreign investment in defense will be though

the approval route, implying it will have to be

cleared by the Foreign Investment Promotion

Board (FIPB). Though the 49% cap will be

general rule for the defense sector, 100%

overseas ownership will be allowed in case the

investments comes bundled with state of the

art technology. Such investment proposals will

have to be cleared by the Cabinet Committee

on Security (CCS).

In companies with a 49% foreign holding, more

than one Indian company will be allowed to

hold the 51% share, unlike the present norm

that mandates that a single Indian entity should

own and control the entire 51%, a move that

will encourage more domestic players to enter

the sector.

In case of Railways, 100% FDI will now be

allowed in railway infrastructure segments such

as electrification, signaling, high speed and

suburban corridors. 100% FDI will also be

allowed through the Special Purpose Vehicle

route to provide last mile connectivity to ports

and mines. Further, some railway operations

have also been partially opened up to foreign

investment.

FDI is now allowed in PPP projects, suburban

corridors, high speed train systems, and

dedicated freight lines. Estimates suggest that

the opening of railways to foreign investors will

add 1-1.5 percentage points to the overall GDP

growth. China and Japan are keen to invest in

the railways sector.

As a result of these changes, railways transport

will be removed from the list of prohibited

sectors in the consolidated FDI policy.

Sources: National Stock Exchange, APAS BRT

August series started off with higher volatility

and key indices had been trading in a narrow

range. Market discounted RBI’s Third

Bi-Monthly policy review as there were no

surprises except RBI cut Statutory Liquidity

Ratio by 50 basis pints to 22%. However central

bank’s hawkish tone on future rate action in

view of inflation had turned the sentiment a bit

bearish and pushed bond yields higher.

Sources: APAS BRT

Further geo-political tension in Middle East and

Russia-Ukrain issues added fuel to the volatility

in the Indian as well emerging markets. Indian

Rupee also fell marginally but recovered due to

stable dollar demand in the market.

Sources: APAS BRT

Sources: National Stock Exchange of India, APAS BRT

Sources: National Stock Exchange of India, APAS BRT

Sources: Bombay Stock Exchange of India, APAS BRT

India’s key indices both Nifty and BSE Sensex

started gaining momentum and touched their

all time highs many times towards the end of

the month. It was largely fuled by Prime

Minster’s speech ensaging “Digital India” with

such a hightech infrastructure wherein pleople

living in remote areas and villages will

convenielty access to banking, healthcare and

education services through high speed internet

facility. Strong optimism in the market helped

reduced bond yields.

GDP numbers for the first quarter of the current

fiscal year which were released last week, hit

2.5 year high. The economy expanded 5.7% in

the first quarter of FY15, against a growth of

4.6% in Q4 of 2013-14.

However below normal and uneven distribution

of rain, rising possiblity of Fed raising rates

earlier than expected and currenlty emerged

issues in coal sector can pose a challenge for

aceleration of the economic growth.

Capital Market Snapshot

Countries GDP CPI Current Account

Balance Budget Balance

Interest Rates

Latest 2014* 2015* Latest 2014* % of GDP, 2014* % of GDP, 2014* (10YGov), Latest

Brazil 1.9 Q1 1.0 1.8 6.5 Jul 6.5 -3.7 -3.8 11.4

Russia 0.8 Q2 0.2 0.7 7.4 Jul 8.0 2.9 0.3 9.35

India 4.6 Q1 6.0 6.4 8.0 Jul 8.4 -2.8 -4.9 8.55

China 7.5 Q2 7.5 7.2 2.3 Jul 2.4 1.7 -1.9 4.02^

S Africa 1.0 Q2 2.0 3.4 6.3 Jul 5.9 -5.4 -4.4 7.76

USA 2.4 Q2 2.0 3.0 2.0 Jul 1.9 -2.5 -2.9 2.38

Canada 2.2 Q1 2.3 2.6 2.1 Jul 1.8 -2.7 -2.6 2.01

Mexico 1.6 Q2 2.4 4.0 4.1 Jul 3.8 -1.6 -3.6 7.75

Euro Area 0.7 Q2 1.1 1.6 0.4 Jul 0.7 2.6 -2.5 0.91

Germany 1.3 Q2 2.0 2.0 0.8 Jul 1.0 7.1 0.5 0.91

Britain 3.2 Q2 3.1 2.7 1.6 Jul 1.7 -4.0 -4.6 2.43

Australia 3.5 Q1 3.0 2.9 3.0 Q2 2.7 -2.0 -1.2 3.33

Indonesia 5.1 Q2 5.3 6.0 4.5 Jul 6.0 -3.5 -1.6 Na

Malaysia 6.4 Q2 5.7 5.6 3.2 Jul 3.3 6.3 -3.7 3.95

Singapore 2.4 Q2 4.1 4.4 1.2 Jul 1.8 19.9 0.7 2.30

S Korea 3.6 Q2 3.8 3.6 1.6 Jul 1.6 6.0 0.6 3.04

We are growing our client base and service activities. We invite applications from

candidates with business and transaction advisory services experience as well as from risk

management and research and learning backgrounds. Candidates with banking, insurance

and capital markets companies may also apply.

Ideally candidates with 6 – 10 years of relevant experience, in the age group of 29 – 34

years will meet the requirement. Only candidates with Post Graduate qualifications in

Finance and / or Chartered Accountants may apply. We do prefer management students

with engineering background.

Kindly email us your application on info@ap-as.com.

Disclaimer – This informative newsletter has been sent only for reader’s reference. Contents have been

prepared on the basis of publicly available information which has not been independently verified by APAS.

Neither APAS, nor any person associated with it, makes any expressed or implied representation or

warranty with respect to the sufficiency, accuracy, completeness or reasonableness of the information set

forth in this note, nor do they owe any duty of care to any recipient of this note in relation to this

newsletter.

Economic Data Snapshot

Career with APAS