Blue Chip Issue 1 (April-June 2012)

APRILJUNE 2012 | ISSUE 1
Reliance Industries Ltd.

The Heavy Weight of Indian Indices
Book Review
In conversation with
Ascent of Money
Financial History of the World
Mr. Sanjay Bakshi

Especially for readers of the 1st Issue
From the Editors Desk

Dear reader, With the monsoons hitting northern India and giving everyone a pleasant relief from the scorching heat, I am proud to present the first ever issue of Blue Chip and hope that it adds to the merriment around! We generally associate the word Blue Chip with the companies that make up the broad market indices such as Sensex & Nifty. To some with a flair for playing card games such as poker, it has traditionally been a token of prestige. Both the stock market and the game of poker are based on a combination of skill and luck luck dominates in the short run and skill if you are in it for the long run! In both these situations, possession of a Blue Chip has always been equated to having a token of safety or confidence. Our namesake magazine hopes to serve its readers with the same goal, of being a companion of MBA undergrads, like yourself, that can be banked upon for being there when in-depth understanding of recent happenings is needed or simply for the fun of reading it. Keeping in line with the spirit of a Blue Chip, we present the cover story on a company that is a phenomenon in itself Reliance Industries Limited, traditionally, one of Indias most trusted blue chip companies. To make the first quarterly issue of Blue Chip special, we present a candid interview of our beloved and respected professor & revered investor Mr. Sanjay Bakshi especially for budding investors like you. By now, in the game of life you have already been dealt the cards and now you also have the Blue Chip in your hands, then what are you waiting for? Play on and have fun! ~Anupriya Editor for Blue Chip
BLUE CHIP
ISSUE 1
All images, artwork and design are copyright of Monetrix Finance and Economics club of MDI, Gurgaon
The Team
Aditya Mittal Amit Garg Anupriya Asthana Keyur Vinchhi Nihal Mahesh Jham Sandeep Patil Uday Das Gupta Varun Sanghi
For any information or feedback, please feel free to write in to us at bluechip@mandevian.com
CONTENTS
Cover Article ( 10
Reliance Industries Ltd.

In conversation with ( 26
The heavy weight of Indian indices
Mr. Sanjay Bakshi
Beginners Corner ( 15
Guru Speak
Stock Markets
A mystery?
Forex Management ( 22 Rupee Depreciation ( 18
The Sliding Rupee
Foreign Exchange Management An Indian Perspective

In Depth ( 36
Hysteresis Effect ( 32
Hysteresis Effect on the Indian Economy
European Crisis Still anybodys guess
Tutorial ( 8 Disinvestement in India ( 4
Active & Passive Investing
Disinvestment in CPSEs
Market Update ( 39
Market Movement
Book Review ( 35
Sector Wise Snap Shot The Ascent of Money

Financial History of the World
In the News
4 |DISINVESTMENT IN INDIA|
Disinvestment in CPSEs
A Haphazard Process Leading to Loss of Value
Mansi Batra
PGDM 2011-13, S.P. Jain Institute of Management & Research
Disinvestment An Overview The concept of privatisation was born on the belief that private ownership can result into better use of resources and more efficient allocation. Gradually the concept has gained worldwide acceptance. Globally, as the economies have advanced, there has been a rise in preference for a market economy as the governments could not efficiently support the high level demand placed by the booming markets, and effectively manage the wide-spread enterprises. Hence, we have witness large-scale disinvestment of government stakes in state-owned enterprises in different economies.
Further the gradual transformation of fragmented markets worldwide into a global village, which is ever more technologically advanced and highly competitive, has fuelled the need for privatization and forced the governments to offload their stakes. Additionally, the adoption of anti-competitive polices, birth of regulatory and trade institution in different sectors and development of comprehensive laws and regulation have severely diluted the need of government intervention to ensure protection of consumer interests and prohibition of monopoly development across most sectors.
Indian industry and the progress of the economy. They have not only been instrumental in steering India towards becoming a self reliant economy but have also met the rising need for public utilities. In India, the objectives of Central Public Sector Enterprises (CPSEs) have been sourced from the Industrial Policy Resolutions and the Five Year Plans. At the beginning of the First Five Year Plan in India, there were five PSEs, which had a total investment of Rs. 29 crores. By the end of the Seventh Plan in 1990, the number of PSEs had reached 244, with the total investment rising to Rs. 99,329 crores. However, while the PSEs had been established to promote economic development and social justice, over the years, large scale inefficiencies had crept into them and the financial position of these companies fell much below the expected levels. Despite some of the companies being monopolies in their respective sectors, the PSEs lacked clear visions, strategic direction and suffered from rampant corruption. In 1991, when a severe economic crisis led by the deteriorating condition of the Balance of Payments was knocking on the doors of the country, the Indian Government decided to work out a plan to offload their stake in the PSEs as they were acting as a drag on the countrys fiscal position and were becoming counterproductive to the economic growth. Additionally, disinvestment was necessitated by the withdrawal of the budget-
Disinvestment in India A Historical Perspective Historically, public sector units (PSUs) have played a critical role in the development of the
Monetrix, Finance & Economics Club of MDI, Gurgaon
5 |DISINVESTMENT IN INDIA| ary support of 60% by the Government to the loss making units. Hence the Government turned its focus on drawing up a divestiture strategy and the Disinvestment Policy received a major thrust in the Industrial Policy Statement 1991. The policy stated that the Government would disinvest a part of their equity in selected PSEs; however, it did not throw any light on the amount of limits of disinvestment. The policy stated the objectives of disinvestment as follows:

The Current Process and the Lost Way The divestment in CPSEs in India is much needed to make them more competitive, reduce the level of political influence on their operations, generate funds for their expansion plans, improve their planning and execution capabilities, make them more competitive and to provide the much needed cash to the Government for various other economic activities.
The process not only covers the listing of the new CPSEs on the bourses, but also includes the dilution of Government stake in the already listed enterprises. While the Government aims to offer a level playing field to the CPSEs to compete with the private sector, it plans to maintain at least 51% ownership and management control in these enterprises. However, during the course of time, the disinvestment process appears to have lost its way, and the focus has been narrowed down on using it as a tool to reduce budgetary deficits. Over the last few years, a key feature of the disinvestment strategy in India has been to sell minority takes of 5-10% in profitable PSUs in quick successions to raise money in an environment of low revenue receipts and to unlock value for investors. The Governments short-term focus on raising the money and failure to adopt a well devised strategy has made the disinvestment process haphazard and unreliable. This not only indicates at loss of opportunity and direction but is also resulting into a loss of credibility and high level of criticism for the Government and the entities involved in different ways. The ad-hoc approach and the lethargic process have cast doubts in the minds of Indian corporate, the business fraternity, the foreign investors as well the retail investors. The industry and business have been put into dilemma of whether to raise such high amount of funds to buy out and
To improve performance of units To reduce budgetary deficits To overcome the problem of political involvement in PSUs Enable the government to concentrate on Social development
In 1993, the Rangarajan Committee was constituted by the Government. The committee provided certain important observations, such as:
Disinvested could be made up to any level, except in defence and atomic energy where the Government should retain the majority holding Disinvestment should be a transparent process duly protecting the right of the workers Suggested setting up of an autonomous body for the smooth functioning and monitoring of the disinvestment programme
The Committees recommendations led to the formation of the Disinvestment Commission in 1996. The Commission was designed to act as an advisory body having a full time chairman and four part-time members. The Commission was required to advise the Government on details such as the extent, timing and pricing of disinvestment.
APRILJUNE 12 | BLUE CHIP ISSUE 1
6 |DISINVESTMENT IN INDIA| acquire PSUs. The foreign investors are also evaluating the opportunity critically based on the process and the resulting changes. disinvestment target. While it had planned to raise an ambitious INR 40,000 crore, it ended-up raising only INR 22,144.20 crore through partial stake sales by way of IPOs and FPOs in six PSUs SJVN Ltd., Engineers India Ltd., Coal India Ltd., Power Grid Corporation of India Ltd., Manganese Ore India Ltd. and Shipping Corporation of India Ltd. The stake sale in Coal India Ltd. was a new landmark as it was the largest IPO in the Indian disinvestment history. The Government raised INR 15,199 crore by selling a 10% stake in the coal mining giant.
Failure of the process to gain traction for almost two decades The divestiture of the Governments stake in PSUs in India started back in 1991-92, however the process failed to gain any traction until 200910. This resulted in a tremendous loss of opportunity and value, especially during the period of high economic growth in India, which had witnessed multi-scale jump in the Indian stock markets.
Supported by the recovery in the equity markets in 2009, the disinvestment drive started to gain some feet. Over 2009-10 and 2010-11, stake-sale in CPSEs provided the Government total earnings of INR 45,667.13 crore, accounting for approx. 40% of the total disinvestment receipts since 1991-92.
Missing the disinvestment targets more than 2 out of 3 times

The Government has missed out on the target of receipts from disinvestments on a large number of occasions since the year 1991-92. However, despite the failures, there appears to be no significant changes in the approach to the disinvestments process and the Government appears to
* Note: 1) In 1993-94, equity of 6 companies was sold by auction method but proceeds were received in 1994-95.; 2) There were no fixed disinvestment targets over 2005-06 to 2009-10. The disinvestment receipts in these years were 2005-06: Rs. 1,569.68 crore, 2006-07: Nil, 2007-08: Rs. 4,181.39 crore, 2008-09: Nil and 2009-10: Rs. 23,552.93 crore. Source: Ministry of Finance, Department of Disinvestment
However, despite supportive market conditions, in 2010-11 the Government failed to achieve its
continue on its ambitious spree. In the budget for the fiscal year 2011-12, the Fi-
7 |DISINVESTMENT IN INDIA| nance Minister of India had announced plans to raise INR 95,000 crore from disinvestment in the PSUs over the next three fiscal years. In pursuit of the set target, the Government had planned to raise INR 40,000 crore in 2011-12. However, it is yet again on the verge of missing the target by a wide margin. The adverse conditions in the financial markets on account of the euro-zone crises and macroeconomic climate in India have slowed down the disinvestment process. The Government is expected to receive approx. INR 14,000 crore from the divestitures in the current fiscal. In the fiscal budget for 2012-13, the Government has announced plans to raise Rs. 30,000 crore through disinvestments, a feat that remains unattained till date in the history of the divestment process in India. 3:20 p.m., which was 10 minutes before the scheduled close of the auction process. The issue was subscribed only to the extent of 98.3%. Against an offer of 42.77 crore shares, the final demand was for 42.04 crore shares. The state-owned LIC saved the day by purchasing around 37.7 crore shares. The process yielded the Government Rs. 12,766 crores. Hence, an initiative that was designed to pave way for disinvestment in other PSEs, ended-up casting a shadow of doubt on the entire disinvestment process.
The ONGC FPO Debacle Nearing the fiscal budget for 2012-13, the Government attempted to take charge of the deteriorating fiscal position for the year 2011-12 by divesting a 5% stake in the state-run oil explorer, ONGC.
However, what appeared to be a hastily planned issue spilled water over the expectation of the Government and led to embarrassment. The timing of the FPO was a severe issue as the announcement of the auction was made only two days prior to the process, leaving a large number of investors unprepared for the process. The floor price for the ONGC auction was set at Rs. 290, which was at a 2.3% premium to the previous day's closing price, contrary to the markets expectation of a discount. Further, the lack of clarity on ONGC's share of oil subsidy resulted in lack of participation from the large foreign institutional investors. Even the process of the auction drew high criticism. The websites of the two main exchanges failed to update the bids after
In the end If the disinvestment program has to successfully see the light of the day and cushion the long-term fiscal consolidation, the Government needs to work out a long term strategy supported by a strong discipline and well planned mechanism. It has to reduce the focus on short-term funding needs and allow the program to be guided more by the market conditions and a long-term strategy.
As part of a successful disinvestment program, the Government needs to identify the companies that will be part of the disinvestment process, the stake it plans to offload in each of them, work out a clear strategy for disinvestment in every CPSE, identify the suitable market condition and other pre-requisites for a successful stake sale and abide by the plans. Additionally, it needs to create higher fiscal room during the short-run to reduce pressure of stake sale in volatile or weak market condition.
References
1. Department of Disinvestment, Ministry of Finance, Government of India 2. Union Budget, Ministry of Finance, Government of India 3. JurisOnline.in 4. Financial Express 5. The Times of India 6. The Economic Times
8 |TUTORIAL|
ACTIVE & PASSIVE INVESTING

Team Blue Chip
Active Portfolio Management or Active Investing stems from the belief that through thorough analysis of the investing options, one can always beat the benchmark index and can attain a positive Alpha. It however comes at a price, and funds which follow this approach charge a considerable amount of management fees because someone has to pay the portfolio manager and the analysts for all their brain smashing stock recommendations and analysis. Passive Portfolio Management proponents believe that an investor cannot beat the market in the long run, and the best way to maximize returns is therefore to minimize the overheads-the management fees. So passive investment invests with a pre determined strategy and does not entail any forecasting. A concept which needs to be introduced here is Efficient Market Hypothesis (EMH). "An 'efficient' market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value. (Eugene F. Fama, Random Walks in Stock Market Prices Financial Analysts Journal, September/October 1965). So according to EMH markets are efficient and so trying to beat the market is nothing but playing on luck. The efficiency of market has been subject to thousands of empirical studies. While not going into the debate of whether markets are efficient or not, we can safely assume that markets vary with degrees of efficiency. Some markets like developed government bond market, bullion market are
highly efficient, reflecting much of the publically held information into the prices. The large capitalization stocks particularly in countries with well developed stock exchanges can be considered as highly efficient. But other markets like real estate markets, small capitalizations stocks, many of the emerging markets are less efficient mainly because not all information is publically available and so it leaves a lot of scope for analysis and finding the intrinsic value. Standard & Poors Indices Versus Active (SPIVA) has been tracking mutual funds performances for over a decade and comes out with an annual scorecard on how different styles of investing have fared. The 2012 report states that There are no consistent or useful trends to be found in annual active versus passive figures. The only consistent data point we have observed over the five-year horizon is that a majority of active equity and bond managers in most categories lag comparable benchmark indices.
Active Management a negative sum game:

Since the universe of stocks remains the same for every active investor, for every active investor who wins, there will be one who loses and so they add to zero. However, it is costly to actively manage a portfolio, remove management fees from the zero sum and we have a negative sum. So the average returns of all the active investors would be less than the average returns of the passive investor. A look at average performance of the small cap and the mid cap funds in the 2002 and the 2008 bear markets by SPIVA reveal that the S&P MidCap 400 and S&P SmallCap 600 which can be taken as proxy for the market, have outperformed more than 70% of all actively managed small cap and mid cap funds over the three year period. Dimensional Fund Advisors have shown that less than 1% of the actively managed equity funds have been able to beat the benchmark over the five year period from 2005 2009 as shown in the chart (please turn over).
9 |TUTORIAL| sheer number of stocks in an exchange can be unwieldy. For example, you can choose your universe as all stocks that are part of BSE 500 or BSE 200, or all stocks with average turnover above a certain minimum level.
Weighing: Weighing means the weight each scrip has in the index. Although one can use any measure for weighing, some of the most popular ones are:
Figure 1: Benchmark [Source: Dimensional Fund Advisors]
The above graph debunks the myth that active investing returns are based on skill rather than luck as just 1% of the funds remained winners for a long period.
Market Capitalization: Each scrips weight is just a representation of its market capitalization with respect to other stocks in the index. So if there are 10 scrips in the index and their total market cap is 1000 Cr , Stock As market cap is 150 Cr. Then stock A would have 15% weight in the index. Although popular initially, this has now been replaced by free float market capitalization. Free Float Market Capitalization: Free Float Methodology is similar to Market Capitalization methodology with only difference being that instead of full market capitalization, free float market capitalization is taken. The free float market capitalization takes into consideration, only those stocks which are available for trading on the exchange. This is the most popular approach and majority of the indexes of the national stock exchanges such as Sensex , Nifty , S&P 500, Nikkei 225 are free float market cap weighed indexes. Price Weighed: The weight of each scrip is in proportion to its price relative to other scrips in the index e.g. if there are 10 stocks in the index. Sum of the prices of one share of each stock is Rs 1000. Stock As share is priced at Rs. 250, and Stock Bs share is priced at Rs. 40 then weight of A would be 25% and weight of B would be 4%. The Dow Jones Industrial Average is the most popular price weighed index. Equally Weighed: If all the stocks in the index are given an equal weight irrespective of its price or market cap, then it is an equally weighed index. The main motive behind this is to remove the bias of overweight stocks which come up if price on one of the stock in the index rises sharply in comparison to others. So if there are 10 stocks in an index, each would have a 10% weight. Russell Investments has created some of the more popular equal weighed indexes such as Russells 2000 Equal Weight, Russell BRIC Equal Weight.
Passive Investing
The most common and synonymous technique with passive investing is called indexing or index investing. Indexing aims to replicate the movements of an index by holding all the securities in the index in same proportions as the index (tracking). The most popular indexes are the FTSE 100, S&P 500, and Nikkei 225. The above philosophy aims at minimizing the management fees and thereby offers higher net return to investors over a long period. Another Strategy is Buy and Hold where investor buys stocks and holds them for long periods regardless of market fluctuations, thereby reducing his tax outgo and transaction costs. A lot of people confuse indexes with markets. Index is just a representation of the universe of stocks in the stock market. An index may or may not contain some or all the stocks traded in the exchange.
There are two parts to an index creating-the 2 Cs of indexes which are Selection (Constitution) & Weighing (Contribution). These two are exe- Fundamentally Weighed: The weight of the scrip is decuted differentiate one index from another. cided by the fundamentals of the company such as sales,
Selection: At the selection stage you decide which stocks would be a part of your index. It could range from all traded stocks in the stock market to as little as maybe a 5-10 stocks which you feel are an adequate representation of the market. Practically it is very important to choose a universe of stocks from which you will choose your stocks because the
profit, book value, turnover, or a combination of these or any other parameters. It was pioneered by Research Affiliates which circulated the methodology in 2005. Fundamental Indexing blurs the line between passive investment and active investment as both of them do not consider the market based price of the stock to be a true estimation of its intrinsic value. The FTSE RAFI index is a fundamentally weighed index developed by RAFI for FTSE.
10
The heavy weight of the Indian indices Reliance Industries Ltd.

Monetrix
Cover Article
The Reliance Group, founded by Dhirubhai H. Ambani, is India's largest private sector enterprise, with businesses in the energy and materials value chain. The flagship company, Reliance Industries Limited, is a Fortune Global 500 company and is one of the largest private sector company in India. The Group's activities span exploration and production of oil and gas, petroleum refining and marketing, petrochemicals, textiles, retail and special economic zones. Reliance stock debuted via an Initial Public Offering in the year of 1977. At the time when Reliance went public, the Indian Stock Market was accessible only to a handful of elite invesFigure 1: Revenue Breakup tors. However, more than 58000 investors from across India subscribed to the Reliance IPO. Since its listing on the stock market, the stock has seen many ups and downs. Be it the rumours of controlling the stock market in the year 1982, the series of articles published in the Indian Express alleging Reliance (and Dhirubhai) of using unfair trade practices to maximize the profits or be it the issues of opacity in corporate governance practices, the Reli-
ance stock has seen it all and stood the test of time. Over the last 34 years, RIL has seen its sales grow from Rs 120 crore (Rs 1.2 billion) to Rs 339,792 crore (Rs 744.18 billion). This remarkable performance was reflected in the stock markets as well. Reliance has always been hailed as one of the prominent Blue-Chip stock of the Indian equity markets. During its initial years following its inception, RIL mainly followed the organic growth strategy. The sad demise of Dhirubhai Ambani, more famously known as Polyester Prince, ushered the beginning of a new chapter in the tale of Reliance Industries. It marked the beginning of succession planning in the largest private sector company of India. The year 2004 went down as a remarkable year in the history of Reliance Industries. The companys net profit crossed the $1 billion mark. It figured among the top 150 companies globally in terms of net profit and among the top 450 in terms of sales. During the same year, in November 2004, Mukesh Ambani in an interview, admitted to having differences with his brother Anil over ownership issues. Eventually the Reliance Empire was split between the Ambani brothers, Mukesh Ambani
11 |COVER ARTICLE|
getting RIL and IPCL & his younger sibling Anil Ambani heading Reliance Capital, Reliance Energy and Reliance Infocomm. During the late nineties and early 2000s, Reliance went on to diversify into multitude of businesses including a diversified and integrated biotechnology initiative under Reliance Life Sciences; transportation, distribution, warehousing, logistics, and supply chain services under Reliance Logistics; development and operation of cross-country pipelines for transporting petroleum products under Reliance Industrial Infrastructure Limited and retails business under Reliance Fresh and Reliance Retail.
production. RIL and the government entered into PSC (Production Sharing Contract) and the plan was to drill 31 wells and extract 70mmscmd of gas from the wells by 2012. However, the sweet times did not last long. A dispute with the Ambani brothers over the pricing of the gas broke out. How much should Anil Ambani's firm Reliance Natural Resources Ltd. (RNRL) pay RIL for the gas? RNRL says it should be US$2.34 per mmbtu (million metric British thermal unit). RIL counters that it should be US$4.21. This is the price according to the production sharing contract (PSC) signed by the government and RIL. Soon the government of India became a party to the dispute as the government will get its royalty and profit share according to the PSC. All the parties went to the Supreme Court which ruled that the price of the gas should be pegged at US$4.21, as mandated by the PSC.
The fortunes of the company started taking an ugly turn with the discovery of vast reserves of Natural Gas in the KrishnaGodavari (KG) basin. In a country which had till then been primarily dependent on imports for its energy requirements, the discovery of However the woes of RIL did not end here. KG gas was a remarkable The output from event. However, since the the gas fields discovery of the gas the started falling, Reliance group has conafter steadily ristinuously been in the news ing to 43mmscd for all the wrong reasons. in March 2011. The long standing dispute As per the PSC between the two brothers the plan was to over the pricing of the gas, drill 31 wells and the disputes over supply extract 70mmscd of KG gas or very re- Figure 2: Falling Gas Output, Source: Motilal Oswal of gas from the wells by cently, the fall in the out2012. The reason cited put of KG D6 output all this has led to a by RIL for the fall in output was the shutdown beating of once a Blue-Chip stock in the Inof one-third of the wells following the ingress dian equity markets. of water and sand. The output from the basin is expected fall further to 27.6 mmscd in April RIL began production of natural gas from its 2012 and to 22.6 mmscd in the next year. RIL deep sea discovery on Wednesday, April 1, also went on to slap arbitration against the 2009 just after six and a half years from the govt. to have the company's entitlement to rediscovery. The discovery and production was cover its costs related to KG-D6 block, off the considered to be a historic feat and expected country's east coast. Reliance said in a stateto save India, $9 billion per year, in imports. ment that it was concerned by media reports Dhirubhai-1 and Dhirubhai-3 were put to
12 |COVER ARTICLE|
that the oil ministry would seek to restrict the amount of the costs recovered by the company from its revenues from sale of gas produced from the D1 and D3 fields in the KGD6 block. Recent developments suggest that the govt. has agreed to allow RIL to recover some of the costs involved in the exploration, devel-
that kind of crude and RIL has the manufacturing reliability, efficiency and technical capability. It has world-class logical infrastructure capable of bringing in 2 million barrels in each shipment and also they possess flexibility of evacuation infrastructure. The Reliance Jamnagar refinery is one of its kind in the world. Recently, RIL reported GRMs at a discount to t h e benchm a r k Singapore refining m a r g i ns a s spreads Figure 3: Comparison of GRMs, Source: Motilal Oswal on fuel oil were better during the quarter. opment and production of hydrocarbons While RIL product slate does not contain any from KG-D6. fuel oil, benchmark Singapore margin considers fuel oil production at 23%. Its gross refinRIL also underperformed on the Oil refining ery margin has fallen down to a level of 9 from front. Historically, RIL has beaten Singapore the peak levels of 13, a feat for which the Jambenchmark consistently. This is because the nagar recost finery is o f known for worldwide. The company attributed the fall to the following:
sourcing crude RIL imports sour, heavy, challenged category crude - is on the cheaper side. Globally, only a couple of refineries have capability to process
Figure 4: GRM Trend
Widening spread of Brent over WTI. Lower spreads of gasoline and naphtha, which contribute relatively more to RIL slate than benchmark Singapore slate.
13 |COVER ARTICLE|
So does that mean that the once Blue Chip stock and a darling of the stock market has lost its lustre? At least the market reactions to the RIL stock suggest so. It has received a severe beating from the market and the companys stock price has fallen sharply from Rs. 1039 levels in Apr 2011 to Rs. 737 in June 2012. This poor performance comes against the backdrop of a dismal performance in terms of its balance sheet and profit and loss statement. Therefore a legitimate question pondering a retail investors mind is whether they should exit the stock or there exists a ray of hope. It is difficult to figure out, however our analysis suggests that in future there exists some opportunities on which the Reliance can hope to cash upon. In the recently held AGM, the company has disclosed some long term investments over the next 3-4 years. Although the investments look promising yet the shareholders might not realize immediate benefits of these investments as the new projects have a high gestation period. We have identified some of the major investments that might help turn the fortunes of RIL. Shale gas is one of the most rapidly growing forms of natural gas along with other nonconventional sources of natural gas. The increase in its production is estimated to be from 42 percent of the total gas production in 2007 in US to 64 percent by 2020. The demand for natural gas is expected to be strong despite the current decline due to the global meltdown. Shale gas is produced from Shale deposits that are found in abundance across the Gangetic plain, Assam, Rajasthan and many coastal areas. But most of these sources are still untapped in India even though many companies around the world have started work on Shale gas. In India, ONGC announced its plans to start a pilot project in 2011 to get gas from shale formations. Reliance was a quick mover and it acquired a stake in the Texas Shale gas field as early as
June 2010. Reliance is looking to invest in new areas such as shale gas, natural gas exploration and retail to expand the portfolio of its company which is currently restricted to petrochemicals. Back in April 2010, reliance paid US$ 1.7 billion to US based Atlas energy and formed a joint venture. The JV gave Reliance a 40% stake in Atlas Marcellus Shale operations in the eastern United States, giving it around 120,000 acres in net holding. Further in August 2010, reliance again announced acquisition of Shale gas asset by forming a joint venture with Texas-based Corrizo Oil and Gas in a deal worth US$ 392 million. The deal gave Reliance access to 60 percent stake in 104,400 undeveloped acres of the Marcellus Shale natural gas field in the north-eastern state of Pennsylvania. Some of the notable achievements of the various JVs of Reliance in the shale gas area include:
Two additional rigs mobilized in the JV with pioneer Nine additional wells in the RILChevron JV with a production rate of 51 million standard cubic ft per day
A total investment of close to US$400 million in three months ended June 30, 2011. Also the company is planning raise close to US$ 1 billion in Foreign Currency Convertible Bonds to fund its Shale gas ventures in the US and invest in its refineries. "The company is entering one of the fastest-growing opportunities emerging in the US unconventional gas business." The deals "will materially increase Reliance's resources base and provide Reliance with an entirely new platform from which to grow its exploration-andproduction business while simultaneously enhancing its ability to operate unconventional projects in the future." - P.M.S. Prasad (Executive Director).
Coal Bed Methane RIL holds 3 CBM blocks in Sohagpur (East), Sohagpur (West) and Sonhat. So far, RIL has
14 |COVER ARTICLE|
completed the following work in the Sohagpur (East) and Sohagpur (West) blocks:
Over 45 core holes drilled, logged and tested for gas content, permeability and coal properties Drilled over 85 production wells 75 hydraulic fracturing jobs done 5 cavitations completion wells and 2 sets of in-seam horizontal wells
At the close of offer on 17th February, the total number of bids received by RIL was 70. The total demand was in excess of 90 million standard cubic meters per day. This is several times more than the peak output of 3.5 mmscd that is planned to be produced at the end of 2014 from Sohagpur block in Madhya Pradesh.
RIL has proposed that the government should pay not just a price pegged higher than the price of ordinarily available domestic gas but RLNG price of about $13/mmbtu for gas coming out of its Sohagpur blocks, more than thrice the price at which domestically produced gas is sold. The formula is the same as the one at which RasGas of Qatar sells LNG on a long term contract to India. According to the formula, RIL wants 12.67% of the prevailing Japanese Crude Cocktail (JCC) plus 0.26/mmbtu as the cost it takes for shipping the gas in cryogenic ships. If JCC is taken as $100/bbl, then the price would be $12.67 + $0.26 per mmbtu totalling $12.93/mmbtu. Industry gurus however, argue that the price was unviable on the ground that the Qatari gas is rich in ethane and propane which are useful in manufacture of LPG and petrochemicals. CMB gas is just methane and should be priced at least 15-20% below the price of compound rich gas. Also, LNG pricing cannot be applied for domestic gas as huge investments go into putting the liquefaction plant that turns natural gas into its liquid state by cooling it at as sub zero temperature. Great Eastern Energy Corp (GEECL) sells CBM produced from its Raniganj block in West Bengal at USD 6.79 per mmbtu while Essar Oil has proposed a rate of USD 4.20 per mmbtu for CBM it plans to produce in the same state. On top of the CBM price set by the government, RIL will charge USD 0.15 per mmbtu as a marketing margin.
Reliance-BP Deal Reliance Industries Ltd (RIL) has signed a joint venture (JV) with British Petroleum (BP). According to the press statement, British Petroleum will get 30% stake in the 23 oil and gas blocks including the KG-D6 oil fields of Reliance Industries. The total valuation of the deal is 9 billion dollars. It has also been one of the biggest Foreign Direct Investments (FDI) in India. British Petroleum and Reliance Industries Ltd will also form a 50-50 joint venture for marketing and sourcing of gas in India. The expertise of Reliance Industries Limited is in project management and operations. British Petroleum brings to the table its expertise in deep water exploration and development in which Reliance is a nascent player. The 23 oil and gas blocks together cover approximately 270,000 square kilometers. The deal is very significant and is being viewed as positive sign for the company Reliance Industries Limited. The strategic part of the deal is that it covers the entire value chain from sourcing to marketing. However, since the signing of the deal, much has not transpired into actual performance. Last words Our analysis suggests that given the above opportunities, the RIL stock may perform better in the future and once again regain the status of a Blue-Chip, however in the near term the stock is expected to continue its dismal performance especially due to the shadow of multiple controversies surrounding it.
Team Blue Chip
15 |BEGINNERS CORNER|
Stock Markets A Mystery?

Mukul Aggarwal, Team Monetrix
Let me begin this article with some basic questions regarding the stock markets around the world- why people make money in stock markets (equities, stocks), why people like Warren Buffett (popularly known as god of investors in stock markets), Charlie Munger (partner at Berkshire Hathaway Inc.) etc. are so successful and rich by just trading stocks in the stock markets despite the fact that less than 2% of total investors in the stock markets make money (i.e. more than 98% of the investors lose money in the stock markets). Isnt it really intriguing and interesting? Let us demystify the core premise behind all these questions and try to clarify some basic fundamentals of the stock market. Imagine a scenario in which there is a company whose fundamental value (the real worth of a company depending on the quality and quantity of its business and its future prospects) is known to everyone publicly. Then what do you think are the chances of anyone making the money by trading that company stocks in the stock markets Its pretty simple- nil (no one will make money by selling/buying stocks of the company in the market as everyone has the clear idea about the real worth of the business of the company, the only way to earn money is to earn dividend on the stocks owned). This kind of market is known as perfectly efficient market where the market capitalization of the company truly reflects the fundamental or true value of that particular company and everyone has the
equal symmetric knowledge. Fortunately or unfortunately this kind of situation does not happen in practical world where public/investor sentiments play an important role in deciding the market price of any stock which leads to inefficiencies in the market (i.e. market price does not reflect the true value of the company) and thats why people make money in the stock market. Whenever there is a positive or bullish sentiment in the market it leads to excessive buying of the stock (overvaluation of the stocks as demand will be much greater than the supply). In contrast to this whenever there is a negative sentiment in the stock markets it leads to undervaluation of the stocks. One of the recent and relevant examples is the Indian stock market in the year 2011 where there are so much negative sentiments like euro debt crisis, low IIP numbers, a depreciating rupee and the foreign investors outflow because of risk aversion which lead to a plunge in the stock markets and the stocks were traded at an undervalued/discounted price. On the other hand as the quarterly financial numbers of the Indian companies are stabilizing and more policy reforms are being initiated by the Indian government, Indian stock market is the best performing market in the world in 2012. This is all because of the investor sentiments (the real worth or the fundamental value of the companies has not changed much as compare to the fluctuations in the market index).
16 |BEGINNERS CORNER| tries especially the Indian stock market where there are lot of inefficiencies in the small and mid-cap stocks. It is pretty clear that investors prefer a stable and certain environment to invest/trade in the stock markets. Now if we know this simple fundamental concept behind the working of stock markets then the question arises: What one should do to earn money? What is the key to earning money in stock markets? To answer these questions firstly we need to answer why such a large number of people (I am talking about retail investors- individual people who buy/sell stocks in stock market) lose money in stock markets. The answer is simple- the common and the most prominent mentality among retail investors is that stock market is an easy and lucrative platform to earn money. One only needs to buy stocks, there is no work/time involved and one will get handsome returns on his investment. They trade stocks on basis of herd mentality/ word of mouth (brokers report, other investors etc.) without knowing what they are trading which leads to losses in the long run. This leads to a very important concept called Stock Analysis. Stock analysis is defined as taking an informed decision on trading stocks after doing proper analysis. Therefore the key to earn money in the stock markets is to do sound analysis before investing. There are two very different schools of thoughts on how to do analysis (these are completely different to each other). These are:

the true value of any particular stock. The basic principle behind this approach is that when you are buying a stock then you are just not buying a paper but you are purchasing a part of a particular business (becoming an owner of a part of that business) so it is very important to find the real worth of the business depending on its present state and future prospects so that you can decide when to buy/sell the stocks to earn profits. This approach assumes that in the long run markets tend to achieve efficiency i.e. the market price of any stock reflects its true value. Fundamental analysis is done in two stages Qualitative Analysis and Quantitative analysis. Qualitative analysis involves studying various external factors that influences the business/ company i.e. the study of economic environment, the study of industry/sector in which the business is operating, the growth potential of the business etc. The study involves finding whether these factors are affecting the business favourably or unfavourably. Quantitative analysis is about studying the financial strength and fundamentals of the company by analysing the financial statements i.e. Balance sheet, Profit and Loss and Cash Flow statements and studying various financial ratios (profitability, leverage etc.). The important thing to keep in mind while doing the quantitative analysis is that one should analyse three year financial statements to verify the trend and also negate seasonality factor if it is present (Hospitality sector companies during peak seasons). Value investing is one of the famous ap-
Fundamental Analysis Technical Analysis
Fundamental analysis is related to finding
17 |BEGINNERS CORNER| It requires a lot of thorough understanding and analysis of the business so that one can properly value the business/company and find its real worth. It stresses on quality of stocks rather than quantity. There are lot of approaches to do valuation of the company like DCF, Relative valuation etc. which depend on the business and the amount of data available. On the other hand, Technical Analysis does not consider the real worth of the business. It is all about analyzing the historical price movements of stocks to take buy/sell decision. Rather than measuring the true worth of the stock, it analyses the investors sentiments behind the stock. It has the following assumptions: 1. 2. Investors pattern will be repeated after a certain time period Market price already reflects the true worth of the company and it immediately reflects/discounts any market information related to the business. 3. the fundamental analysis and technical analysis. One should consider both underlying value and investors sentiments while taking any trading decision. Lastly a few useful fundamental tips for the beginners who want to start investing in the stock markets. These are as follows: 1. In beginning try to identify 2-3 sectors/ industries which you find interesting for example banking, aviation, real estate etc. Try to know about basic fundamentals of that particular sector i.e. how revenue is generated, key terminologies, external factors that affect the sector etc. Try to keep yourself updated with all the latest news related to that particular sector i.e. whats happening in the sector, how various companies are doing etc. Try to study 2-3 companies within that sector which you think are performing well and try to look for businesses/ companies which are trading at a discount to the real worth because of one reason or another (this is defined as circle of competence by Mohnish Pabrai in his book The Dhandho Investor). Finally try to analyse the historical price pattern of the stock of these companies to take a fool proof investing decision.
2.
There are many approaches for technical analysis such as the help of technical charts, technical patterns, indicators etc. which can be easily learnt. Apart from this difference between the two approaches, there is one more difference which is the time horizon. Fundamental analysis is generally more suitable for long term investing while technical analysis is more suitable for short term investing. Now that we have a basic and clear understanding of the two approaches that can be followed while doing the stock analysis, the next question that arises is what approach I should follow. Should I follow fundamental analysis which involves studying the underlined value of the business or follow technical analysis which involves studying the investors sentiments regarding the stock? The ideal scenario for sound investing is to follow a combination of both
4.
I hope this article has helped you in understanding how stock markets work and how to approach investing in the stock markets. All the best for your future investing endeavours.
Happy investing!!!
18 |RUPEE DEPRECIATION|
The Sliding Rupee

PGPM 2011-13 Management Development Institute, Gurgaon
Krishna Prem Sharma Shashank Kumar Jha
In an environment of high internationalization of the Indian economy, the recent fluctuations in exchange rate of the Indian Rupee against the U.S. Dollar have exposed the entire corporate sector to Source: Oanda high levels of risk. In CY2011 the rupee depreciated against the dollar by approx 20%, bringing joy to the companies with an export oriented model and exerting high pressure on the importers. In Q1 CY2012, the momentum turned and the rupee appreciated by approx. 10% until mid-March 2012. However, the relief for the importers and companies with foreign currency loans was only temporary as the rupee again entered the depreciation mode.
In fiscal year 2012, India registered a sharp rise in its Current Account Deficit (CAD) on account of subdued external demand and relatively inelastic imports of POL (Petroleum, Oil and Lubricants) and precious metals (gold and silver). The CAD increased from USD 46.0bn (approx. 2.7% of the GDP) to USD 78.2bn (4.2% of the GDP). The deficit in trade balance widened as the growth in exports declined sharply from 37.5% in 2010-11 to 23.6% in 2011-12 while the rate of growth in imports increased from 26.7% in 2010-11 to 31.1% in 2011-12.
The erratic cycles of rupee appreciation and deprecation are constantly pressurising the risk management strategies of the Indian corporates and have put the entire Note: (P) Preliminary, (PR) Partially revised Source: Reserve Bank of India economy in a cautious mode. Currently, the rupee is into a depreciation mode and is hovering around 56.05 (INR/USD) after hitting an all time low of 57.37 (INR/USD) on 24th June 2012. Owing to the combination of weak domestic macroeconomic indicators and uncertainties in the global environment, the rupee is expected to remain under pressure in the medium term. 2. Movement of Investments by Foreign Institutional Investors (FIIs) The year 2011 was disappointing for the investors in the Indian equity markets. After nearing the 8,000 level in March 2009, SENSEX, the benchmark index of the Bombay Stock Exchange gained a whopping 81.0% in 2009 and 17.4% in 2010. However, the index lost almost a quarter of its value until the end of 2011.
Factors behind Rupee Depreciation 1. Deficit in the Balance of Payments
19 |RUPEE DEPRECIATION| A key factor behind the sharp fall in the index was pull out by the FIIs, largely over August to November 2011. The FIIs registered a net outflow of INR 7,902.5 crore in August 2011, led by withdrawals from the equity markets, which were to the tune of Rs.10,833.6 crore. It was the highest outflow of FII investments in a single month since October 2008. Over August to November 2011, there was a net FII outflow of INR 9,952.6 crore from the equity and debt markets. Indian economy have declined. In January 2012, the Reserve Bank of India (RBI) revised down the baseline projection of GDP growth for 2011-12 from 7.6% to 7.0% on account of high global uncertainty, weak industrial growth, lower investment activity and decline in resource flow to the commercial sector. In April 2012, Standard & Poor's cut India's outlook to negative from stable, quoting large fiscal deficit and policy paralysis as key reasons. Currently, Indias rating is BBB-, which is just a notch above the junk status. The negative outlook for the Indian economy has made the foreign investors cautious of the Indian markets. The key factors responsible for the negative sentiments are:
Persistent Inflation
Source: Securities & Exchange Board of India
The pessimism among the FIIs which triggered the outflow was casted by the international factors such as the ongoing Eurozone crisis and slow recovery in the U.S., coupled with domestic factors such as high inflation, slower growth projections and policy paralysis in the country. The large scale pullout by the FIIs, fuelled the depreciation of the rupee, which gained momentum in August 2011 and continued until the end of 2011. The economy was offered some respite from the deprecating currency by the renewed optimism of FIIs towards India, which led to large scale capital inflows over December 2011 to February 2012. The renewed faith was pegged to relative insulation of the Indian economy during the global meltdown and steps taken by the Securities and Exchange Board of India (SEBI) to attract investments in corporate bonds and government securities. Investments in debt accounted for approx. 57% of the FII inflows over December 2011 to February 2012. 3. Adverse Economic Outlook for India Over the last fiscal year, the prospects of the
Over the last two years, the Inflation in India has remained around 9 -10%. While, initially the high inflation did not create a significant impact on the investor sentiments, however, the persistence over the last couple of years has turned it into a structural issue and has disturbed the investment sentiments in the economy. Over the recent past, the inflation has been relatively easing out; however it is primarily due to the base-effect.
Persistent Fiscal Deficit

In March 2012, the government announced that the fiscal deficit for 2011-12 was pegged at 5.9% of GDP, against the target of 4.6% of GDP. The government has target by a wide margin on account of lower tax and disinvestment receipts as well as the rise in expenditure, mainly for subsidies. The government is targeting to bring down the fiscal deficit to 5.1% of GDP in 2012-13. The high fiscal deficit is leading to an adverse impact on the exchange rates.
Policy Paralysis
Policy Paralysis has become the new buzzword circling the Indian Economy as the UPA -II government has been unable to success-
20 |RUPEE DEPRECIATION| fully drive home many economic reforms and improvements in the governance. The failure has tarnished the Brand Indian image and adversely impacted the long-term foreign investments. The economy is awaiting reforms in critical areas such as the Goods and Service Tax (GST), Direct Tax Code (DTC) and FDI in sectors such as Retail. 4. Global Uncertainty and Appreciation of the US Dollar While the US is still struggling with its weak economy, high debt and downgrade of its long term debt, the US dollar strengthened against major currencies in over the last year. Over July 2011 to June 2012, the EUR has depreciated by approx. 14.1% again the USD while the GBP has deprecated by approx. 2.4% against the USD. Over the same period, the INR has deprecated by approx. 24% against the USD. caused due to the debt crisis and in the Euro zone and concerns over likelihood of default by a few member nations. Secondly, volatility in the global markets which has driven investors to sell off their financial assets and maintain cash reserves in dollar. Thirdly, Federal Banks policy measures to contain the supply of dollar while still increasing liquidity by replacing long term bonds with short term bonds instead of printing additional currency. Lastly, the safe haven status associated with the US dollar due to which all major central banks still continue to buy treasury securities.
Measures Available/ Adopted by the RBI to Stem Rupee Depreciation Over the recent past the RBI has taken a number of steps to increase the inflow of foreign capital. However, the measures are only remedial in nature and not really designed to check the fundamental exchange rate adjustment. The interventions by RBI have been unable to provide a support to the falling rupee and have just been able to impact the pace of currency depreciation.
Summarised below are some of the recent steps taken by the RBI: 1. High Policy Rates Historically, rise in the policy rates has been adopted as a measure by many nations to prevent sudden capital outflows thereby check meltdown of their respective currencies. However, RBI has raised interest rates several times since March 2010 to tame inflationary expectations. Thus, further increasing the policy rates is not the most attractive proposition for Indian policy makers, as it has already dented the economic
Source: Oanda
This can largely be attributed to four reasons. Firstly decline in value of Euro which was
21 |RUPEE DEPRECIATION| growth. Most economists are concerned that current interest rates in India, which are already higher than most countries, could not attract capital flows. However, any decrease in these rates could potentially lead to further capital outflows and hence the RBI is adopting a cautious approach in reducing the rates. In June 2012, the RBI left its repo rate and cash reserve ratio unchanged at 8.0% and 4.75%, respectively, against the expectations of the industry in favour of a rate cut. 2. Using Forex Reserves Since November 2011, the RBI has been selectively selling forex reserves and buying the Indian Rupee to stabilize demand for the currency. However these interventions have been limited as the liquidity in money markets is already constrained and any such actions will only tighten it further. 3. Relaxing Credit Controls As increasing supply of foreign currency is the best way to fight domestic currency depreciation, relaxing credit controls to allow more market participation and capital inflows has been the most favoured approach by RBI to fight the current crisis. Various measures adopted by RBI in this direction include:

200 basis points (bps) to 6 months Libor + 350 bps Increasing the ceilings on interest rates payable on non-resident deposits a move which was later deregulated to give banks the necessary autonomy in deciding their own deposit rates
4. Administrative Measures Since the second half of 2011, the RBI has undertaken several administrative measures to curb market speculation. These include:
The RBI withdrew the provisions of rebooking forward contracts after cancellation, thereby ensuring that forward contracts are booked only by hedgers and volatility is reduced. The Board of Directors of Authorized Dealers was allowed to fix suitable limits for various treasury functions. The net overnight open exchange position and aggregate gap limits need to be approved by the RBI. All cash as well as spot transactions executed by authorized dealers on behalf of clients will be undertaken for actual remittances and cannot be cancelled/ cash settled.
References
1. 2. Economic Survey 2011-12, Ministry of Finance, Government of India Rupee Depreciation: Probable Causes and Outlook STCI Primary Dealer Ltd. The Economic Times Reuters The Hindu Business Line Business Standard India Today Oanda The Reserve Bank of India Securities & Exchange Board of India
The ECB limit under automatic approval route has been enhanced from USD 500 million to USD 750 million for eligible corporate. For borrowers in the services sector, the limit was enhanced from USD 100 million to USD 200 million. The limits of investments by FIIs in government securities and corporate bonds has been increased by USD 5 billion each to USD 15 billion and USD 20 billion, respectively. In Trade Credit, the all-in-cost ceiling has been increased from 6 months Libor +
3. 4. 5. 6. 7. 8. 9. 10.
22 |FOREX MANAGEMENT|
Foreign Exchange Management : An Indian Perspective

PGP 2013
IIM Bangalore
Kunal Ashok Abhishek Baid Sudeep Mohapatra
Apart from the traditional roles of a central bank to ensure price stability and growth through its monetary policy, one of its more important functions particularly in the context developing countries is managing foreign exchange reserves. This role is critical since the Central Bank is the only national authority which can take any significant step in times of a foreign exchange crisis. This article talks about the various ways a central bank can intervene to manage foreign exchange reserves and control exchange rates. A detailed analysis of the foreign exchange concerns in the current Indian economic scenario is presented. Introduction Foreign exchange reserves are the foreign currency deposits and bonds held by the central banks generally in US dollar, though at times they can be held in other major currencies such as the Euro, Pound sterling or the Japanese Yen. For all purposes in this write up the official gold reserves of a sovereign will be outside the scope with which we treat the foreign exchange reserves (hence forth referred to as forex reserves).
Given below are some of the most important uses of foreign exchange reserves: 1. Reserves are used to manage external payment obligations arising out of current account deficits. They are used for exchange rate management. This can help make a countrys exports competitive in the international market especially during times of a financial crisis. Psychological factor: A depreciating currency can create a negative outlook about the economy as a whole which in turn can lead to lower confidence among foreign investors. Helps nations, particularly the ones with relatively large reserves (China, UAE, Singapore) create a sovereign wealth fund which can help these countries fund their overseas investments Given the importance of the reserves, the duty of a central bank becomes crucial since it is the only authority regulating it.
Forex management The management of reserves by a central bank depends on a number of factors such as:
2.
Whether a country is CAD positive or runs a CAD deficit Whether the currency is market driven, pegged or partially floating Whether the country is export driven or not Whether the country is outward looking in that it feels the need to make overseas real estate investments (a case of sovereign wealth fund) Based on which of these brackets a country comes under, the central bank may decide to take up a particular style of reserves management For instance the United States holding the worlds reserve currency never feels the need to indulge in practices to control its exchange rate. The country despite running a huge current account deficit (the highest in the world) never maintains a large forex reserve because the nation has for years held a AAA rating which has helped it borrow cheap internationally and meet its payment obligations. At the other end of the spectrum is the Peoples Republic of China .The Peoples Bank of China regularly intervened before 2010 to keep the Chi-
3.
4.
23 |FOREX MANAGEMENT|
nese Renminbi pegged to the USD. In order to keep its exports competitive the bank prevented the Renminbi from appreciating vis--vis the dollar by buying the USD and thereby building its reserves. The Chinese behemoth built up reserves up to 2.8 trillion USD becoming the central bank with the largest foreign exchange reserves and an enviable sovereign wealth fund carved out of it. That the central bank could achieve this is commendable, but then in Chinas case this ability was helped by their huge surplus in trade balances.
Fig2: Growth of Indias Foreign Exchange Reserves
Fig1: Chinas Foreign Exchange Reserves
India seems to follows the middle path. The RBI generally allows a floating exchange rate, however, it does intervene in the currency market to meet temporary demand-supply imbalances. What follows below is how India has managed its exchange rate and reserves and our recommendation as to how it could have been better managed.
its balance of payment requirements. While Januarys FII numbers should be encouraging for our central bank, a 3rd quarter GDP growth of 6.1% may suggest a future loss of investor confidence in the economy. This could lead to a subsequent withdrawal of investments which could lead to a 1991 like crisis taking into account the fact that our fiscal deficit for the current year is going to be around 5.6% of GDP. This might get the Moodys and the S&Ps interested for a credit rating downgrade. Given this situation it will be worthwhile analyzing some questions which the RBI will need to give a serious thought to the major ones being: How much reserves should the RBI be comfortable maintaining Should the RBI intervene (have intervened previously) to prevent a downward slide of the rupee Should we create a sovereign wealth fund out of our seemingly strong reserves
Forex Management in India From a time in 1991 when the nation had no more than 600 mn USD to finance its international payments and had to, in a major instance of embarrassment, airlift 67 tons of Gold and pledge it to the Bank of England and the Union Bank of Switzerland to serve as collateral for a 2.2bn emergency assistance from the IMF, the nation has come a long way. Indian forex reserves as of 24th Feb 2012 stand at 295 bn USD [1] (Peak of 318 bn USD) enough to finance imports for the next eight and a half months.
While this looks like a formidable amount, appearances could be deceptive. With a current account deficit at 3.3% of GDP India has increasingly relied on foreign investments to meet
How much Reserves should the RBI be comfortable maintaining India belongs to the twin deficit club i.e., the country runs both a current account deficit and a fiscal deficit the high CAD being attributed primarily to a large trade deficit mainly due to huge oil imports. For the year 2011, the current account deficit was 44.3 bn USD [2]. This was balanced by a capital inflow of 59.8 bn USD allowing approximately 13 bn USD to flow into the Indian reserves. The net change in the previous 2 years has been an outflow of 20 bn USD in 2008-09 and an inflow of 13.4 bn USD in 2009-10. While the RBI can take solace in the fact that reserves are burgeoning, a closer look into the BOP shows that more than 60% of the entire capital account inflow is due to foreign investments in the country
24 |FOREX MANAGEMENT| (50% FII and 10% FDI). While the net foreign infrastructural investments are permanent in nature the portfolio investments are fickle and to a large extent depend upon the macro-economic outlook of the nation. This leaves the country at the mercy of these institutional investments who may already have started doubting Indias growth story due to a higher than expected inflation and a slowing GDP growth (See graph below to see the impact on reserves when investments dried up in 2008-09)
Table1: Net foreign investments and impact on foreign exchange reserved
All other things remaining equal if in the current fiscal year the portfolio investors turn flat(net buying and selling being equal), the nation will be left literally gasping for breath with the RBI having to deplete reserves or borrow foreign money to the extent of an additional 24bn USD a year to meet its BOP commitments. With fiscal consolidation going for a toss this year (even an ONGC auction having its share of controversy), Indias international credit rating may itself take a hit. Borrowing from abroad will be more expensive and India may actually prefer depleting some of its reserves than taking loans from abroad. From a doomsday perspective assuming India is unable to borrow and uses its reserves, our 295bn USD of reserves will be depleted in about 12 years. Not an immediate problem one might think but take into account the scenario when the investors turn net sellers. In such a case the RBI will have to buy rupee with its dollars to prevent the depreciation of the rupee which is bound to happen with an FII pull out. All of a sudden the RBI does not have the sort of cushion that ac-
companies large reserves. With the foreign exchange trading market running into trillions of dollars in just one afternoon billions of dollars of fire fighting reserves may be consumed by speculators hell bent on shorting the rupee. Even if we borrow instead of depleting our reserves, a higher interest payment (made worse by a falling rupee) will only worsen the fiscal deficit leading to further deterioration of our credit standing thus sucking India into a downward spiral. One may call us fierce pessimists especially with the FDI expected to reach a record high of 35 bn USD and FIIs have already pumped in a net of 12 bn USD in the new year alone. One could expect another positive flow into the reserves this fiscal year (figures awaited). But the point we are trying to make should be clear. No central bank of a country with a twin deficit problem can rest on its foreign exchange reserves no matter how large. Our belief is that in Indias case the forex reserves should be used with the intention of exchange rate stability and not for CAD financing. Long term monetary and government policies should be framed to strengthen our exports so as to reduce our trade imbalance. With oil imports accounting for a third of the countrys imports, the problem of large imports is going to stay with us for the foreseeable future unless the country (and the RBI governor could play a coaxing role in this) shifts to alternate energy sources.
Should the RBI intervene to prevent a downward slide of the rupee While we mentioned that the primary job of RBI with its reserves should be to maintain a competitive exchange rate, how much intervention is needed, is a tricky question. The rupee depreciated more than 15 per cent over the last 4 months (see graph below) primarily on account of FIIs fleeing the Indian markets. Should the RBI have intervened? The RBI did in fact intervene selling 845 mn USD last September [3]. But was that too little? With the Indian interest rates fighting for a spot in the skies, Indian firms thought it was worth their buck to raise money from abroad where interest rates were lower. While this meant lower interest payment in USD, a falling rupee meant that firms needed to shell
25 |FOREX MANAGEMENT| out additional Indian money to service their foreign currency obligations. With their financial statements being released in rupees, Indian firms were understandably disappointed with a rupee fall. Lowered profitability due to higher interest expense meant a further pull out of FIIs and further rupee depreciation. The Indian rupee was being humiliated in the international market not because of bleak macro fundamentals but because the portfolio investors just love to buy and sell at the tiniest signs of changes. This is where we feel the central bank should have put its foot down and sold some of its reserves to back the rupee at least to send a to investors to check their rampant selling. This would have let Indian firms be more competitive and FIIs wouldnt have fled like they were in an apartment on fire. not much point in having an SWF worth 10 bn USD or around that figure. India will need large amounts of money for real estate projects outside and in India. With India being a country with large twin deficits, we will always need the full force of our reserve to support a BOP eventuality. Also, the government of the SWF will be a matter of controversy who will monitor the use of the SWF? Will there be a free flow of money into and out of the SWF. What if the SWF is not appropriately utilized that would serve a double whammy.
Fig 4: Largest Sovereign Wealth Funds
Fig3: Fall of the Indian rupee against the USD in late 2011
Should We Create a Sovereign Wealth Fund out of our seemingly Strong Reserves Sovereign wealth funds are they essentially the prerogative of the rich? China isnt essentially rich yet it has a sovereign wealth fund worth 567bn USD carved out of its massive foreign exchange reserves. For a developing country that is indeed an achievement of sorts. China has used this fund to buy real estate in Africa and other parts of Asia. With the next resource battle to be fought in Africa, should India carve a SWF for itself out of its reserves and use it for purposes of investment? Clearly the central bank should restrain itself from such an action. To begin we are no Arnold Schwarzenegger when it comes to forex reserve muscle power (China is, see graph below). We are at best a Tom Cruise nice and handsome but not powerful enough. Our entire exchange is not even half of Chinas SWF. If we are indeed to carve a SWF out, it should be worth atleast 40-60 bn USD there is
Conclusion The position of a central banker is riddled with ambiguous questions. While its primary responsibility is that of price stability and low unemployment, for a nation having emerged from an embarrassing BOP crisis, it has the additional responsibility of maintaining and monitoring forex reserves. We opine that the reserve bank carve out its policies favoring stronger exports to reduce CAD since relying on foreign funds for deficit financing is like riding a tiger. Additionally while market forces be allowed to play their part in exchange rate determination the RBI should be more proactive in saving the day especially when the nations firms are exposed to foreign currency debt. References [1] http://in.reuters.com/article/2012/03/02/ india-reserves-idINDEE82109220120302 [2] http://www.rbi.org.in/scripts/ PublicationsView.aspx?id=13728 [3] http://www.thehindubusinessline.com/ industry-and-economy/banking/ article2639510.ece
26 |IN CONVERSATION WITH|
Guru Speak
Mr. Sanjay Bakshi
A professor at MDI, Gurgaon, where he teaches two of the most popular courses in Finance. Apart from being elected as the Best Teacher by students year-on-year, he is also the CEO of Tactica Capital Management, a highly sought after deep value investment boutique. He also writes articles for Outlook Profit and delivers talks at prestigious institutions. He blogs at http://fundooprofessor.blogspot.in, Site: http://www.sanjaybakshi.net
You are known as an authority on value investing in India. How did you get into value investing?
I got interested in stock markets in school. Like many others, I was attracted by hot IPOs. My friend and I used to pool our money together to increase the odds of IPO allocation. If we made any money, we did not keep it, because it went in the next hot IPO and in the end we had huge losses. Good early lesson!
web was yet to dominate the world. I received the Buffett letters within a week or so and when I opened them, I could not put them down. I was hooked to the idea of value investing. Buffett was heavily influenced by Ben Grahams teachings at Columbia who taught him how to evaluate stocks in 1930s. In his letters, Mr. Buffett talked about Graham and his book, "The Intelligent Investor," and so I went and bought the book.
I lost interest in the markets when I got into At the end of this book is a transcript of a talk college because I met this enchanting girl, who that Mr. Buffett gave at the University of many years later became my wife. So Columbia in 1984. The talk was titled The she kept me more interested in her Contrary to what I Super in ves t or s of G r aha m -a nd than in the markets. learnt at LSE, Doddsville, in which he lists the track Buffett said that My interests in markets got re- that to get HIGH record of a bunch of ex-students of Graignited, when I went to the LSE. I returns, you should ham who bought different stocks at differattended a class called "Security In- take LESS risk. ent times and ended up with astonishing performance. vestment Analysis," where I was taught that markets are efficient and One of the best ideas Mr. Buffett gives in that that there is no point doing any analysis because talk was to do with the relationship between risk everything that is knowable is already in the and return. Contrary to what I learnt at LSE, price. Buffett said that that to get HIGH returns, you should take LESS risk. When I read this, I immeSo while I being taught that markets are effidiately experienced cognitive dissonance. On one cient, I came across an newspaper article which hand my profs at LSE were telling that risk and talked about a fellow called Warren Buffett. return are positively co-related and markets are You see this was in 1990 when Mr. Buffett was efficient and humans are rational, while here was not the household name that he now is. Anya man, who had a fabulous track record, and who way, the article said Warren Buffett has a fantassaid just the opposite. I promptly resolved this tic track record in investing and he has a knack dissonance by dumping the idea of efficient marof explaining complex financial and business kets and picking up the teachings of Buffett and topics to people in a wonderful way by writing Graham. amazingly good letters to his shareholders. I became interested in reading these letters and I wrote to Mr. Buffett. Berkshire Hathaway did not have a site then. Indeed, the world wide I also decided that I wanted to come back to India and start up an investment partnership just like the way Buffett did in his early years. So

that's how I got into value investing. pany had a billion dollar valuation at one point of time but it never made any money. If you look at the cash flow statement and understand the economics of the business with its need for constant investment in new plant and machinery because the old one becomes obsolete rapidly, you will find that over its life, the company never made any money for its stockholders. All of the dividends paid out were funded not from what Buffett calls "owner earnings," because there weren't any, but out of new cash injections from owners and lenders. That's the functional equivalent of pyramid scheme where old speculators are paid from money brought in by new ones. This can't last. Today, the stock is worth almost nothing. As Graham said, market is like a weighing machine in the long run but in the short run its like a voting machine. So all sensible investing involves seeking value in excess of price paid. Deep value is different only by the degree of cheapness in a situation. Deep value means "cheap now", not cheap based on "future prospects." One form of "cheap now" would be a profitable company which is expected to remain profitable, having zero or very little debt, having substantial cash on the balance sheet which is surplus to the needs of the business and having an aggregate market value less than net cash alone. That's a cash bargain as an example of "deep value".
Why did you select value investing over other methods of analysis?
In his talk The Superinvestors of Graham-andDoddsville Buffet said that if somebody explains value investing to you, two things happen - either it grabs you immediately or you dont get it. In my case it was the former. The idea of getting something for nothing completely grabbed me. There is a joke about two professors who are walking down the corridors of their finance department and one of them spots a hundred dollar bill lying on the floor. He tries to pick it up but the other professor stops him and says well you cant pick it up because its not there. If it was there, it would have already been picked up. There is a janitor who sees these two learned professors walk away leaving hundred dollar bill on the floor. He picks up the note and enjoys the money. Thats fascinating because the idea that you can get something for nothing is a very seductive idea and to most people if you put it in that way people will get it. Thats what value investing really is.
How would you define value investing? How is it different from deep value investing?
For me, all investing is value investing. Consciously paying more for anything than what it's Sounds ridiculous if you think about from the worth is speculation. Now, this might work in a viewpoint of a businessman. Let's say you walk momentum-driven market where somebody else into a nice restaurant and approach the owner will buy overpriced merchandise from at an even and offered to buy his restaurant for less than higher price, which is what the Greater Fool the cash in the till. The owner would think you Theory says ("I know I am a fool to buy this are insane and yet you get the functional equivastock at this price, but I also know that a bigger lent of such situations in the stock market. fool will come along and buy it from me at an even higher price.") Deep value means At the beginning of your investIPOs are a form of the greater fool cheap based on tify the first stock to be included theory if you think about it. Buffett future prospects. in your portfolio? once said that value is destroyed not My first stocks were IPOs as I mencreated by any business that loses money over its tioned. However they were not the beginning of lifetime no matter how high its interim valuation my investment career but the beginning of my might get. In my class I like to cite examples of speculation career which ended very badly and companies which never generated any cash over very quickly. But when I came back to India their life but nevertheless commanded gigantic after finishing my studies in the UK in 1994, valuations for a while. there were a lot of listed NBFCs. Some of these One example is that of Samtel Color. This comcompanies had very high dividend yields and many of them sold well below book value. Some
cheap now, not
ment career, how did you iden-

of them were very conservative in terms of lending. One of them was Cholamandalam which was selling at less than 50% of book value. It was giving you a dividend yield of more than 10%. So it was a classic Ben Graham kind of a stock. buying high quality companies and holding on to them for a long time, and then there are people who have done I enjoyed investing in high yielding stocks. I also well by buying loved the idea of stripping dividends from high mispriced securities in bankrupt companies undividend yielding stocks which is an dergoing a debt restructuring operation, operation where you buy them on cum and then there are those who have -dividend and then you sell them on ex Its about trying to bought statistical bargains like Tweedy -dividend basis at the same or even fit your personality Brown does now based on the principles to a style, and it isn't higher price, effectively stripping out necessary that you taught by Graham. the dividend. The annualized return on have only follow Graham or only such operations can be very good. This I like to give exposure to all these investfollow Fisher. happened at a time when the dividends ment styles to students and its for stuwere taxable and when dividends became dent to decide what suits him or her the tax free, such operations became even more most. Its about trying to fit your personality to a interesting. I think in one of his talks, Charlie style, and it isn't necessary that you have only Munger said that when you have very little follow Graham or only follow Fisher. You can amount of money, then you can look at these take bits and pieces of things that you like the obscure bargains in tiny companies. You dont best from different role models and try to defind such inefficiencies in large companies bevelop your own investment personality. This will cause those are tracked closely by hundreds of happen automatically over a period of time proanalysts, so there is a lot of competition in that vided you get a variety of exposure to different space. styles.
Identifying stocks for value investing is a difficult process. What would be your advice to young investors looking to get into value investing?
My advice is to approach value investing with an open mind and that is an advice that I give to my students by exposing them to a variety of value investing styles. My own investment philosophy has evolved over the years based on the different styles that I have adopted, from different role models like Ben Graham, the partners of Tweedy Brown, Philip Fisher, Warren Buffett, Seth Klarman, Martin Whitman, Richard Zeckhauser, Nassim Taleb and others. My advice to students is to go into this (or for that matter anything) with an open mind and if the idea of value investing grabs at you then don't decide that you want to only do cash bargains early on in your career. Get exposure to different styles and see what suits you the best. There are people who have done extremely well by adopting the Fisher/Munger/Buffett style of
The other thing which I want to tell your readers is to look out for great businesses by having an investment frame of mind. One favorite example to explain this to think about what happens when you go out for a dinner to a popular restaurant. Let's say you walk into joint like Haldirams and start thinking about Return on Capital in your current location VS a situation in which you are dining, let's say, at a much more fancy place like The Oberoi. Return on Capital is the key ratio to focus on but that's just a start. So let's break it up into its two components: margin and turnover. Which one of the two situations would have a much more rapid turnover. Obviously that's Haldirams where in a single lunch shift, a table will turn over maybe five paying customers. That's just not going to happen in The Oberoi. So, a Haldirams restaurant may have a lower margin on sales but the very fast turnover should deliver it a much higher return on capital. This is a very useful way of thinking about a variety of businesses, so it makes sense to make a habit of it.

The ideas of return on capital and how it breaks into margin and turnover are not just abstract concepts. These are practical concepts. So my advice to students who are starting out is to think in a much more common sense way about what makes a business a great business and what makes a business a lousy business and why. works. If you combine these two skills - accounting and business economics, then you learn to visualize what the accounting numbers of a given company might look like under different scenarios 10-15 years from now. There is a famous ice hockey quote: "Go where the puck is going, not where it is." Its quite applicable to the field of security analysis and the combined skill of accounting and business analysis would enable you to go where the puck is going The last point I want to make is about understanding human nature. Its important to know the power of incentives, the power of perverse incentives. Human nature has not changed much in the last 1,000 years.
In your opinions what are the virtues/ qualities that a value investor should possess?
The single most important thing in my view is to have the independence of mind. You cant get swayed by what everybody else is doing. In fact, independence of mind is just one of the attributes of being "psychologically astute." People who are not psychologically astute consistently make errors of judgment, something I talk about in the early part of my BFBV course.
The idea that bad accounting promotes bad behavior is a very powerful idea. If you have aggressive accounting - let's say the rules allow you to recognize revenues faster than you There are about 15 biases and they are in us for a should - and if you adopt such practices of pre reason. So one has to recognize that they were -poning your revenues and postponing your given to us by evolution for a reason. For examexpenses, you are not changing anything ecople, "social proof" which is just a fancy phrase nomically but you showing higher current meaning "herd mentality" was given to us by earnings at the expense of lower future earnevolution because it had survival advantage. ings. People would do that because of perverse There is "safety in numbers" when you are living incentives e.g. if their own bonus is tied to in the caves and in the jungle. But when you are reported earnings. That's how it starts. Then it trying to make a living by buying securities that spreads and when almost everyone is doing it, very tendency, which gave our ancestors survival everyone else starts to do it too advantage, causes us to make foolish (social proof) and it get's rationalmistakes in markets. You really have ized. Man is not a rational animal, But when you are to fight these automatic tendencies trying to make a living rather man is a rationalizing animal. which are hardwired into us, and there by buying securities that are specific methods of fighting them. very tendency, which Evil in corporations almost always gave our ancestors starts with bad accounting, and then Another important skill to acquire is survival advantage, human nature takes over and it causes us to make accounting and I realized this late, spreads. So, understanding human foolish mistakes in despite being a Chartered Accountant nature that explains why people are markets. from a great firm, Price Waterhouse. going to do wrong things and how At PW, I learnt how accounting really the good people end up making bad works but I never learnt what the judgements, and how that inevitably results in numbers mean from the viewpoint of business blowups over time, is something you will learn economics. That's the part I got by reading Graby reading a lot of books on financial history. ham's "Security Analysis," Warren Buffett letters and the books by other authors like Philip Fisher. What readings would you suggest to an Those books really tell you how to determine if a aspiring value investor? given business is good, bad, or mediocre, and I mentioned some books before. Read up all why. And its an enormously useful skill to have the books written by Graham. He wrote two answers to those questions and you get better books for investors, but there are 6 editions of answers when you know how accounting really Security Analysis and each is a bit different

with different examples, so read them all. Also read all editions of The Intelligent Investor. You should also read letters written by some of the greatest value investors like the partners of Tweedy Brown and Warren Buffett, and Seth Klarman. Euphoria," and "The Great Crash, 1929." A great book has come recently which is called "This Time its Different" which by the way are the four most dangerous words in investing according to John Templeton, who is another role model.
Warren Buffetts letters I think are the best education in finance that anybody can get, and I cant overemphasize this enough. The thing is that these letters are free Warren Buffetts and that if he had charged a thousand letters I think are the So you have to read these books on hisdollars for them, people would value best education in tory, and those written by famous invesfinance that anybody them more. But he gives them away can get, and I cant tors but you also must read books on for free and people think that these are overemphasize this multiple disciplines. You have to have a enough. free and can't have much value, which multidisciplinary mindset, and that is a is completely wrong. My very strong thing which I like to teach in the early suggestion to your readers is to drop part of my course. We are trying to buy good everything and just download these letters and businesses and you wont understand what a print them out. Dont read them on the screen. good business is unless you understand multiple Read them slowly, read a letter in four days and disciplines. One of them is evolution and you can try to absorb what he is saying. I think there is no pick up any number of great books on the subject better place to learn about finance, about busiincluding Dawkins' "The Selfish Gene" and learn ness economics, about ethics and about a whole about the remarkable parallels between evolution lot of subjects related to the business world than and business. from the letter of Warren Buffett. Pick up some of the greatest texts in social psyRead Seth Klarman's "Margin of Safety." Martin chology like "Influence: Science and Practice" by Whitman has written a couple of books ("The Robert Cialdini, and "Social Animal" by Aronson. Conservative Aggressive Investor" and "Distressed Investing"), and they are worth readI love books on and by Feynman who is one of ing although his writing style is a lot harder to my role models. I love his way of thinking - the understand than that of Buffett. scientific way. There are some video lectures that have been put up on the net by Bill Gates who Read up all the three books by Philip Fisher: bought the rights and gave them to the world. "Common Stocks and Uncommon Profits," "Conservative Investors Sleep Well," and I also highly recommend a course called "Justice" "Developing an Investment Philosophy." Then I by Michael Sandel from Harvard Law School. It's want your readers to read books on history. As I on the net. See a few lectures and I guarantee you said earlier that human nature hasnt changed will be hooked. much and people have made enormous mistakes You have to know what to read and you have to in the past and one can learn from the mistakes read a lot. So one of the things about this profesmade by our ancestors. There is a book called sion is that reading is required and its not going "Extraordinary Popular Delusions and the Madto end just because you finished your business ness of Crowds" by Charles Mackay. It is one of school. It only begins after that. But you also the greatest books on crowd psychology where must know what not to read, because the world is you read up on Tulipomania and South Sea Bubfull of noise and that is only going to keep on ble and once you read them you will automatiincreasing because of distractions. My advice is to cally relate them to recent bubbles and manias keep away from television, except for entertainand find that nothing has changed. ment and not for news. Ignore the front page of Then there are two books written by John Kennewspapers and do not read the stock market neth Galbraith: "A Short History of Financial pages.

You have to see how funny this is. Pick up newspapers of 5 years ago and pick up the top stories of that time and see how irrelevant they were in the whole scheme of things. People think they were terribly important but in the end they were not too important. That's recency bias where people overweigh recent but unimportant or irrelevant events. So you have to know what to read and what not to read. I like to think a lot about how to eliminate distractions. I use tools to eliminate distractions like Facebook or Twitter or e-mail or SMS. Being connected is good but so is being disconnected. Depth is also as important, perhaps more important than breadth. with one explanation that answers the question. That's one hell of a way to think - like the fictional Sherlock Holmes did. I think one should read Judith Harris and Richard Feynman and other great thinkers. Even if you don't understand their subjects, you'd understand their thinking styles. I think its terribly important to have these role models from multiple disciplines.
What is your opinion on the current Indian macroeconomic environment with respect to investments in the equity markets?
None, I have no macro views. I think it is very difficult to predict these things. I have read a lot of studies by the experts who try to predict them but they dont do better than a toss of a coin. So I dont think it is worth it to try to predict where the interest rates, GDP growth rates or stock market levels are going to be in the next year or two. The idea that you can buy-well run companies which are selling at low valuations occasionally in the stock market is a very powerful idea. If the business is good, the management is good, the price you are paying is reasonable and you have the patience to hold on to that stock for a long time, then you will do well, particularly if you have many of them in your portfolio.
You are a role model for thousands of young investors/students across India. Who is your role model?
I get new role models every year; they typically come from books I read, or columns written by a journalist. So if I really like a column written by a journalist I would like to read his or her other columns, so you have all these people who think the way you want to think and who think better than you think and you want to emulate them.
To give you an example, there is a lady by the name of Judith Rich Harris, she writes on evolutionary psychology which is a combination of Any special words of wisdom for evolution and psychology. She has written two BlueChip readers? books and one is called "The Nurture Assumption" and the other I use tools to eliminate "No Two Alike: Human Nature and distractions like Facebook or First, find role models. One interHuman Individuality". esting thing about role models is When you read these books, you not only learn about a new fascinating subject, you also learn how this remarkable woman thinks, how she develops her thesis and you really have to read the book to understand what she is saying, but the algorithm she uses is a fabulous one, its the one which Charlie Munger refers to as "inversion" or "proof by contradiction." Judith Harris has a question and she seeks various answers to that question and with extremely logical way to thinking she starts dismantling one reason after another and in the end she is left
Twitter or e-mail or SMS. Being connected is good but so is being disconnected. Depth is also as important, perhaps more important than breadth.
that these are not necessarily the guys who did the best. The guys who did the worst, the guys who messed up, the Nick Leesons, the founders of LTCM, the Bernie Madoffs and other people who are, or until recently, were, in prison for frauds, can also be good role models. They are great role models because they are teaching you in a very vivid way" hey guys look how I screwed up my life, and I hope you don't end up like me." An interview with Mr. Sanjay Bakshi As told to Aditya Mittal & Mukul Aggarwal Team Monetrix
32 |HYSTERESIS EFFECT|
Hysteresis Effect on the Indian Economy

Aditya Maira, Nitin Jain
Indian Institute of Management, Indore
The Indian economy has been seeing many changes over the years owing to both domestic as well as international forces. One of the key indicators of economic health is the nominal exchange rate of the country. It is a well-established fact that India follows a managed floating rate system in which it does not intervene until there is a significant deviation from the standard rates. The Central Bank, Reserve Bank of India in our case does this by buying or selling currencies. In an increasingly integrated global economy, currency rate fluctuations affect the economic health of the country. Hence, almost all governments now follow the managed floating system to control sharp deviations in nominal exchange rates. There are merits as well as demerits of this system. However, we have attempted to understand the effect of changes in the net exports during the last 6-8 months owing to the exchange rate variation. share and even left some foreign markets entirely, going back to the initial level will not be enough to bring US firms back. To return to the initial trading pattern, exchange rates will have to overshoot in the opposite direction, making it profitable to incur the costs of starting up export operations and competing with foreign firms that supply imports. The evidence on these hysteresis effects remains tentative. The hysteresis effect supports the argument proposed by the J-curve effect where the net exports fall and later rise whenever the exchange rate is devalued.
Hysteresis effect In the aftermath of a large and persistent overvaluation of the dollar in 1980-85, several US firms were at a disadvantage in world trade as dollar prices of imports declined. These are normal effects of a currency appreciation. However, the hysteresis argument states that when there is a change is exchange rate, there is a considerable amount of lag before the economy reacts to such a change. Once foreign firms have become established in the United States and consumers have become accustomed to their goods, even a reversal of the exchange rate to the initial level will not be enough to enable US firms to recapture the share of the market. Similarly, when US markets have lost foreign market
Figure 1: J-curve effect on net exports due to devaluation
Trend of net exports since July 2011 The graph shown below shows the variation in exports, imports and nominal exchange rate from November 2010 to Jan 2012. The figures mentioned in the graph are in $ millions. An average value has been considered for each data point for the purpose of analysis. As we can see from the graph, the exchange rate remains steady at around Rs. 45 per dollar for the period until July 2011 following which there is a sharp devaluation in currency. The exports depend primarily on two factors namely Real exchange rate (R) and foreign GDP (Yf). On
33 |HYSTERESIS EFFECT| the other hand, the imports are affected by Real exchange rate and domestic GDP (Y). Prior to July 2011, the net exports varied owing to changes in domestic GDP (Y) and foreign GDP (Yf). Since the outlook of the economy had been good until this period, both imports and exports rose causing the net exports to rise. Thus, trade balance improved during this period. even though there was trade deficit (X<M). The graph below shows the trend of rising exports and imports during the period of October 2010 to July 2011. eign price level, ER is nominal exchange rate and Qm is the quantity imported, we can see that
Net Exports NX = Qx.P Qm.Pf.ER
When the currency is devalued, ER increases. This causes imports to increase but the exports remain constant in the short run. Thus Net export decreases initially. This occurred because there was a consumer response lag. The price effect dominated quantity effect causing consumers to take time to accommodate to cheaper domestic goods.
Figure 2: Trend of exports, imports & exchange rate fluctuatin
For the entire period from July 2011 to Jan 2012, net exports has been more or less constant, only varying slightly owing to changes in domestic GDP, despite a devaluation in currency. This can be attributed to the steady & high level of inflation persistent in the Indian economy during the period. This has caused a high domestic demand causing prices to rise further.
Following this drop in exports for 4 months, the consumers switched to buying foreign goods. Thus, exports increased and imports decreased. This caused the trade balance to improve subsequently. During this phase, the quantity effect dominated the price effect. This effect will now last long as the lag due to consumer response has now been surpassed. Thus the hysteresis effect can be seen to affect the dynamics of net exports even in the Indian economy but impact in not so prominent.
However, from July 2011 to October 2011, the exports fell from $29344 million to $ 19870. Beyond this, the exports rose to $ 25347. The J-curve effect can be noticed in this change. Let us assume Qx to be quantity exported at an average price of P. If Pf is for-
Heavy imports of capital goods, fertilizers, petroleum and some other essential commodities have contributed to the rise of imports in India. India imports three fourth of its requirement for oil and a recent shortfall of coal has further led to an increase in import figures. For last few months the confidence of the investors in the Indian market is at all-time low which is combined with the recent spurt of corruption cases on politicians. This has led to a huge outflow of money from the Indian market, which in turn has increased the exchange rate or the value of the rupee has depreciated.
34 |HYSTERESIS EFFECT| Future of Indian economy, if the recent trend continues, should see an increase in GDP figures due to increased exports from Indian sub-continent. Indias managed floating exchange rate system has actually benefitted the exporters, but the recent increase in the import of oil and coal combined with increase in exchange rate will only mean further increase in inflation. This would prove to be a huge set back since India is already following a contractionary monetary policy. to reduce subsidies. Monetary policy will remain less effective in inflation control, if fiscal policy does not focus on improving supply of key goods and services agriculture, skilled labour and infrastructure but keeps stimulating consumption demand. Increasing agricultural productivity will require the policy to foster a supportive environment of better irrigation, better technology and infrastructure. A developing country has to live with some inflation and using monetary policy to control inflation would only lead to reduced investments. The only way to fill the demand and supply gap is to increase productivity.
Since India has a managed floating exchange rate with free capital flow, fiscal policy will remain ineffective. In addition, expansionary fiscal policy would delay the growth further. In contrast, monetary policy will be highly effective but again it would hit investments. Seeing the recent trends, it is clear that Indias net exports does not increase drastically with an increase in exchange rate. It only leads to increase in inflation due to increase import bills on coal and oil. For a developing economy like India, a rupee appreciation seems best for some time to come which can be assured only through positive market sentiments. India has been always an attractive destination for investment but for this the sentiments of the investors and market need to be corrected. Foreign investments in the form of FIIs and FDIs are needed for the economy to grow further. This will only be possible by improving market sentiments.
Linking wages to productivity will be critical for managing demand pressures. Increasing productivity will enable the economy to control inflation and enjoy higher growth. Else, the economy could lapse again into a phase of lower growth. We should use innovative techniques, look towards east and west on how to increase productivity, learn from our mistakes and try to create an atmosphere for growth.
The hysteresis effect on Indian economy may not be directly traced due to its overdependence on imports. A developing economy like India should try to decrease trade deficit and device mechanisms to increase productivity, maintain high investor confidence, eradicate corruption and try to control inflation by filling the demand supply gap.
The composition of government expenditure needs to lay greater emphasis on increasing the productive capacity of the economy, through increased investments in agriculture, education and infrastructure. This would make sure that we are less dependent on foreign markets for
References
basic needs. To create fiscal space to invest in these critical areas, the government will have
1. Macroeconomics, 9th editon by Rudiger Dornbusch, Stanley Fischer and Richard Startz 2. Essentials of Macroeconomics by Peter Jochumzen - BookBoon , 2010 3. Macroeconomics: Principles and Tools (3rd Edition) by Arthur OSullivan, Steven M. Sheffri
35 |BOOK REVIEW|
The Ascent of Money:

A Financial History of the World
is written by Harvard Professor Niall Ferguson and it was later adapted into 6-part television documentary. Logically structured into 6 chapters banks and banking system, debt and bond market, equity and stocks, insurance, real estate and finally Chimerica, which covers a unique union that has been established between USA and China, the author investigates right from the history of credit and debt to the present day topics like globalisation, obsession with home ownership and emergence of Chimerica. Modern finance was born in Italy in 15th Century. Initially, Christians did not participate in the money lending as the Bible forbids usury. The Jewish population construed this to mean that they could not charge interest to their own family. This was one of the first associations of Jewish people with money. A Christian by the name of Giovanni de Medici used to give advance money to a merchant and charge a fee (Something what we call Interest now). There are lots of fascinating details about financial events including main innovation that happened in last few centuries. Perhaps the most distinct aspect of the book is Ferguson's ability to link the past events with the present scenario and cases. For e.g. Spanish found gold and silver mines in South America while on their exploration. They mined this gold and silver and sent them back to Spain which made it one of the wealthiest countries. Whenever they needed more money, they would mine more gold and silver (Just like how money is printed nowadays). However, there was so much gold in the market that it lost it value and the Spaniards drag themselves into financial ruin. Also the bond market has its origins in the states need for money to finance war.
In Scotland, in the early 1700s, widow and children of deceased ministers of Church of Scotland faced penury after his death. Robert Wallace and Alexander Webster raised money from the group of 930 Scottish ministers to profitably invest it and pay out the widows of these ministers from the profits of these investments. The keystone behind the success of this first insurance fund started for Scottish ministers was the mathematical precision needed to calculate how much premium to be paid out every year. He explicates how China has become banker to the USA and until the current global financial crisis, relationship which seemed to be pretty reliable, now seems unstable. American consumers overpurchased goods and overborrowed from China and the China in turn accumulated huge dollar surpluses by cheap exports and invested those dollars back into Wall Street and US treasury bonds, thereby providing spendthrift Americans with the money they needed to live an American dream and sustain as the superpower. For a time it seemed like a marriage made in heaven, Ferguson writes. The East Chimericans did the saving. The West Chimericans did the spending. Mr Ferguson, a historian with a largely business oriented interest and research, clearly explains rationale behind the book by summarising: From ancient Mesopotamia to presentday Chinathe ascent of money has been one of the driving forces behind human progress: a complex process of innovation, intermediation and integration that has been as vital as the advance of science or the spread of law in mankinds escape from the drudgery of subsistence agriculture and the misery of the Malthusian trap.
Team Blue Chip
36 |IN - DEPTH|
European Crisis
Still Anybodys Guess
Aditya Bansal, Ankur Dikshit Team Monetrix
Europes 19th crisis summit was held in the last week of June in Brussels amidst great hope and global attention. Like the previous 18, this too was supposed to be a game changer. Did it live up to its billing? Well partially yes, if you believe the financial markets and pundits. Yields on Italian and Spanish bonds fell sharply as investors interpreted that Europes political leaders had committed t h e m selves to the creation of a banking union and to allowing troubled countries easier access to Eurozone rescue funds. The heads of Italy, Spain and France were hailed in their respective countries for scoring a vic-
stance from Germanys exclusive obsession with Fiscal Austerity. The other notable developments were that the promised aid of up to 100 billion ($125 billion) for Spain to recapitalise its banks would no longer be senior to other debt. It is mentionable here that when Greek debt was restructured earlier this year, bonds held by the ECB were not subjected to losses. Spain was also given one year more to meet the deficit target of 2.8%, the new deadline being 2014. Ireland could also expect the burden of its bank bailouts to be eased. But there are several caveats. Firstly, the Eurozone members did not commit to a
tory over German Chancellor Angela Merkel, who came under severe criticism at home for conceding too much at the summit. Looking at the fine print, the European leaders have broadly agreed to create a Europe-wide bank supervisor (involving the European Central Bank) before the end of the year. Secondly and more significantly, by accepting that bail-out funds can go straight to banks, Mrs. Merkel has made a big shift from her insistence that help could go only to governments, with tough conditions attached. This underlines a big change in
banki n g union as such. Although this could be considered as the first step to a Banking union which could end the deathly cycle of weak governments and weak central banks trying to stifle each other. Secondly, before banks can be recapitalised directly, the euro zone will have to create a strong central supervisor, centred on the European Central Bank (ECB). This will take time, with several issues to settle among them the question of which banks should be supervised. Germany has tried to limit scrutiny to big crossborder banks. But this will tend to overlook the smaller regional banks in Spain and Germany
37 |IN - DEPTH| where the worst problems lie. The events of the recent past suggest that the chances of break-up of the euro precipitated by Greece are highly unlikely. The EU has enough firepower to keep Greece in the single currency, if it wants to. More alarmingly, if both Spain and Italy are unable to fund themselves through the markets, the EU may simply be unable to assemble a bailout fund large enough to save them. At that point, the break-up of the euro does not look a distant reality. In this light, the recent failed attempt at bailout of the Spanish Banks becomes more significant. The Europeans thought they had exceeded market expectations by coming up with 100bn. On the contrary, the yield on Spanish bonds actually rose after the bailout was announced. Investors seem to have concluded that if Spain cannot borrow directly to bail out its banks; it is perilously close to losing access to the markets completely. The prospect that Spain might need a full sovereign bailout seems frightening. It would need something in the vicinity of 500 bn - Source: The Economist exhausting almost the entire financial firewall that the EU has constructed to contain the crisis. However, because the new provisions in the Eurozones 440bn rescue system were applicable on Spain, it will avoid the kind of intrusive inspection of government books that came along with Irish, Greek and Portuguese bailouts. But the new loans, expected to be negotiated before the end of the month, will not be condition-free. EUs top economic officials made clear that it would be the European Commission and other international experts, and not the Spanish government that would decide how much Spains banks need. The rescue of Spain is likely to have more impact on financial markets than the rest three as its economy is nearly double the size as the rest three combined. Coming to Italy, the Italian budget deficit is now pretty small as a percentage of gross domestic product much smaller than Britains, for example. But Italys total public debt has recently hit a new record of 1.95tn and is well above 120 per cent of GDP. The country needs to borrow hundreds of billions in the markets this year, just to roll over its debt. However, the IMF and European Union might not be able to cough up the amount of money Italy the country with third largest debt stock in the world, might need for a bailout. The borrowing costs for Italy are creeping up we might just be approaching the point where Italy has to look at some place other than the bond markets because it becomes unfeasible. In the light of these facts, the result of general elections in Greece becomes more important. The newly formed government under Mr. Antonis Samaras makes any confrontation with the EU more unlikely. It is very important that Greece avoids any showdown with the EU because the indirect effects of a Greek exit could be enormous. Once investors see that countries can indeed leave the
38 |IN - DEPTH| euro, then they will inevitably re-price risk in other eurozone countries intensifying the pressure on Italy and Spain. It is unlikely that Greece will comply sufficiently with even lite fiscal austerity conditionality, let alone with structural reform conditionality, including privatisation targets, which are unlikely to be relaxed. Political opposition to both austerity and reform is now stronger in Greece than ever before. So is the apprehension over bailouts in the core. It has already led to one round of elections that didnt give any party the mandate to form a government. The troika of the European Commission, ECB and the IMF may forgive a Greek failure in the September progress assessment, but is unlikely to tolerate another failure to comply on all fronts by the December assessment. It would not be the wisest to assume that the core Eurozone would be willing to take on significant exposures to Spain and Italy unless it can be established unambiguously that a wilfully and persistently non-compliant programme beneficiary will be denied further funding. Therefore Greek exit would become even more probable should Spain and Italy require a broader troika programme and external help, respectively, which appears likely. The greatest fear of the core nations is not the collapse of the euro area but the creation of an open-ended, uncapped transfer union without a surrender of national sovereignty to the supranational European level. The exit is likely to create extreme unrest in Greece, and lead to social and political instability. In recognition of this, the Greek government is likely to drop its demand to ease bailout terms after warnings that it would be rejected by international lenders. The industrial activity front is also gloomy. The new data on manufacturing activity released in June shows a steady decline in the month. This follows four months after the private sector shrugged off the regions debt crisis and expanded output in January for the first time in five months. Purchasing managers indices for the 17-country bloc showed manufacturing and services activity rebounded unexpectedly sharply in January, driven by robust output growth in Germany and a modest expansion in France. Januarys improvement was because of companies running down order backlogs. Exports were helped by a weaker euro. Another boost to the confidence might also have been the ECBs crisis-fighting measures, which saw it provide 489bn in three-year loans to Eurozone banks in December. As per the current figures, companies are clearly short on confidence and anticipate the worst, cutting back on both staff numbers and stocks of raw materials at the fastest rates for two-and-a -half years. The situation at the employment front continues to find a new low with each passing month. Across the euro area as a whole, the count of the unemployed topped 17.5m in May, nearly 2m more than a year ago and more than 5m above the level in early 2008. Whatever direction the crisis takes from here, one thing has become clear, the idea of a currency union without a fiscal union is essentially flawed. Nations with weak currencies and high productivity get an unfair advantage. The current crisis is here to stay and it is only with concerted apolitical action that the European Union can hope to see a solution in the foreseeable future.
References
1. 2. The Economist Financial Times
39 |MARKET UPDATE|
Market Movement
Sensex
Sector-wise Snapshot
40 |MARKET UPDATE|
Policy Rates and Reserve Ratios Repo Rate 8.00 % Reverse Repo 7.00% CRR 4.75% SLR 24% Bank Rate 9.00%
Currency Rates 1 Dollar Rs. 54.36 1 Euro Rs. 68.54 1 Pound Rs. 85.31 1 Yen Rs. 0.68
Source: www.bseindia.com Currency rates, policy and reserve ratios as of 3 rd July, 2012
In the News
India's Current Account Gap Reaches 20year High
June 30, 2012; The Economic Times
India's current account deficit (CAD) has increased to the highest ever level to 4.5% of GDP at USD 21.7 billion in January-March period of 2011-12. The rise has been on account of higher imports of oil and gold. During Q1 CY12, Indias forex reserves decreased by USD 5.7 billion despite inflows of USD 13.8 billion. A high CAD signals that a country is living beyond its means and is only able to fund its consumption with excessive external borrowings. Under the current circumstances in India, if left unchecked, the rising CAD will lead to a decline in rupee, and further increase the debt burden.
aim of increasing the safety in payments and settlements system. It has invited public comments on the 'Payments System Vision Document 2012 -15'. The document proposes the vision of "proactively encourage electronic payment systems for ushering in a less-cash society in India"
M3 Money Supply Grows 13.8%

According to the Reserve Bank of India, the M3 money supply in India increased 13.8% y-o-y and stood at INR 76,216.5 billion as on 15th June 2012.
India Targeted M&A Value Decline 26%

External Debt Increases 13% in FY12

In FY2012, Indias external debt increased by 13% to USD 345.8 billion from USD 305.9 billion at end of March 2011. The rise was on account of higher commercial borrowings and trade credit. According to the RBI, almost all the components of the external debt recorded a rise during the last fiscal year. The dollar denominated debt was the largest, accounting for 55% in the total external debt as at end of FY2012. Loans under external assistance rose by ~USD 3 billion during 2011-12 in comparison to a rise of USD 8.7 billion during 2010-11.
According to Dealogic, a deals tracking company, the cumulative value of merger and acquisition deals targeted towards India this year so far has registered a decline of 26% over the corresponding period a year ago. The total value of the deals till 22nd June 2012 was USD 25.5 billion. The second quarter of 2012 has witnessed a significant decline in the M&A activity with approx USD 3.7 billion worth of transactions announced during the period. In comparison, deals worth USD 21.8 billion were announced in the first quarter of 2012.
RBI Promotes Electronic Payments in India
RBI Increases Limit on Inward Remittances

June 9, 2012; Business Standard
The Reserve Bank of India (RBI) has raised the limit on the number of foreign remittances an The Reserve Bank of India (RBI) has proposed to individual can receive from 12 to 30 per calendar actively promote electronic transactions with the year. However, there have been no changes in
41 |MARKET UPDATE| the cap on the amount of each transaction. It has been retained at USD 2,500 per person. According to the industry experts, the measure has been adopted to extend some support to the falling rupee. It had been a long standing demand of the money transfer agents to increase the number of remittances due to such requests flowing in from the customers.
New Format for Reporting Financial Results

April 16, 2012; The Hindu Business Line
SEBI to Derecognise Exchanges with Less than Rs 1,000 crore Turnover

May 30, 2012; The Hindu Business Line
The Securities and Exchange Board of India (SEBI) released a new reporting format for disclosing financial results for companies other than banks. According the SEBI guidelines, the companies will have to adopt the new format for filing their income statement and balance sheet starting FY12. The format follows a February 2012 notification from the Ministry of Corporate Affairs, India. Under the new format, companies filing consolidated results need to include details of profit and loss of associates and minority interest. Additionally, they have to include details of shared pleged by the promoter/ promoter group.
The Securities and Exchange Board of India (SEBI) has announced that it will compulsorily derecognise exchanges with less than Rs1,000 crore annual turnover and not applying for exit within two years. Stock exchanges with an annual turnover of less than Rs 1,000 crore are eligible to voluntarily exit. The derecognised exchanges would be required to file for exit within two months, failing which, they will have to compulsorily exit.
SEBI Allows Stock Exchanges to List

The Securities and Exchange Board of India (SEBI) has decided to allow stock exchanges and depositories to list. The move is in contrast to the recommendations of the Bimal Jalan Committee NRI Deposit Flows Triple in FY12 May 11, 2012; Business Standard on listing of exchanges, which suggested that exThe non-resident Indians (NRIs) deposits inflows changes, depositories and clearing corporations into banks in India increase around three times in should not be allowed to list because of their the year 2011-12. THE NRIs sent around USD 11 frontline regulatory role. billion in the last fiscal in comparison to USD 3.23 However, the SEBI has allowed the listing under billion deposited in 2010-11. The increase in the certain restrictions, including that the minimum inflow was on account of higher interest rates and net worth for exchanges and depositories should a weakening rupee. be INR 100 crore and that no single investor can According to RBI executives, a large amount moved into NRE deposits after banks raised rates in the second half of FY12. RBI had raised the ceiling on these deposits with the objective of attracting foreign fund flows to check the rapid declined in rupee value. hold more than 5% in exchanges.
RBI Relaxes Rules for Foreign Currency Accounts

The Reserve Bank of India (RBI) has liberalised the regulations governing the Foreign Currency Accounts (FCA) with the objective of providing RBI Announces OMO to Ease Liquidity operational flexibility to Indian entities making May 8, 2012; Business Standard overseas direct investments. The Reserve Bank of India (RBI) announced plans to infuse up to INR 12,000 crore through Open Under the new regulations, Indian entities can Market Operations (OMO), with the intent of eas- open, hold and maintain FCAs abroad to ing liquidity pressure and creating an appetite for smoothen the process of making overseas direct investments, subject to certain eligibility condifresh supply of government bonds. tions.
The Club
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From top left: Nihal Mahesh Jham, Raghav Pandey, Keyur Vinchhi, Uday Das Gupta, Siddharth Janghu, Aditya Bansal, Rukun Tarachandani, Ankur Dikshit, Shaik Arif Ahmed, Amit Garg, Anupriya Asthana, Soumya Hundet, Goutam Kumar, Aditya Mittal, Krishna Prem Sharma, Sandeep Patil, Varun Sanghi, Mukul Aggarwal
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Monetrix is the Finance and Economics club of Management Development Institute (MDI), Gurgaon. As one of the most active clubs in the campus, Monetrix continuously strives to contribute to the financial and economic knowledge of the MDI community by holding events and conducting knowledge sessions and other interactions. The magazine, Blue Chip, is an effort in the same direction, of contributing not just to the MDI community, but to the fraternity of MBA undergrads throughout India. Hope this issue of Blue Chip has served as an interesting read. Do watch out for our next quarter issue to be released in October this year!
More information on Monetrix can be found at http://mdi.ac.in/students-life/academicclubs.html. For any other feedback or information, please mail in to us at monetrix@mandevian.com Note: You may have noticed that some of the articles in this magazine have been written by team Blue Chip or team Monetrix. These articles have been kept in the issue only with the purpose of making the magazine content wholesome and are not considered for the prize money.

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Blue Chip Issue 1 (April-June 2012)

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APRILJUNE 2012 | ISSUE 1

Reliance Industries Ltd.

Mr. Sanjay Bakshi

From the Editors Desk

For any information or feedback, please feel free to write in to us at bluechip@mandevian.com

Reliance Industries Ltd.

The heavy weight of Indian indices

Mr. Sanjay Bakshi

The Sliding Rupee

Foreign Exchange Management An Indian Perspective

Hysteresis Effect on the Indian Economy

European Crisis Still anybodys guess

Tutorial ( 8 Disinvestement in India ( 4

Active & Passive Investing

Sector Wise Snap Shot The Ascent of Money

Monetrix, Finance & Economics Club of MDI, Gurgaon

APRILJUNE 12 | BLUE CHIP ISSUE 1

Missing the disinvestment targets more than 2 out of 3 times

Monetrix, Finance & Economics Club of MDI, Gurgaon

APRILJUNE 12 | BLUE CHIP ISSUE 1

ACTIVE & PASSIVE INVESTING

Active Management a negative sum game:

Monetrix, Finance & Economics Club of MDI, Gurgaon

APRILJUNE 12 | BLUE CHIP ISSUE 1

The heavy weight of the Indian indices Reliance Industries Ltd.

Monetrix, Finance & Economics Club of MDI, Gurgaon

APRILJUNE 12 | BLUE CHIP ISSUE 1

Figure 4: GRM Trend

Monetrix, Finance & Economics Club of MDI, Gurgaon

APRILJUNE 12 | BLUE CHIP ISSUE 1

Monetrix, Finance & Economics Club of MDI, Gurgaon

Stock Markets A Mystery?

APRILJUNE 12 | BLUE CHIP ISSUE 1

Fundamental Analysis Technical Analysis

Fundamental analysis is related to finding

Monetrix, Finance & Economics Club of MDI, Gurgaon

APRILJUNE 12 | BLUE CHIP ISSUE 1

The Sliding Rupee

Factors behind Rupee Depreciation 1. Deficit in the Balance of Payments

Monetrix, Finance & Economics Club of MDI, Gurgaon

Persistent Fiscal Deficit

APRILJUNE 12 | BLUE CHIP ISSUE 1

Monetrix, Finance & Economics Club of MDI, Gurgaon

APRILJUNE 12 | BLUE CHIP ISSUE 1

Foreign Exchange Management : An Indian Perspective

Monetrix, Finance & Economics Club of MDI, Gurgaon

Fig2: Growth of Indias Foreign Exchange Reserves

Fig1: Chinas Foreign Exchange Reserves

APRILJUNE 12 | BLUE CHIP ISSUE 1

Table1: Net foreign investments and impact on foreign exchange reserved

Monetrix, Finance & Economics Club of MDI, Gurgaon

Fig 4: Largest Sovereign Wealth Funds

APRILJUNE 12 | BLUE CHIP ISSUE 1

26 |IN CONVERSATION WITH|

Monetrix, Finance & Economics Club of MDI, Gurgaon

27 |IN CONVERSATION WITH|

ment career, how did you iden-

APRILJUNE 12 | BLUE CHIP ISSUE 1

28 |IN CONVERSATION WITH|

Monetrix, Finance & Economics Club of MDI, Gurgaon

29 |IN CONVERSATION WITH|

APRILJUNE 12 | BLUE CHIP ISSUE 1

30 |IN CONVERSATION WITH|

Monetrix, Finance & Economics Club of MDI, Gurgaon