AUGUST 2012

THE FINANCIAL
www.nmims.edu
EXPERT SPEAK G.GOPALRISHNA EXECUTIVE DIRECTOR Reserve Bank of India

Melancholy of the Indian rupee Vibhu Gangal

INSIGHTS ON BASEL

COVER STORY : IMPACT OF POLITICS AND POLICIES ON INDIAS GROWTH

The Financial August 2012

From the Editors Desk

The Editorial Team

Senior Team Komal Poddar Achal Mittal

Creative and Design Srijan Srivastava

Dear Readers, I would start by thanking one and all for their valuable contributions to this magazine. The Financial continues to evolve and it has received an overwhelming response this time. We are happy to bring to you, with this issue, a magazine with several new sections that will grow into a repository of original content and opinion from the Finance Cell at NMIMS. Keeping with this theme of change, The Financial, in this issue, explores the highs and lows that the economy seems to have confronted in its journey. In this issue, we have delved into the reasons behind the free fall of our domestic currency. The perspectives put forward by the budding managers from across the B-schools are sure to give a new dimension and importance to this issue. We have also tried to enlighten the readers about the implications of the new capital adequacy norms-BASEL III. How all this will affect us in India? In addition, the issue also captures the LIBORS tweaking and how it will cause ripples across the world. Lastly, there are many other financial goodies for you to discover! We hope you enjoy the articles and also write back to us. The Financial an interactive magazine and, beyond just a magazine, a two way interactive channel. As we exchange ideas we will evolve and grow to greater heights. The process of evolution of The Financial will see a deliberate attempt from Finomenon, the finance cell to involve the readers as much as possible. The aim this time is not to have an article end with its last word in the magazine but to take it beyond through comments and discussions. Feel free to contact the writers of each article and discuss their views or to even dispute them! Let us keep it interesting this way. As always, I hope you enjoy this issue! Let us know how you feel about the content. Feel free to contact anyone from the Finance Cell regarding any aspect about the magazine and I promise we will get back to you. Critics, suggestions, requests, and jokes, they are all more than welcome. So until we meet again next time and while you wait to see what is in store for the next issue, take care and enjoy reading! Komal Poddar

Junior Team Akshay Goyal Anirudh Kowtha Debottama Sharma Ellina Rath Prakash Nishtala Prashant Arora Sagar Gupta Tirthankar Behera

Finomenon NMIMS Mumbai All design and artwork are copyright work of Finomenon NMIMS Mumbai

The Financial

Table of Contents

Cover Story: Impact of Politics and Policies on Indias Growth Melancholy of the Indian Rupee The Falling Rupee Basel III: What does it mean to the Indian Banks? Expert Speak True LI(e)BOR: What does it Mean? LIBOR Scandal : Resurrecting Demons
Mr. G Gopalkrishna on My Expectations from Today's Youth

1 3 6 10 15 16 20 23 26 29 32 37 40 42 44

Policy Paralysis : An Excuse or Reality? World War III : Brewing Will the Dark Knight rise? Has RBI gone far too ahead to curb Inflation? Facebook IPO: A repeat of the Dot Com Bubble? Which is better: Central Bank or the Weather Forecast Department? Finknowledge Updates

August 2012

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IMPACT OF Politics & Policies on IndIas Growth

t was in the year 2007, when P Chidambaram: The then Finance Minister of India had made a statement on Indias growth on her 62nd Birthday stating that only complacency and laziness can hamper the growth story of India and that the Indian economy is built on strong foundation. Five years hence, on exactly the same day, the growth seems to have slowed down and reasons are not laziness and complacency but corruption and suicidal policies. It has become very clear that the growth India witnessed was not because of the government but in spite of the government. The 9% growth rate India witnessed from 2004 to 2007 was not in isolation but on the back of some global factors. What had appeared to be step up in trajectory now looks like a one-offs driven by a global boom and an unsustainable burst of corporate optimism. The current GDP for the year is 6% which has been lowest since last few years. There are few reasons for the decline in current GDP: high interest rates, global slowdown and commodity prices among the prominent ones. There is no denying that interest rates (high interest rates unable to curb inflation) can surely impact growth but this coupled with bad policies can be a poison for the Indian growth story. Specially, in India, the real causes of the slowdown can be associated with politically-influenced policy breakdowns emerging from 10 Janpath rather than RBI headquarters. Policies and proposals like GAAR and retrospective taxation have deeply impacted the

countrys ability to raise funds and the interest rates have hence become a problem because such policies have closed off the alternative sources of funding. High interest rates have surely increased the cost of funds and have impacted individuals ability to purchase a house and have added to the woes of already stagnating real estate sector. But this is not the only reason for slow down in real estate. In 1997, the interest rates on housing loan were 14% and yet it was easy to purchase a house for 15 lacs. Now, in 2012, even with a higher income and lower interest rates, it is difficult to purchase the same sized property in the same area. Hence, it can safely be concluded that it is just not the interest rates but some other factors which actually killed the real estate markets. The rigid real estate market does not follow the law of demand and supply and this can be confirmed by the fact that even though, there is little demand for real estate, the prices are still no slowing and this can be attributed to politicians, land grabbers and crony capitalists. Even in aviation, its not the high interest rates which are killing the sector (Even though, the sector is overburdened with high debt and hence higher interest payments), the reasons are more fundamental and policy driven. The FDI is still not being allowed which can surely solve the debt crisis and repeated bail outs of Air India is impacting and making the rest of the sector sick. Just like aviation and real estate, Telecom is also a sector which runs on policy benefits

Cover Story

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The Financial
which are getting impacted. But, what we can surely learn from the above three sectors is that policies in India are currently creating an illusion (not an atmosphere) for fast growth which will tempt many to enter the business and hence reduce consumer prices. But only a few players will make the necessary investment for long term growth. What the economy needs for the bull to come out of its cage is stable growth and consolidation rather than impetus for mindless expansion. This needs policy inputs and not just low interest rates. Overall, economys fundamentals (thanks to the regulators) are far better than perception, a clarity of policy in infrastructure can revive consumption, investment and hence the growth.

rather than actual forces of demand and supply. The real cause of slowdown and losses in telecom is wrong political decisions and corruption. In fact, then telecom minister of 2010, Mr. Raja had laid down the groundwork for dramatic failure by selling the spectrums at low prices and then the government retrospectively increasing the spectrum cost. This selling of spectrum at low cost tempted many non serious players to enter into the business thus forcing the existing players to reduce costs and margins and spoiling the dynamics of the entire sector. Aviation, Real Estate and Telecom are not the only sectors which are getting burnt, there are many others like power and infrastructure

Did You Know??

Warren Buffet bought his first share at age 11 and he now regrets that he started too late! He bought a small farm at age 14 with savings from delivering newspapers. He still lives in the same small three bedroom house in midtown Omaha that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall or a fence. He never travels by private jet, although he owns the world's largest private jet company.

Cover Story

August 2012

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MELANCHOLY OF THE INDIAN RUPEE

significant reason for the recent fall in rupee is attributed to macroeconomic deficiencies of India. The article analyses the same and tries to establish a relation between the steep fall of rupee and the general tendencies, trends and situations prevailing in India that affect the economy eventually. The demand equation states that the aggregate demand (and the national income at equilibrium) is an algebraic sum of consumption-demand, investment demand, government expenditure and net exports. The moment we say 'demand', it is backed by money and indicates a destination where people roll out the money they possess. If this money is spent to fulfil any of these demands which add up to the national income, its a positive sign. The more this happens, the more the country grows economically, the more is the national income, the stronger is the home currency. One scenario, where possession of money with individuals of a nation can harm the economy, is when the money possessed gets expended towards imports, which makes net exports and overall national income negative, leaving the investment demand of the nation unquenchable. A similar thing seems to have happened in India. Lets take a closer look at its causes and implications. Consider an analogy, where we have a dam constructed with an aim to irrigate fields. It has some water collected in the reservoir. This water flows to the fields through channels. Thus, its the channels which ensure that the water in the dam gets utilized for growing crops and not for domestic purposes of farmers' households. Had the channels being broken and had the water been routed to households instead of fields, crops could never have grown due to lack of water and the production of the territory could have taken a severe hit. The water is equivalent to liquid rupee with the Indians, crops to the GDP,

Vibhu Gangal SCMHRD, Pune

and channels to the government regulations and policies. In India, a major part of money (water) is spent in buying volumes of gold by families (household demand). If gold was available in India, the tendency of buying gold would have created better circulation of money and the multiplier effect would have done well to the economy. Unfortunately, out of 902 tones of domestic annual gold demand, India produces only two tones and the rest 900 tones is imported. More the demand for gold, more are its imports, more is the payment in dollars, more is the influx of rupee in forex market, more is the outflow of dollars from forex market, more depreciates the rupee, and thus, more expensive becomes any imported item including gold. This self-feeding spiral continues and raises ringing-alarm-bells when it reaches a stage where RBI cannot save the rupee by adhoc workarounds like selling dollars and "trying" (rather struggling) to induce more FII participation. Indians have imported gold worth $61.5 billion
More the demand for More are its imports More is the payment for imports More is the influx of rupee in forex More depreciates the rupee

More expensive becomes any imported item including gold

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The Financial
deficit causing further decline in rupee value. It all gets again into the self-feeding loop discussed above. So, where do we break this infinite-loop of events where every step, every action has a well justified reason behind it? But somewhere, somehow you need to break this to get things in place. Weakening or breaking one block might give a temporary relief to figures, but in long run, this would halt growth. Instead, if every link in the chain is made to melt down in terms of its prominence, it will just be a matter of time when the whole chain shall cease to be prominent. What I wish to convey is instead of unplanned adhoc and short-term steps like giving subsidies on fuel prices and making efforts to attract hot money sources, this nation needs to plan for a durable strategy which would 'subtly' and 'indirectly' bring about relatively stiff and lasting changes in the economy. Heres what I mean to say Whenever individuals hold disposable rupee, government should ensure that substantial part of rupee gets either invested into banks, corporate bonds, government securities and the share market or it gets to quench 'domestic' consumption demand of goods and services. Lets remember in a dam, its the channels which ensure the usage of water in a desired way and ultimately govern the production. Whenever it's expected to have an enhanced liquidity among individuals, it should be THE time for government to make capital investment attractive. This would trigger the multiplier to take effect and eventually translate liquidity into growth. As far as demand for gold is concerned, it can be discouraged by raising customs duty exorbitantly. Buying gold should be made at least half as tough as buying a scooter was in late 1980s... Even if the demand for gold reduces partially,

(or around Rs 341,000 crore) in 2011-12, recording a growth of 44.4 per cent during 201112. Same is the case with petrol. A consistent surge in demand eventually causes the same vicious circle of events. Together, gold and petrol are the biggest burden on trade deficit and have worsened current account deficit badly, causing the sharp decline in value of rupee vis-a-vis dollar. The trade deficit during 2011-12 was recorded at $184.9 billion than $118.7 billion during 2010-11 mainly on account of large imports of fuel, gold & silver accounting for 44.4 per cent of Indias imports. Reports suggest that gold imports contributed to almost one third of the incremental rise in Current Account Deficit over the 2008-2011 period. Directly, gold contributes 0.36% to the inflation index. Indirectly, it makes all imports including crude oil costlier fuelling input costs for all industries ranging from plastics to automobiles. If the input costs rise, prices of finished products will follow suit. Eventually its the inflation which kicks off. The time lags between rise in gold demand, rise in import prices and rise in end product prices make the three events appear disconnected to the general public and as the "safest" option, we end up blaming the government without any knowledge of ground level proceedings. Arithmetically, every dollar reduction in international oil prices translates into a cut in product price by 33 paisa. But every time the rupee depreciates against the US dollar by one rupee, it translates into a requirement to raise prices by 77 paisa. Another aspect is, with booming inflation, with industrial products being costlier than earlier, why would a buyer in international market prefer buying expensive Indian goods when the same is available at a lower price in other countries? Together, with imports already being discouraged due to sharp depreciation of rupee, this fall in exports due to inflation exacerbates the trade

August 2012
this would mellow down dollar appreciation and prevent further damage. On the other hand, the consumer which demands gold and oil so excessively needs to understand that if he chooses deliberately to intensify imports, he is fuelling inflation to such an extent that he himself is going to get in trouble. A major reason for S&P indicating to downgrade India in terms of its investment-grade rating was a drought of investment opportunities in India. With Indian businesses borrowing big-time from foreign sources, with other events increasing imports and causing the rupee to depreciate, Indian borrowers will now pay more for every dollar borrowed. With every firm borrowing millions of dollars, the rupee loss is going to be phenomenally huge and shall reflect on a cost-cutting approach by companies' management which shall also include a cut in salaries. Eventually, a selfcheck on surge of gold demand can help prevent a number of significant things. Recently, after a lot of hue and cry over oil price hike, the government declared a subsidy on petrol price. I say why? As a long term plan, the government should let the petrol price rise so that vehicular usage takes a hit, even though the hit is marginal. Towns, where bikes and cars are favourites for personal transport, should be picked up and transformed into towns with a quality mass public transport, quality in terms of speed, frequency, availability, ambience, approachability, grievance handling mechanisms and any and every aspect which makes mass transport well-preferred and equal in status vis-avis individual vehicles. This shall help in fading the rise in demand for crude oil and so shall prevent the rest of the spiral. One may say that its the gold which facilitates loans and so fosters investment. But one fails to note that at the time of repaying the same loan taken against gold, the value of the money repaid plummets so much that the good done by the investment gets offset substantially by severe inflation, the root cause for the good and the bad being the same. One

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may say that if investment in India has taken a backseat, why doesn't the government invest? But one fails to note that it would be foolish on the government's part to do so, as it is already burdened by a budget deficit of 5.19 percent and any further disbursement of money would widen it more. One may say that subsidies on fuel shall be continued for a few more years as inflation is cost-driven and not demand-driven. But one fails to note that its the demand which drives the entire spiral discussed above and its the drive of this demand which ultimately coverts into a costpush inflation. Thus, its high time now that the administration of the nation gets into a patient and consistent mission of correcting the fundamentals of economy at a macro-level with an aim to bring about a long-term change.

Vibhu Gangal is a student of SCMHRD, Pune and has been writing many analytical articles, related to exchange rates and financial statement analyses of different companies, published in various finance magazines. Email- vibhu711@gmail.com

Did You Know??

Queen Elizabeths portrait has appeared on 33 different countries. Her image first appeared on the Canadian currency in 1935, when she was just 9 years old.

Indira Gandhi has been India's only woman finance minister year from 1970 to 1971.

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The Financial

THE FALLING RUPEE

Bharat Mulchandani Himanshu Bhutani NMIMS, Mumbai

n the morning of 31st May 2012, after reading the headlines Rupee falls to a new low, my father exclaimed, I wish you were in the US right now, sending Dollars home. Ironically, the expensive dollar was the reason my father refused to send me to the US to complete my post graduate education after I graduated in June 2010 (The exchange rate at that time was 1USD= Rs. 46.50). That was my first brush with the greenback and the affair has continued since. Today, as a student of the capital markets, I wish to put my learning into practice and see how the economic theories I learnt in class apply to the current heartache caused by the dollar. Let us look at these theories in greater detail. The Demand Side Current Account captures the difference between the imports and exports of goods and services in dollar terms. Here, we consider two commodities that account for most of our imports and drive the demand for the Dollar.

Oil

Let us analyze the consumption of oil, one of the most essential commodities and the chief driver for the demand of dollar in India. Even though the rupee depreciated from Rs 48 to Rs 56 in the blink of an eye and the price of crude stayed put close to a US$100 a barrel during the quarter which ended on 31st December 2011, the demand for crude was not affected, as India imported nearly 3.45 million barrels of crude a day during FY 12. In value terms, crude imports rose 41% to US$141 billion. This, despite the volume imported remaining the same. Any undergraduate text book will explain that when currency weakens, imports become more expensive and people consume less. It's a way the currency and demand adjust themselves. In India, it doesn't work that way. Here, the currency slips, imports become more expensive but consumption does not fall. What happens then? The currency further slides and slowly you find yourself in the midst of a vicious cycle. That's when a flexible exchange rate loses its significance. Its a point

August 2012
where economics ends and politics begins. The subsidy provided by the government artificially kept the demand high and also caused the government finances to take a severe hit. Moreover, the severe shortage of Dollars because of fund outflows by foreign investors resulted in the government hiking the price of fuel sharply. This further stoked inflation, already at dizzying levels because of supply side constraints, which affected the common man in the most extreme way possible. The prices of essential commodities such as food and milk went up drastically. The cost of travelling by public buses, once considered to be the most economical form of transport, increased by nearly 50%. The household budgets went for a toss. And coupled with a slowing economy ahead, it spelt difficult times for the man on the street.

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up from 8.1% in 2001-02 to 9.6% in 2010-2011. [2] This accounts for the major outflow of the Dollars from the country and has a major impact on Fiscal Deficit. The table shown below gives us an overview of the demand for gold. However due to the depreciation in local currency and rising fiscal deficit figures government has been taking some strict measures in order to curb the demand of gold. This is being done by imposing 1% excise duty on unbranded jewellery and doubling the customs duty on gold to 4%. The outcome of such measures is quite evident. Indias gold imports slowed to 200 tonnes (-30% YOY) in 1Q12. The Supply Side Capital account records the flow of money in and out of the country. For a currency to be stable, the Dollar inflows in the capital account should match the deficit in the current account and vice versa.

Source: RBI website

Gold

1. Capital Account Flows In order to finance the gaps created in the current account by oil and gold, India needed to finance it by attracting Dollars for investment. And Dollars flowed in thick and fast due to the high returns on investment and the higher interest rate on offer. Using the interest rate parity theorem, we realize that the interest rates need to be high in order to ensure that there are sufficient capital inflows in order to finance the deficit, as is the

Let us consider the case of gold now. India has been fascinated by gold since time immemorial and consider it to be the safest form of investment. This is reflected in the fact that India is the largest importer of gold in the world and accounts for one-third of the worlds demand. The gold import bill has risen from US$4.1 billion in 2001-02 to US$33.8 billion in 2010-11. As per the data released by ASSOCHAM India, golds share in total import bill of the country has gone

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The Financial
to worst in a span of 6 months from December 2011- June 2012 as the FII inflows poured in at the start of the year and have been withdrawn after the budget session. 3. FDI:

case today, where the interest rates on offer in India are nearly 8% and near zero everywhere else around the world. So this should not be a problem right? But as it turned out, things have not quite been so smooth for India. Let us now look at the details. 2. FII: Foreign institutional investors have been a great source of dollar inflows for India. They invest in the India in order to capitalize on the higher interests on offer apart from trying to milk the security markets which features a number of high growth companies. But, things have changed considerably. FII Inflows have dropped from US$30 billion in 200910 to US$18 billion in 20110-12. IN FY 13 also, FII have been net sellers, pulling out nearly US$327 million from the Indian Markets. This has caused severe shortage of Dollars and has led to a freefall in the rupee. And given that these flows move in and out of the country frequently, this has caused major volatility in the Rupee. This is demonstrated by the fact that the Rupee went from being the worst performing currency in Asia to the best performing and back

Foreign Direct Investment was seen as critical to Indias development as the money was badly needed to build infrastructure in order to support economic growth. Thus the policies were liberalized and money came in. But, due to unfavorable government policies such as GAAR and failure of government to take tough decisions rolling back its decision to allow FDI in multi brand retail due to pressure from coalition parties, FDIs inflows have dipped recently to US$1.32 billion in May 2012 compared to US$4.66 billion a year ago. And this has had a direct impact on the rupee. 4. NRI deposits: In order to create newer avenues for dollar inflows, RBI deregulated the interest rates for NRI deposits. As a result, Non-Resident Indian (NRI) fund inflow into Non-Resident External (NRE) deposits in the month of January 2012 touched US$1.6 billion, the highest in the last ten years. But this had little impact as this could not cover up the fall in inflows from FIIs and FDIs.

August 2012
The Results Balance of Payments is defined as a record of all transactions made between one particular country and all other countries during a specified period of time. One might argue that this fall must

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they have not been able to compensate for the outflows on current account and reduced inflows on the capital account. RBI just does not have enough firepower in order to do anything due to limited forex reserves. The onus is on the government now to put its act together and stop using monetary policy to correct structural problems in an economy. Strong measures have to be taken on the fiscal policy front such as removing fuel subsidies and reducing fiscal deficit. Government needs to come out of its slumber and take decisive political decisions such as FDI in retail to attract Dollars and help recover. I know that increasing fuel prices would harm the economy, but I sincerely believe that Indian must bear the pain through this correction as this will result in a far superior recovery and will ensure that we will reach a solution rather than postpone the problem. It is amazing the manner in which a common Indian household, which may have never seen the dollar, is being ruled by it.

help exporters and reduce imports and that the situation will correct automatically. But what we fail to realize is that our imports are far greater than our exports and that the demand for oil is nearly inelastic due to the subsidies provided. It is precisely this imbalance between the current account and capital account in the current scenario has led to a Balance of Payments crisis. What it simply means is that we are using up our foreign reserves rather than adding to it and it is going to be very difficult expect the RBI to intervene directly to stem the fall. This can be illustrated by the fact that our forex reserves fell US$12.8 billion Dollars in Q3 and US$5.7 billion Dollars in Q4 of FY12 respectively. RBI has used various measures such as limiting the banks open position in contracts and providing Dollars directly to the oil marketing companies. But this has simply helped in reducing volatility, and has not prevented the Rupee from falling. Moreover, even though there have been more remittances,

Bharat Mulchandani is currently pursuing his MBA (Capital Markets) at NMIMS Mumbai (batch -2011-13). Himanshu Bhutani is also pursuing MBA (Capital Markets) from the NMIMS Mumbai (batch -2011-13).

Did You Know??

The word Budget was derived from the French word, bougette, which in turn is a diminutive of bouge, meaning a leather bag.

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The Financial

BASEL III: WHAT DOES IT MEAN TO INDIAN BANKS?

I ntroduction:Before embarking on the depiction Basel III

norms and their futuristic impact on the Indian Banks and Economy at large, let's start off with a simple question: What is a Venture? It simply means an undertaking which has inherent Risks and Returns .When some capital is invested in a venture; it is expected to yield some returns or benefits out of it. But the buck does not stop here. As along with returns come the rabblerousers; the different kinds of risks that plague an investment. Risks entail all potential losses which have detrimental effects on the expected output or the Returns. The risks can be quantified and analysed under many heads namely Market risk, financial risk, Operational risk, Credit risk etc. It is intrinsic to all the ventures from FMCG companies to Automobile giants to Non- banking financial companies to the most reputed of banks. The 3 Basel Accords: Raison Dtre:Basel Accords were created under the aegis of Basel Committee on Banking Supervision to provide various avenues of safety against the various credit, operational, market and liquidity risks vis-a-vis the liquidation of banks. The first round of deliberations was conducted in 1988 in response to the insolvency fiasco of Herstatt Bank of Cologne; which was attended and ratified by the Central Banks of G10 nations. It gave rise to the de rigueur guidelines known as Basel I which elucidated the capital requirements to avert credit risks. The number of nations adopting it has since burgeoned to 100 worldwide. In June 2004 followed the Basel II regulations; which broadened the horizon of Basel I to include banking laws and regulations pertaining to

Jubin Mohapatra Shikha Sharma DoMS, IIT Roorkee

capital adequacy , arbitrage regulation , risk quantification , risk classification and risk sensitive capital allocation. The final version of this dictum entailed three Pillars or Concepts namely: Minimum Capital Requirements, Supervisory Review and Market Discipline, catering to the different risks and their repercussions. It also included a framework of tools called Risk Management System to detect and deal with prima facie evidences of risks and fend off residual concerns like systemic concentration, reputation and legal threats to avoid a financial tailspin. Pillar I

Millennium Capital Requirements

Market Discipline

Supervisory Review

Pillar III

Pillar II

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However, Basel II has been sporadically criticised by a section of economists for having magnified the effects of the credit bubble. Basel II made it imperative for the banks to obtain credit worthiness ratings and loan risk evaluations from unfettered credit rating agencies. However these agencies in lieu of awarding honest ratings, swindled the credits awarded to weak Mortgage based Derivatives on beefy payments from the client bank leading to disastrous consequences. Since then Basel II has been appended and updated many times on the back of numerous financial turmoil and the sequence of reforms eventually culminated in formulation of Basel III regulations. The accord brought into existence during the year 2010-11 aims to plug the deficiencies which led to the late 2000 banking crises. Basel III: An Overview:Apart from banks capital adequacy, stress tolerance and market risk pruning, the third Basel accord also sketches out well defined contours of bank leverage, capital and liquidity requirements. It tries to reconcile the banking regulations with economic robustness to safeguard against the financial frailties. Some salient features of the latest accord are as follows The accord has five broad implications:The first dictum tries to better the quality, eminence, consistency, and transparency of the capital base, by segregating the capital of a bank into 3 heads A) Tier I or Core capital( common shares , retainable earnings, disclosed reserves and equity ) , B) Tier II or Supplementary capital (Instruments in need of harmonization , Re-valued and Undisclosed reserves ) and C) Tier III capital (needs to be eliminated). Second change strengthens the risk coverage of the capital framework by trying to marginalize the credit risk.

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Third pillar offers a leverage ratio based system to entrench the Basel II risk frameworks. Fourth point requires building up capital buffers during good times, on which the banks and clients can fall back on; during stress and instability. Fifth one involves creation of a novel global liquidity standard; involving calculation of de facto liquidity coverage ratio, called Net Stable Funding ratio. It also limits the bad loans. Indian Banking Sector, Basel III and Growth Scenario:After Reserve Bank of India pronounced final guidelines for Basel III commencing January 1st, 2013, and to be implemented by March 31st, 2018; speculations have been rife about its potential effects on the Indian GDP growth and whether or not the Indian Banks will be able to meet the cumbersome capital requirements. The potential trade off between preventive safeguards and languishing economic growth has been making rounds in the economic debate mills of the

Graph showing spiraling Indian GDP , and Basel III might further accentuate the degrowth.
Source : www.tradingeconomics.com , Indian Central Statistical

country. And the cascaded effects of still to be tamed inflation, oil price hike, a free-falling Rupee and sluggish industrial expansion have only escalated the concerns. So is the Indian Banking Fraternity ready for implementation of Basel III? Will it invigorate

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gent loan disbursements which wont be helpful for the Indian industrial sector which is in dire need of banking support to fortify its position. Moreover under the new norms, for every 1% increase in Non-Performing assets the Banks need to gather 25000 crore worth of back up capital. So the banks are expected to go harsh on loan defaulters and tidy up the sectors of economy where NPAs are proliferating rapidly like the critical Power sector and MSME sector; among others. Henceforth, any rate cuts expected from the chests of RBI will aid in boosting up the capital buffers of banks rather than accelerating the economic progress. All these factors might end up in a medium term reduction in growth rates of around .05 to .15 percent as per OECD studies and will most certainly have an adverse impact on the presently effervescent Indian economy. With that being said, lets take a look at the vibrant side of things, the bigger picture. As far as CAPITAL ADEQUACY is concerned, Indian banks are better placed than most of the foreign foils, to make a transition to the stricter capital regime. The seemingly draconian regulations set by RBI even after liberalisation of monetary policies, will actually work in favour of the Indian banks. The existing RBI norms are more stringent than the international Basel III standards, which mean that the equity capital ratio and capital adequacy ratio of rated Indian banks are pegged well above the required margins of 9% and 14% respectively. Moreover recently the international credit rating agency Moodys and its Indian subsidiary ICRA have gone on records stating that the conservative return on equity and higher cost of capital on loans adopted by Indian banks will actually be seen in a positive light after the implementation of Basel III and it will be CREDIT POSITIVE for the developing economy of the subcontinent. Further the LEVERAGE RATIO under Basel III needs to be 3% to check derivative counterfeits and takes up cudgels against off the balance sheet trading .But the same ratio for Indian banks lies between 4.3 to 4.5% thus providing a hefty

the economic and banking standards or will it worsen the already plummeting growth rate as well? Prima facie it seems like a conundrum, but an in-depth analysis reveals that the long term benefits outweigh the imminent shortcomings. Just like every leap of faith, this step also has both pros and cons. The downside begins with requirement of a massive capital raising by Indian banks, in the tune of Rs 1.67 trillion over the next five years to cater to their growth necessities and boost up their held capital. This figure is churned out from the new Basel III norms requiring a minimum 5.5 per cent in common equity stock by March 31, 2015 against 3.6 per cent now.

Bank Credit Requirements Vis- a -Vis held deposits

Source : http://www.thehindubusinessline.com

Moreover, creating a capital buffer by March 31, 2018 entails dilution of equity up to 2.5 percent. It has also hiked the minimum overall capital adequacy to 11.5 per cent as opposed to the current level of 9 percent. For now the private sector banks like ICICI, YES, Kotak Mahindra etc seem to be in a comfortable position to meet the guidelines as compared to the public sector peers like SBI who need large chunks of funding to mop up the required capital for compliance with Basel III. Because of such a massive capital structure overhaul the Indian banks will have to go for strin-

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cushion and making it further easier and rudimentary to implement Basel III. Moving on to the LIQUIDITY COVERAGE RATIO required to provide cash flow for stress period of up to 30 days , here also Indian banks are much well endowed as compared to the foreign banks given the traditional saving mentality and conformist practices. The liquidity requirements of Basel III can be comfortably offset from two major sources namely; Cash Reserve Ratio-CRR (4.75%) and Statutory Liquidity Ratio SLR (24%).

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defaulting risks. During a downturn as seen in case of housing bubble of US , these contraventions impede the very fabric of the banking system hurtling it into a spiral of abyss. The creation of additional capital buffers under Basel III would put some shackles on the unfettered banklending as sufficient amount of capital has to be preserved now. This restrain will smoothen the large swings when the business cycles go berserk, thus acting as a shield. India has already witnessed a few moderate tremors in the wake of Eurozone and US slowdown. Hence, for counter-

TABLE 1:- Net Assets of Indian banks with assets more than Rs. 250000 crores . ( in crores )
Name of the Bank State Bank of India ICICI Bank Limited Punjab National Bank Bank of Baroda Bank of India Canara Bank City Bank Net Assets as on 31.03.2011 1223736 406234 378325 358397 351173 336079 277353

Large commercial and Public banks of India which are likely to meet the new requirements fairly easily, owing to their large capital buffer and assets.
Source : http://www.thehindubusinessline.com , Article 2205002.ece

The biggest yet intangible benefit will come in form of HEDGING against cyclic fluctuation in business market. Economic activities progress in form of cycles and banking system which operates in sync with the economy, is universally pro -cyclic . When the economy is zesty and rollicking , carried away by the booms, banks throw caution to the winds and disburse large amounts of loans , thus accumulating unbridled

cyclical measures to be proficient and effective, our banking system has to improve its ability to envisage the business cycles at sectoral, industrial and systemic levels. Conclusion:There is a famous quote: Whatever was on the left-hand side (liabilities) was not right and whatever was on the right-hand side (assets) was not left. This comment came in the context of Lehman Brothers, who foundered so shoddily

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The Financial
perk up their banking regulations by embracing Basel III. Yes, in the initial phases it will decelerate the growth fractionally but then again all good things come with a price tag .In the long run, it will prove to be a prudent and constructive step as the strong balance sheets will make our banks resilient enough to withstand the financial quakes. Coup -de- Grace!!! Jubin Mohapatra is currently pursuing his MBA at DoMS,IIT-Roorkee( batch 2011-13 ). He has a penchant for issues pertaining to the broader spectrum of economy and finance
Email- jubin59@gmail.com

that their assets were not even worth a fraction of their book value and their entire capital base was worn out. It simply exposed the decay that had crept into the financial machinery, as a result of loose lending, subprime mortgages, shadow financial institutions, speculations, large NPAs and insufficient liquidity buffers, which planted the seeds of the great downturn. In this light, Basel III can prove to be an earnest and triumphant attempt to avoid crises like the late 2000s. Basel III tries to ensconce the balance sheets of banks by enhancing common stocks of equity, creating capital buffers to absorb shocks, increasing liquidity of assets, marginalizing the leverages, improving transparency as well as the market discipline. The famous adage make hay when the sun shines is paramount in the case of Indian Banking fraternity. Given their secure position in contrast with the tumultuous west, coupled with rising diplomatic and economic clout of India in world map, Indian banks are ever so ready to

Shikha Sharma is also an MBA graduate from DoMS,IIT-Roorkee( batch -2011-13 ). She has keen interest in finance and marketing. Email-10shikhasharma@gmail.com

TABLE 2:- Net Assets of some small banks which may flounder to meet the regulations( in crores )

Name of the Bank The Ratnakar Bank Nainital Bank Limited The Catholic Syrian Bank Limited Lakshmi Villas Bank Limited The Dhanalakshmi Bank Limited City Union Bank Limited Tamilnad Mercantile Bank The Karur Vyasa Bank The Karnataka Bank Limited The South Indian Bank Limited

Net Assets as on 31.03.2011 3230 3292 9829 13301 14268 14592 16117 28225 31693 32820

Smaller Banks like the afore mentioned , with limited assets will find it difficult to conform to Basel III norms , resulting in dearth of loan disbursal to the smaller industries.
Source : http://www.thehindubusinessline.com , Article 2205002.ece

August 2012

Page 15

MY EXPECTATIONS FROM TODAYS YOUTH

hree decades back, when it was our time to choose a career, a government job was the obvious and most glamorous choice. Life was simple, expectations from life were modest and and hence it was more enjoyable. Today's youngsters are more intelligent , competitive and even more ambitious in terms of wealth acquisition. A cushy job today means the one which pays the highest and is directly related to one's status. I, through this article want to disseminate some of these misconceptions and sell the idea of working in government sector by describing a typical day in the life of a 'Banker' I started off my career in 1979 in RBI as a grade B officer. There were 14 other directly recruited B grades with me coming after clearing one of the most competitive exams in the country. We were put through an intensive 3 months training in Chennai and post the training all of us were sent to different parts of the country in different areas of work. With the pride of being a central banker at the age of 26 and budding with enthusiasm because of first job and more importantly, expectation of the first salary, I started working in currency department in Hyderabad. During this tenure of more than 23

G. Gopalakrishna Executive Director Reserve Bank of India

years, I have worked in different departments and in different cities and countries, an experience which neither the glamour of a private sector company nor its salary can buy. Today, my typical days shapes up from the morning pujas followed by mediation for 1 hour. As the day progresses, the blood pressure shoots up, be it the management of currency fluctuations or inflation, there has not been a single day in last five years which has not gone without fire fighting. But at the end of the day, the satisfaction & exposure is totally unparalleled. Times have changed, the job which was at one point of time rather stress free has become rather stressful, the pay has increased, perception of youth towards the government job has changed but one thing has not: The attitude & approach towards the job. I hope that with this article, I have been able to give a brief insight of a typical government job and I hope more and more of youngsters give IAS and RBI exams and change the mindset of future generations to come.

Expert Speak

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The Financial

TRUE LIe-BOR: WHAT DOES IT MEAN

n the international business scope, while the Euro zone crisis is getting everyones eyeballs, there is another story of a similar magnitude that has been brewing inside UK, the country which is most affected by it. According to some estimates the financial contracts based on this rigged benchmark rate are of the order of $800 trillion. The benchmark rate we are talking about is the LIBOR, which has for many years been the trusted benchmark for financial contracts around the world and the recent doubts on its authenticity have made many in the business world uneasy The fact that it affects so many and so much of what goes on, begs the world to take a closer look at this benchmark rate and see what goes into its making. LIBOR stands for London Inter-Bank Offered Rate which is a benchmark rate licensed by British Bankers Association (BBA). It is calculated& published daily by Thomson Reuters. For this, Reuters takes quotes daily from major banks for the rate at which they could borrow unsecured inter-bank funds just prior to 11:00am London time. Once Reuters receives each submission, it calculates the LIBOR for that day by computing the central tendency by using the inter-quartile mean. Inter-quartile mean is calculated by ranking the submissions in descending order and then excluding the highest and lowest 25% of submissions and taking the average of the remaining values. This is done for 15 maturities (overnight to 12 months) and ten currencies 150 rates per day. The size and set of contributing banks which make up the panel varies by currency. The membership of each panel is reviewed annually by the Foreign Exchange and Money Markets Committee. Decisions on membership are made on the basis of: 1. Scale of activity in the London market 2. Perceived expertise in the currency concerned

Siddharth Janghu Anupriya Asthana MDI, Gurgaon

3. Reputation 4. Credit standing Historically the banks in the LIBOR market were among the strongest in the world and included names like J.P. Morgan, Citibank, and Bank of America. The calculation that goes on at these banks for calculating their submissions is not declared in the open and is internal to the respective banks, thus different banks may be using different methods for calculating their quotes. The implicitly trusted Benchmark Being the most important benchmark for short term rates globally, LIBOR is written into standard derivative instruments like interest rate swaps, forward rate agreements & foreign currency options, and loan documentations. Worlds major futures and options exchanges use LIBOR as the basis for the settlement of interest rates contracts. Therefore, rises and falls in the benchmark can have serious consequences for commercial and consumer loans, including mortgages, worldwide. Economists and Financial Institutions use it as a barometer to measure the strain in economy. E.g. the LIBOR OIS spread is used to measure the credit risk in the system. OIS (overnight index swaps) are interest rate swaps at which depository institutions trade based on a specific currency. Because OIS is based on actively traded balances held at the central bank, there is almost no credit risk involved. And thus the LIBOR OIS spread is a measure of the default risk when lending to other banks.

August 2012

Page 17

The following graph* shows the LIBOR OIS which they manipulated the LIBOR quotes to spread for the subprime crisis years. gain advantage on certain trading positions. AfThe fact that LIBOR-OIS spread is a barometer ter being found guilty, the bank has been fined for the credit insolvency in the system can be 60m by the FSA. But even this figure pales in seen from the graph as shown below. The spread front of the fine of 290m by CTFC (the US) suddenly spiked when certain events took place Commodity Futures Trading Commission) and and reached highs during 2008 when the banking DoJ (the US Department of Justice), which crisis was at its zenith. amount to almost 10% of the profits from previBut the recent events questioning the veracity of ous year. This has lead to the resignation of the the LIBOR have raised some doubts on whether disgruntled CEO Bob Diamond, triggering headthis is truly a good indicator. Doubts about LIlines like Diamond not forever across the print BOR being media rigged were world. first raised In more by the Wall recent Street Journews, nal as far Barclays back as in was be2008 with ing ramificaapolotions being getic that the after banks booking health a greater could be in than exworse pected shape than profit of Source: research.stlouisfed.org they were willing to *The LIBOR OIS is for dollar: 3 months (OIS based on the Feds fund rate) about its 4bn. admit. The basis of the doubts on the According to the trueness of LIBOR was the divergence of the 3 FSA investigation, the price rigging which dates month interbank loan rate from the 3 month LIback to 2005, in case of Barclays, fixing the LIBOR, meaning that banks were at times borrowBOR was done to increase profits (or reduce ing at higher rates than the LIBOR. The quotes losses) involving groups of derivatives traders given by these banks are public to the world and and several unnamed banks. Barclays was one of thus, banks have an incentive to under-report the leading traders in these derivatives and upon their submission - not showing their true borrowthe investigation of FSA (in Britain) admitted ing costs and how short they were on cash. that it would lose/gain up to 20m on any day At least one 300 year old bank, the second largbased on these trades. Another grudge against est in the UK has been found guilty of rigging its this old bank is that even though it tried to porLIBOR submission. Lets take a closer look. tray that only a few brazen traders were involved in this manipulation, it seems that such behavior An Eagle falls The suspicions of FSA (Financial Services Auwas widely tolerated on the different trading thority) on Barclays rigging the benchmark rate floors of the bank. were confirmed by going through the e-mails of A snapshot of the trend of the quotes submitted traders which revealed the every-day manner in by various banks over 2008 period shows that

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The Financial
true rate making the submission by bank B of 4.9% eligible to be part of those submissions which are used for the calculation of the LIBOR and thus making the false rate of 4.8% by bank A being filtered out. As we can see from the second case, even though bank A rate doesnt get included in calculating the rate, it affects the final LIBOR by creating a difference of 0.1% (difference between 4.9% and 4.8%) divided by the number of submissions being considered, in the LIBOR published. This was somewhat achieved by banks like Barclays when they lowered their rates even though they were part of the filtered quartiles. Seeing the high submissions published as given in the figure above, when questions were raised about Barclays health, it said that it was being honest whereas other banks which were obviously in poorer health than Barclays were underreporting their costs of borrowing. Certain banks were actually borrowing at rates which were 30bps higher than their submissions for LIBOR. Later upon investigation by the regulators, Barclays admitted to reporting lower than actual rates at the time. They did so strategically so that the rates submitted by Barclays were high enough to get filtered out and yet not high enough to be the highest out of all the quotes, thus making the spotlight on its financial health a bit less harsh. As much as admission of one bank to its illegal demeanors brings a feeling of safety and justice to the average Joe, Barclays acts might just be the tip of the iceberg as other banks, up to 12 other banks have come under the scanner for rigging the rates. Silent Watchdogs? There has also been talk in the market about central banks abetting and aiding the banks in reporting lower rates. Whether BoE (Bank of England) asked banks to change rates or not, the regulators had a pretty clear motive for wanting a lower LIBOR during the subprime crisis: since British Banks were being shut out of the markets

Barclays was one of the highest submitter of quotes which would get filtered out in the top quartile and thus would not actually contribute to the calculated LIBOR. If the submissions of Barclays were not amongst

those actually used for taking out the average, then how did it affect the overall LIBOR rates?

Lets take the case of a banks submissions which according to the above figure were consistently among the bottom quartile and see how it affects the published LIBOR. Suppose there were two rates true rate and rigged rate that bank A could submit, true being higher (say 5%) than rigged (say 4.8%). Also assume that rate submitted by another bank B is 4.9% and that these rates are at the border of the threshold of the lowest quartile. In the first case lets assume that bank A submits the true rate of 5% such that it is the last (lowest) entry to be considered for calculating the average LIBOR. Such entry of bank B gets filtered and isnt eventually used for calculating the LIBOR. In the second case suppose that the bank A was to submit the rigged rate of 4.8% instead of the

August 2012
and the two hardest hit banks were Royal Bank of Scotland and Halifax Bank of Scotland were both far too big to fail, and so lowering LIBOR would help these banks to support themselves more, rather than depending on the regulators to do so. Thus, in times of systemic crises, the central banks faced a conflict between maintaining financial stability and allowing the banks to operate transparently. No one knows exactly how many banks were explicitly or implicitly involved in this rigging but some estimates say that the difference between actual LIBOR and rigged one could be at 30bps. [1] If we were to do the math for that and consider the $800 trillion of trades annually, we would get a value of 14.4 trillion for which those relying on this number have been fooled for since past 6 years. To be fair, assuming half of the people benefitted and half lost, we divide this also into half, giving a whopping 7.2 trillion loss to the world! This is many times the combined capital of all of the too-big-too-fail banks in the United States and close to the GDP of China! How to make the LIe-BOR true We now know that the regulators had an important role to play in the crisis. The companies involved were given leeway in terms of having allowance to operate without proper guidelines and supervision. The extent of the banks' liability shall depend on whether these regulators aid them for damages or punish them for their mis-

Page 19

deeds. In the latter case, the companies may even go to the extent of filing for bankruptcy, and in effect requesting for bailouts. This will bring into play the slow legal process which will take years to play out. Hence, the only logical solution seems to be a government backed deal for sharing the damages caused by LIBOR fixing. This means that all the claims against Banks shall be met by both the Banks and the Government. It is not logical to discontinue LIBOR totally, as doing so would affect the $800 trillion contracts dependent on it. What needs to be done is to ensure public/corporate safety in assuming the underlying benchmark. Head of States, Chief regulators, CEOs of the largest banks and the IMF must meet and plan out a fool proof strategy to incorporate changes in regulations supervising LIBOR. Siddharth Janghu is currently pursuing his PGPM at MDI( 2011-13 ) Gurgaon . He has worked at Pricewaterhouse Coopers, Ernst & Young and Goldman Sachs (Intern) Anupriya Asthana is also pursuing her PGPM at MDI( 2011-13 ) Gurgaon . She has worked at: Amdocs DVCI. She graduated from Netaji Subhas Institute of Technology

Did You Know??

The widely used $ symbol, which is used to represent US Dollar, doesnt appear on US currency at all. When Pakistan was in its infancy after India-Pak separation in 1947, they used Indian currency with "Pakistan" stamped on it for the first few months till there was enough circulation of Pakistani notes. Morarji Desai was the longest serving finance minister. Desai was the Finance Minister for five years under Nehru and three years under Indira Gandhi. He presented two Budgets on his birthday, February 29, in 1964 and 1968.

Page 20

The Financial

LIBOR SCANDAL: Resurrecting Demons

IBOR, if the word doesnt ring any bell in your ears then you must have returned from a trip to another planet. Welcome back to earth, a planet captured in the shackles of greedy minds. Even after weeks of being the blue eyed boy of economic reporters across the world and eating away a lot many pages of your daily newspaper, the LIBOR Scandal refuses to die down. But the question that arises is why the world is so fascinated about such a simple sweet-sounding word. Well, the article tries to answer such questions of yours. Libor is an acronym for London Inter-Bank Offered Rate. The history of LIBOR dates back to 1980s, when a need of benchmark for lending rates was being felt. Without a benchmark, calculating prices for financial products such as options and interest swaps was fast becoming a herculean task. As a result, work on creating a benchmark commenced, culminating with the birth of LIBOR in 1986. LIBOR is stated as the average interest rate at which banks can borrow funds from other banks in the London interbank market. It applies to loans with maturity period ranging from overnight to 12 months. But how is LIBOR fixed? The authority of fixing LIBOR is bestowed upon British Bankers' Association (BBA). BBA takes data from a panel of banks which are felt to be representatives of London

Akshay Goyal NMIMS, Mumbai

Money Market. These banks are selected only if they meet the stringent criteria like money value, reputation etc. set by BBA. Once a part of the panel, these banks have to report daily to BBA about the rate at which they are willing to borrow loan. These are only the hypothetical values and not based on actual transactions. Once BBA (in association with Thomson Reuters) has collected the rates from all panel banks, it eliminates highest and lowest 25% values. An average of the remaining values is calculated. This average is called the LIBOR. All said and done about LIBOR but one wonders why there is so much fuss surrounding it when it is related to just a single country? That is exactly not the case. Firstly, its not just a country; its a country which forms the largest chunk of the overall global forex daily trading. Secondly, the banks which are a part of the panel include heavyweights like Citigroup, JPMorgan Chase, Deutsche Bank, Barclays etc. It is a universal fact that these banks are to the financial sector what sun is to the solar system. One can well imagine the gravity of the problem, even if one of these fails. Thirdly and most importantly, LIBOR acts as a basis not only for inter-bank loans but also a basis for the loan of your favorite car, your dream house and other such loans and mortgages. Thus an increase or

August 2012
decrease in LIBOR leads to corresponding rise or fall of cost of borrowing, affecting people at large. To cut the long story short, around$350 trillion is the amount which uses LIBOR as the reference rate. You can now yourself feel the impact LIBOR possess. One question that is still lurking in the darkness is why and how banks played with LIBOR. A simple one word answer exists for the why part and it is called GREED. Greed which is contagious was successful in luring even the top-notch bankers. The how part is explained ahead. It is alleged (allegation nearing towards confirmation) that the top banks which contribute in the calculation of LIBOR submitted a false rate to BBA. This is now what is famously, rather infamously, called the LIBOR SCANDAL. The banks distorted LIBOR by submitting a lower or higher rate than the actual rate and thereby making profits. A higher LIBOR signifies that banks lack trust and confidence in each other whereas a lower LIBOR signifies financial stability. The banks reportedly rigged LIBOR to present themselves as financially strong in spite of going through a rough patch. They did so in order to lure investors and in the process affected trillions of dollars of financial products. The LIBOR issue was brewing up for quite a time, with warnings coming from various sectors. But the scandal came to the fore when Barclays accepted its wrongdoings and agreed to pay around $452 million as a fine for manipulating LIBOR. The scandal didnt end there. As of now, it has cost the top three executives of Barclays their jobs, including the CEO Robert Diamond. The issue has gathered much limelight to be kept under wraps and it is a matter of time when some of the other big names start pouring in. Fingers are already being raised on some of the regulators and government officials. The British Government and executives of other top banks are leaving no stone unturned to come out clean. The economy which was already reeling under the global recession now has a pleth-

Page 21

ora of issues which might stymie its recovery. The reputation of bankers has taken a beating. Once looked as the guard of your money with people reposing immense faith in them, is now looked with an eye of suspicion. A time when demons of the debacle of Lehman Brothers were yet to be exorcised, another scandal has cropped up. This has filled people with an overwhelming sense of outrage and has done a serious damage to their psyche. In such grave circumstances, the government and the banks need to do much more than simply suppressing the matter. The governments of various nations (since such a situation can surface in any other nation as well) need to set up independent organizations in order to review the day-to-day activities of the banks. A timely analysis and reporting system should be in place. The current organizations in many of the countries are not given enough teeth to prosecute the bankers and if they do possess some powers, they find it more fruitful in joining hands with the corrupt bankers rather than doing their job honestly. Also, imposing a mere fine doesnt deter the banks from their malicious intentions and executions. There is an urgent need for enactment of stringent laws and punitive measures in order to curtail banks in their wrongdoings. The banks should also come to the front and be accountable to the public because of whom they are able to do their business. In the history of banking, rarely we have cases where banks have taken the responsibility of some error or misdeed conducted by them. It has always been some outside organization which has disclosed the frauds and scandals. In the current era, when the banks image has gone for a toss, they need to act in a much more responsible manner. They need to restore the lost faith and do their best in maintaining it. The foremost reason in most of the cases where banks are found indulging in unlawful activities is their investment wing incurring huge losses. This is due to over reliance on high returns from the predictably unpredictable investment sector and divergence of banks huge deposits to that sector. As a result,

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The Financial
the problem could be solved in the dormant state itself. In the end, it is imperative for the governments and the banks to take the responsibility instead of keeping the skeletons in the closet. They need to act (and act swiftly) before the basic pillartrust-on which our economy stands, collapses. Till then, caution is the line to follow for pawns like us or else be prepared to be crushed under the feet of big players.

when losses are incurred (which are usually in huge numbers), they compensate by utilizing the funds from other wings like retail banking etc. and in turn, jeopardize the entire situation. This leads to a catastrophic falloff affecting people at large. This situation could be well avoided if restrictions are imposed on the inter-mixing of funds from the different sections in the bank. There is a dire need to differentiate and segregate risky assets from the safe assets. This would prevent a catastrophic situation from occurring and

Courtesy: Akshay Goyal NMIMS, Mumbai

August 2012

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POLICY PARALYSIS: An Excuse or Reality

S &P has downgraded Indian sovereign (BBBve) which is just one notch above the junk grade or below investment grade. Analytics of Moody and Fitch say that India has entered into the period of stagflation. But, the Government and economists in India believe that India is inching towards stagflation. What is stagflation? Is really our country under the clutches of stagflation and if so then who is to be blamed for it? Are policies to be held responsible for the current Indian economic scenario, which is now believed to be in doldrums or in the verge of being labelled as the First BRIC fallen Angel? Stagflation is combination of stagnant economy and inflation in the economy. Although exactly current Indian economy is not stagnant but the growth of the economy has really slowed down. There is higher level of unemployment and inflation everywhere in India. As per Moodys and Fitchs reports, inflation rate is as high as 8.8% and real GDP growth rate is as low as 6.5%. The last quarters economic growth is 5.3 % and such slow growth is not sufficient enough to provide employment to the young Indians. Morgan Stanley has forecasted growth of about 5.8% in the fiscal year to March 31, 2013 which is less than the earlier target of 6.3%. Current deficit of India is very high. Also, the fiscal deficit is increasing. Here arises the big question. Is only the economic downturn in Europe and US is to be blamed for the situation of stagflation in India or is it the policy paralysis of India which is playing a major role in it? Are policies the real cause or just silly excuses? Will the tough policy deciAnanya Apirisima XIMB

sions of Government on economic and fiscal front be able to avoid further downgrading of India by the rating agencies? We know that policy is not neutral to politics. The political parties do influence the forming and implementation of policies making them more dynamic in nature. Some 8 years back, in 2004, when UPA Government came into power under the chairmanship of Ms. Sonia Gandhi and Dr. Manmohan Singh sworn in as the Prime Minister, the kind of arrangement they had in ministry and party, was highly appreciated by everyone. Some major steps were expected to be taken by this government on the economic and financial front. At that time, it was believed that Ms. Sonia Gandhi would be taking care of the coalition government and Dr. Manmohan Singh would be taking care of administration and policies as he had already shown his calibre as Finance Minister while Mr.P.V.Narasimha Rao was the Prime Minister. This kind of arrangement was expected to work wonders for Indian Economy because in the year 1990, as the Finance Minister of India, Dr. Manmohan Singh had taken certain major steps to open and liberalise the economy. But he was well supported by PM Mr. Rao and his ministry at that time. But to our dismay the kind of apex arrangement that we have now, has only weakened the framework. As the Prime Minister of India, Dr. Singh now lacks the support of his own party. Moreover, there is a coordination failure among the various parties which are part of the coalition government. This has resulted in failure of various economic policy initiatives. Whenever he comes up with any

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The Financial
taxation on the offshore transaction of assets in India has reduced the chances of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). This has increased the risk among the foreign and domestic investors and reduced the growth prospects. Also, the reduced growth rate will impact the FDI inflows and FPI inflows as well. Some of the policies have even hampered the productivity as it has happened in case of National Rural Employment Scheme in which the wages of the rural people have been increased although its effect on productivity has not matched up. Cases of corruption in major sectors like mining and telecommunication, oil and gas, land acquisition show poor governance and policy failures. There is no policy, no decision regarding fuel subsidies. Government policy should be to spend more on getting foreign investment, employment programs and increasing productivity. It should cut down its investment in welfare programs. RBI has cut its key rate for the first time to 8% in April, 2012 in last three years. After that, investment from foreign companies has increased but still the investment is not up to the mark. Slowdown in government decision making, failure and delay in implementation of economic reforms, infrastructure problems combined with growing shortfall in production of coal and other

liberalization policy, there is always an opposition from any of the parties forming the coalition government. According to RBI Governor Dr. Subbarao, monetary policy cant address all the ills of the economy unless and until the fiscal deficit is reduced. Foreign Direct Investment (FDI) in multibrand retail was one of the best government initiatives to reduce the budget deficit but due to opposition by TMC and other parties, this policy could not be implemented. Thus, there is definitely a policy paralysis in India which is because of absence of harmony, coordination and synchronization among the parties forming the coalition government. In the present date scenario, all power lies with the Finance Ministry. The Finance Ministry has become the super regulator and RBI has no say in it. RBI has lost its autonomy these days. The opportunities are getting converted to liabilities because of poor planning and wrong decisions of Finance Ministry. Many of the policies and reforms have been deferred, some because of opposition from the allied parties as it has happened in case of Pension Reform Bill and some because of the government itself as it happens in case of providing environment clearances, as granting the clearances take indefinitely long time due to lack of decision making. Similar things have happened in case of land acquisition laws, oil price deregulation etc. These in turn hinder the investment. Announcement of Indian government on retrospective implementation of

August 2012
fuels has hindered investment possibilities. As per Fitch, there is very negligible progress in fiscal consolidation. This is because of heavy public expenditure. RBI also believes that inflation is not under its control and there is a huge possibility of increase in inflation further. So, strong policy reform and implementation at the bureaucracy and ministry level is the need of the hour otherwise the time will come soon when the Indian industries will start laying off workers and recession will hit Indian economy. Politics has its roots in economics or is it the other way around? Managing the economy is now more about managing the coalition. This is difficult because different partners are not on the same wavelength. But keeping the partners

Page 25

amused, as has been done so far, will only invite a crisis. The need today is for the RBI to take bold steps. The economy is on the wrong side of the cycle and it can be boosted only by taking firm decisions by the government, framing policies and implementing them. The coalition government and the RBI should work hand-in-hand and should frame strategies to bring the economy back to growth without higher inflation.

Ananya Apirisima has done B.Tech in Electrical engineering (20052009) from KIIT University, Bhubaneswar and has then worked for 25 months in ACC Limited and is currently pursuing PGDM BM at Xavier Institute of Management, Bhubaneswar.

Courtesy: Ellina Rath, MBA, NMIMS Mumbai

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The Financial

WORLD WAR III: BREWING

istory has shown us that the main cause for all wars that have taken place so far has been for MONEY. The last such war that the world witnessed was the 2ndWorld War. And now with the present debt crisis all over the world, especially in Europe, the 3rd World War is fast approaching. Lets have a look at some of the history behind the EURO first. After the 2nd World War the country premiers and presidents in Europe felt that the only way of avoiding such a war again would be by binding the European countries economically. In 1957 the Treaty of Rome was signed which established the European Economic Community (EEC). This treaty allowed free trade of goods, labor and other services across the European countries. This was followed by the establishment of the European Monetary System (EMS) where most of the EEC nations linked their currencies to prevent large fluctuations in the currencies of the EU nations. In 1999,this finally led to what we now know as the Euro, a single currency across all the Euro nations comprising of 17 countries. To participate in the currency, member states were meant to meet strict criteria, such as a budget deficit of less than 3% of their GDP and a debt ratio of less than 60%. There were problems with this common currency right from the start. Only the Monetary policy had been made common while all the fiscal poli-

Bhuvan H Gandhi NITIE, Mumbai

cies had to come from each of their governments with one currency and one interest rate. So now when the lending took place to each of these members, the rate of interest charged for each of them was the same. The assumption by the financial market was that all the Euro nations were in it together and none would let a fellow member fail if it came to that. So countries like Greece, Italy and Spain were unable to grow as much as countries like Germany while enjoying the loans at the same lower rate of interests as Germany. As expected the first one to fall was Greece. To make up for the weak job creation in its Economy it pumped up the public payroll which meant more borrowing as public sector started looking more attractive. So basically the Greeks were paying their public sector employees more than what they were producing or rather bringing into the economy. When the subprime crisis struck the United States the market sentiment went down and investors were reluctant to invest or lend money to anyone. So, most of these Euro nations were running out of pocket money as there was no one to lend them any. In October 2009, Greeces budget deficit forecast at 3% of its GDP, actually turned out to be 12%. This is when the investors panicked because the rule for being a Euro member

August 2012
was that the budget deficit should not cross 3%. Investors started thinking that if Greece is thrown out of the Euro nations then there would be no way for them to get back their money and therefore stopped investing further in Greece and just hoped to get back what they had invested. Greece needed money to run its Economy and approached the EU for its Rescue. Now, the only Euro nations doing well were Germany and France and the problem with lending to Greece was that they werent sure if Greece would be able to pay them back. Because if Greece were to default on their loans then the other Euro Nations would be forced to default on theirs, which could put them under financial crisis as well. After a lot of deliberations the first bailout package of 45 billion was approved by the EU in April, 2010 on the condition of a lot of austerity measures in Greece. Here lies the next problem which is intrinsic to all of us humans i.e. once we are used to a luxurious lifestyle, shifting to austerity is never welcome so there were large scale pro-

Page 27

tests in Greece against the proposed austerity measures. As expected the mess that the Greeks had created for themselves would not end with just that much. In May 2010 Greece announced further austerity measures which included wage cuts and again this was met out with a lot of protests. On the basis of these austerity measures Greece hoped to get another bailout of 110 billion over 3 years. The EU,IMF and ECB agreed to give a second a bailout of 130 billion on the condition that further austerity measures would be brought in by the Greek Government. This generated further protests and eventually the stepping down of the then Greek Prime Minister George Papandreou to make way for Lucas Papademos. These austerity measures helped bring the Greek debt before interests down from 24.7 billion to 5.2 billion but but at the same time it made payment of that debt more difficult because because the austerity measures heavily relies on increasing the tax collected from private sectors and thereby

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The Financial

many private sector companies have had to close resulting in loss of jobs. The unemployment rate at present is at 22% and if there arent enough people contributing to the economy then they cannot aspire to pay off their debt. If Greece defaults on all this debt then it would mean that the other EU nations would have to default on theirs. The other EU nations generally fall upon their national banks for lending so theyll end up defaulting on the payments to their own people which would create unrest in their countries because no one likes losing their hard earned money. The only solution to get back their money would be to take over Greece, because as has been seen from ages the best collateral for payment is land and to use the people of that country to generate revenues till the debt is paid off. And history has told us that no country gives in easily without a fight. So far we have seen only about the situation in Greece this is the scenario all over the world. Consider the report below highlighting the world public debt as of this year. As can be seen the entire world is under debt, it is only a matter of time before someone starts asking back for their money and when that happens WAR is inevitable. Is this the December, 2012 that everyone has been anticipating, the day the world ends? I dont know about that but I would like to quote Einstein here, I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones". So, if the 3rd World War does happen, then it is bound to wipe out a huge portion of the human race and with it all the scientific and technological breakthroughs we have witnessed till date. Bhuvan Gandhi is in the 1st year at NITIE. He has a work experience of 2 years in Robert Bosch as a functional developer. He has keen interest in Finance and wishes to pursue his career in the same.

th n o r M a s i e y Th t a Th
August 5, 1861: US levies its first Income Tax (3% of incomes over $800) August 6, 1997: Microsoft buys $150 million worth of shares of financially troubled Apple Computer Aug 12, 1998: Swiss banks agree to pay $1.25 billion as restitution to Holocaust survivors to settle claims for their assets. Aug 16, 1841: U.S. President John Tyler vetoes a bill which called for the reestablishment of the Second Bank of the United States. Enraged Whig Party members riot outside the White House in the most violent demonstration on White House grounds in U.S. history. Aug 22, 2007: "The investment bank

Lehman Brothers announces plans to shutter its sub prime mortgage business, eliminating 1,200 jobs" Aug 27, 2009: Judges at the Supreme Court of India agree to make their financial assets public Aug 28, 1995: Chase Manhattan and Chemical Bank announce plans for a $10 billion merger to become the largest bank in the US.

: st d By e l 1 i ( p A m B Co ta , M

Year)

Gup Sagar mbai u M , S NMIM

August 2012

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WILL THE DARK KNIGHT RISE?

f I think about the year 2008, only three things come to my mind: First, how Italy clinched the soccer world cup; second, the great recession and how India survived it, and at last but not the least the movie The Dark Knight. Prima Facie you may not find any similarity, but a closer look will reveal not one but few similarities between the movie The Dark Knight and The Recession and how India survived it. The characters of the two stories may be different, but the underlying plot reveals the same level of chaos and the organized attempt to curb it.

Tirthankar Behera Srijan Srivastava NMIMS, Mumbai

the month of September 2008, can be easily seen when Dow Jones had three major dips of 504 (4.4%), 449 (4.1%) and 778 (7.0%) on September 15th , 18th and 29th respectively. The effect of recession was not limited to USA only. The aftermath was found in almost all major stock markets around the world. Also in India sensex fell by 710 points and 704 points on September 15th and 22nd. In this global turmoil, India was rescued by the combined effort of its government, financial regulators and citizens. The nationalization of the major banks in India during 1969 came to rescue during these days. Also the active role of various financial regulators like Reserve Bank of India, Securities and Exchange Board of India,

Joker had a face, a face with scars, a face to make others realize what pain is. Even though the great recession never had a biological face attached to it, its symbolical face had as brutal effects as joker's biological face. The country and its citizen faced unemployment, slow economic growth, huge wealth loss in stock market and real estate etc in the face of recession. As in the movie The Dark Knight, the robbery of the bank begins the chaos; the crash of giant financial institution Lehman Brothers and the acquisition of Merrill Lynch by Bank of America waved a signal of an initiation of a downturn of unimaginable magnitude. An event (fall of Lehman Brother) which is one of the worst bankruptcies in USA, brought down a quick crash in stock markets all over the world. The effect of the recession on the stock market in Ministry of Finance, Ministry of Corporate Affairs imparted a strong signal to fight recession. Participatory Notes (P Notes) is one such measure to control the Foreign Institutional Investment (FII). During recession stock markets get plunged if foreign players withdraw their investments and P Notes is the key to prevent such outflow. Also Indian governments prudent fiscal policy of rolling out two rounds of stimulus packages (December 07, 2008 and January 02,

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omy not only attracts investors, but also terrorists. Indeed, in late 2008, foreign investors did withdraw $12 billion from Indias stock markets due to the terrorizing effects on Mumbai. Here the dark knight was a symbolic representation of how the country and its citizen unanimously fought against recession. The slightest contribution of a consumer to consume basic commodities to the intervention of RBI (loosely similar to Harvey Dent) and earlier policy reforms by government of India (loosely similar to Chief Gordon) made the country to be free from the ill effects of the recession . In 2012 after a peaceful 8 years (as per the movie The Dark Knight Rises) Gotham city again turned chaotic. A massive masked man again appeared in the city of Gotham to create panic, vandalism and pain. Initially Batman fails due to lack of aggression and rustiness accumulated over the years, but he starts the journey all over again with full of energy. In the end, it was revealed that the prime antagonist is Talia Tate; the masked man Bane was a marionette. Role of RBI can be compared to the Two-Face Harvey dent in The Dark Knight. At one face RBI has to make sure that it keeps a tight check on inflation and the other face has to make sure there is enough scope for economic growth in India. The repo rate has increased from 5% in 19-March-2010 to 8.50% in 25-october2011 and decreased again to 8% in 17-April-2012. RBI has to take an aggressive stance in this regard to boost economy growth. The recent cut of 1% in SLR may be a good signal, but the combined SLR and CRR should be around 20%-25% for a healthy economy growth. The condition of Indian economy is also at cross -roads. After having an unprecedented GDP

2009) brought liquidity into the market. The highlights of this stimulus packages were reduction in CRR, Repo rate and Reverse Repo Rate, an increase in FII investment limit, decrease in service tax and excise duties etc.

The Governments active policies along with its citizens passive involvement brought down the effects of recession. As per the study published in Global Journal of Finance and Management, it has been found that Indians have higher risk aversion as compared to their European and American counterparts. Above study reflects the behavior of Indians in stock market, that they are less prone to speculative and risky investments. In India people also tend to put their savings in form of gold which further reduces the risk of losing investment. Also according to World Bank, 68.7% people in India live below $2 a day (data as per 2010). So any fluctuations in stock market dont affect the livelihoods of these people. Indias accomplishment of fighting recession should be given more glory as the country was confronted with a terrorist attack on Mumbai in November 26, 2008. The terrorist attack created a global mindset that India an emerging econ-

August 2012
growth rate for about a decade, now the GDP growth rate has fallen to 5.3%, the lowest growth rate since 3.6 percent in the January-March quarter of 2003. Even if the blow from the euro zone debt crisis hauled Indias growth throughout last year, a lot of India specific events are also cause for the low growth. Crowding out of private firms, high fiscal deficit, high inflation, high government spending on subsidies and slump in the currency are the major decelerator for economic growth. Also the deficient monsoon this year is another feather in Indias problem hat. Just as in The Dark Knight Rises the prime antagonist for Gotham city is Talia Tate, who is very close to Batman and not Bane, the problem of slow economic growth is not outside the country, but inside. Its policy paralysis. Even US president Obama noted that There appears to be a growing consensus in India that the time may be right for another wave of economic re-

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forms to make India more competitive in the global economy. They say "when America sneezes the whole world gets a cold." But during the great recession 2008 India has truly shown that it had already taken the D-cold to make sure that it stays healthy irrespective of Americas sneeze. But can India truly repeat its golden endeavor of the past to make its future golden? Will the dark knight rise? Tirthankar Behera is currently pursuing his MBA at NMIMS, Mumbai (batch -2012 -14 ). He did his B.Tech from NIT Jalandhar and worked in Capgemini for 27 months Srijan Srivastava is also pursuing.his MBA at NMIMS, Mumbai (batch -201214 ). He did his B. Tech(CSE) from JUET, Guna.(2012 batch)

Did You Know??

There are only 5 currencies in the world that have unique symbol to represent them. These are US Dollar, Yen, Pound, Euro and Indian Rupee (latest addition). The first U.S. Congress voted to give George Washington a salary of $25,000 per year. He turned it down, because he was already rolling in cash, and asked for a salary of zero dollars.

The post-WWII hyperinflation of Hungary holds the record for the most rapid monthly inflation increase ever: 41,900,000,000,000,000% for July 1946, which means prices doubled every 13.5 hours.

The first country to hyperinflate in the 21st century is Zimbabwe. In 2008, a loaf of bread cost 1.6 trillion Zimbabwe dollars. Officials in Zimbabwe blamed it on rising global food prices and international sanctions.

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The Financial

HAS RBI GONE FAR TOO AHEAD TO Varun Sanghi CURB INFLATION?? MDI, Gurgaon

n June 18, 2012, as Duvuri Subbarao, Govalso ended 1.5 % below the opening mark. The ernor of Reserve Bank of India read out impact was harder as the market had expected a the quarterly monetary policy review, it became rate cut of at least 50-100 basis points. Not only clear that inflation had taken priority over the market, but the Commerce and Industry Mingrowth. In the week to the run up of the policy istry were caught by surprise by RBIs decision review, Dalaal Street was ripe with speculation to keep the rates unchanged. that the repo rate could be cut down by 50-100 basis points. The Indian equities further showed Given the poor growth outlook and tightness in faith in the belief by gaining over 5% in the last the money markets, this move, or absence week. The investors belief was due to the abysthereof, comes as a negative surprise to the marmal poor IIP numbers in April and the dwindling kets. While we understand the need to eliminatgrowth. The industry had been suffering due to ing supply side bottlenecks, RBIs emphasis the tight credit policy and lack of investors conshould be skewed towards growth, MrTarun fidence as far as foreign investment is concerned. Kataria, CEO- India, Religare Capital Markets Coupled with this the looming threat of investLimited. ment downgrade by credit rating agencies was sufficient to make investors believe that RBI Industrial production has been adversely imwould go for a rate cut in the policy review. But pacted. The investment sentiment is low. Thereinflation had once fore the RBI decision, again weighed heavy in Figure 1: BSE SENSEX on June 18, 2012 whatever reasons they comparison to growth Source : Google Finance have based it on, is disprospects as the RBI appointing and will not governor thought it help in reversing the wise to keep the policy trend when it comes to rates unchanged manufacturing, Mr. against the wishes of Anand Sharma, Comthe industry. merce and Industry Minister. The decision of RBI to leave the policy rates The major factor that unchanged definitely has kept the RBI Goverdid not go well with nor busy is the inflation the Indian stock marnumbers. India has been ket, as the market was dealing with persistent quick to react with inflation for quite some time now with inflation heavy selling. After reaching an intraday high of hovering close to 9 percent. While RBI has been 17,109 the BSE SENSEX plummeted to a low of trying hard to curb the demand side pressure by 16,636 before closing at 16,705 (drop of 1.96%). absorbing the liquidity in the market, the governSuch quick was the response that it took just 15 ment is engaged in reducing the supply side botminutes for the market to absorb the shock and tlenecks, especially in food sector as the inflation move into the red. The broader index NIFTY of food products has been quite high.

August 2012
"The task for the Reserve Bank is to restrain demand to keep growth close to the potential growth rate. The task for the government is to support a supply response to raise the potential growth rate," Duvvuri Subbarao, Governor, RBI. The RBI governor has expressed his concerns regarding inflation at many public forums, even as he maintained that the economy would grow at 7 percent. Rising food prices and crude oil have been a major worry for India, a country that is heavily dependent on imports for its fuel requirements. Persistent high headline inflation has let few options with RBI but to maintain high policy rates. But the tight monetary policy which is analogous to the mid-1990s is likely to hurt growth. In the end its reasonable to question the over dependence on monetary policy to curb inflation even as the country battles hard to fight the supply side constraints and bottlenecks. Figure 2: Consumer Price Index for Agricultural Labors in India

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tion and storage facilities. In Uttar Pradesh alone 30% of the produce that includes food grains, vegetables, and fruits rot due to improper infrastructure. The shortfall is immense in terms of infrastructure; In Malihabad, a place in UP known for its mangoes, the storage capacity available is just 20 tonnes per day even as the quantity of the fruit traded is close to 2500 tonnes. The solution to fix the problem lies in building a robust supply chain that will minimize the wastages. An intelligent system needs to be deployed that can help in demand planning, replenishment of stocks and monitoring its movement. Indias continuing restraint towards FDI in food retail has led to reduced private expenditure in the food supply chains. The foregone investment is desperately needed as the country battles spiraling food prices. The use of technology and other private investment will only aid the sector. Opportunities for improvement in the food supply chain include FDI in cold storage (currently 51% is allowed), third party logistics, better technology, promotion to the food processing industry in the form of food parks and processing centers, FDI in retail as they would invest in back end infrastructure and others. While RBI is leaving no stone unturned in its bid to tame inflation, it is seriously falling short of fire power as the ability of monetary policy to reduce inflation is limited. In other words, monetary policy is not the right tool to address the demand side constraints that have led to the current high inflationary environment. Even RBI has acknowledged this fact as it is unable to address the supply side constraints.

Source: www.Indiastat.com As India is dealing with high food inflation, consistently in double digits, it makes sense to analyze where the problem lies and the remedies for the same. On the front of supply chain there exists an immense opportunity as India loses close to Rs 60,000 crores due to lack of post harvesting infrastructure such as cold chains, transporta-

"States could for instance, help better management of Public Distribution System (PDS) and improve productivity in agriculture and allied activities. There is also need for reform in the Agriculture Produce Marketing Committee (APMC) Acts among other measures." D. Subbarao, RBI Governor. RBI has been battling hard to curb inflation

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Figure 3: Index of Industrial Production

and has thus hiked the policy rates 13 times since March 2010. While inflation numbers still elude RBI, the hike in policy rates has made borrowings for the industry more costly and led to poor industrial growth. The Index of Industrial Production (IIP) which is a measure of the industrial production in various sectors reflected the poor performance of the Indian industry in the last year. The index that averaged 8.2% in 2009-09 was down to 2.8% in 2009-10, which is a significant drop. The recently released IIP numbers for April 2012 was down to 0.1%, which was significantly lower than expected. The industrial output fell by 3.5 percent in March 2012. The credit crunch created due to high policy rates has made it difficult for the industries to raise capital. This has had an adverse effect on the industrial production. Along with this, rising input costs and slack demand from the consumer side is also leading to poor production figures. The dismal numbers of April 2012 provided further support to CII which has been urging RBI to cut policy rates. The decline in capital goods production, which forms a part of the IIP numbers is quite serious and it could further slide if investment is not encouraged in the sector. There has been a common voice emerging from the Industrial Houses namely FICCI, ASSOCHAM and CII that underlines the need for RBI to review its monetary policy and stimulate investments. Figure 3 and 4 highlight how grave the situation is especially when it comes to capital goods. "Amid global uncertainty, a radical policy shift is needed to retain investor confidence and ensure inflow of overseas funds," D S Rawat, ASSOCHAM, Secretary General The Purchasing Managers Index published by HSBC India that is a measure of the manufacturing activity in India has also shown signs of the slowdown in the Indian manufacturing sector. In April 25, 2012, the government of India got another jolt as Global rating agency Standard & Poor's (S&P) scaled down India's credit rating

Source: Indian Ministry of Statistics and Programme Implementation

Figure 3: Index of Industrial Production

Source: Indian Ministry of Statistics and Programme Implementation

August 2012
outlook from stable' (BBB+) to negative' (BBB -). It also issued a warning of a further downgrade if there is no improvement in the fiscal situation and political climate. The investment bonds of India now stand just one step ahead of junk rating. Slowing GDP and the policy paralyses at the center could further lead to downgrading of the rating. Amidst such a situation a policy rate cut by RBI would have definitely lifted the investor confidence and led to increased investment into the various sectors. In fact poor IIP numbers and worsening investors climate further reinforced the belief among the investors that RBI would go in for a rate cut in June 2012. After the policy review of June 2012, many blame RBI for the downgrading of Indias rating by Fitch, another global rating agency. Closely on the heels of RBIs monetary policy review, Fitch downgraded the credit rating outlook of India from stable to negative. While governments inability to cut back deficit, spiraling inflation were some of the reasons for the downgrade, the decision to keep the rates unchanged is believed to have triggered the downgrading of

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the sovereign debt rating. Now there is a greater fear of the economy slowing down further as companies find it tough to get new investments. The negative outlook will further make the Indian markets estranged for the foreign investors. The reduction in the input of desperately needed foreign investment will further slowdown. The Purchasing Managers Index published by HSBC India that is a measure of the manufacturing activity in India has also shown signs of the slowdown in the Indian manufacturing sector. In April 25, 2012, the government of India got another jolt as Global rating agency Standard & Poor's (S&P) scaled down India now stand just one step ahead of junk rating. Slowing GDP and the policy paralyses at the center could further lead to downgrading of the rating. Amidst such a situation a policy rate cut by RBI would have definitely lifted the investor confidence and led to increased investment into the various sectors. In fact poor IIP numbers and worsening investors climate further reinforced the belief among the investors that RBI would go in for a rate cut

Disclaimer: The HSBC India Purchasing Managers IndexTM (PMITM) is a composite indicator designed to provide an
overall view of activity in the manufacturing sector and acts as a leading indicator for the whole economy. The indicator is derived from individual diffusion indices which measure changes in output, new orders, employment, suppliers delivery times and stocks of goods purchased. A reading of the PMI below 50.0 indicates that the manufacturing economy is generally declining; above 50.0, that it is generally expanding. A reading of 50.0 signals no change. The greater the divergence from 50.0, the greater the rate of change signaled by the index

Figure 4: HSBC India Purchasing Managers Index

Source: Indian Ministry of Statistics and Programme Implementation

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possibility of a drought. The rainfall in June 2012 has been below normal levels and the situation has already made the farmers in the country worried even as they gear up for the sowing season. While the Indian Meteorological Department (IMD) has only made a slight downward change in the forecast for rain this year, a private company has pegged the probability of a drought at 60%. If the calamity does occur, then it would spell havoc for the nation that is already battling high food prices. The food prices will definitely shoot through the roof and increase the plight of the common man. The ripples would also be felt by RBI as all its efforts to contain inflation would go for a toss. While it remains to be seen how correct RBI is in predicting the inflation numbers, it is certainly not clear how high interest rates will tackle the supply side constraints of vegetables and other food products that have contributed to double digit inflation. The tight monetary policy might push the entire economy into a long period of stagnation even as the nation battles with high inflation. The industry will be deeply hurt in the process and that will surely reflect in the GDP numbers, the ultimate parameter of a nations performance. In the end it can be stated that to achieve better growth, the industry needs investments, but RBIs continuous reluctance to cut policy rates is making it more and more difficult for the industry.

in June 2012. After the policy review of June 2012, many blame RBI for the downgrading of Indias rating by Fitch, another global rating agency. Closely on the heels of RBIs monetary policy review, Fitch downgraded the credit rating outlook of India from stable to negative. While governments inability to cut back deficit, spiraling inflation were some of the reasons for the downgrade, the decision to keep the rates unchanged is believed to have triggered the downgrading of the sovereign debt rating. Now there is a greater fear of the economy slowing down further as companies find it tough to get new investments. The negative outlook will further make the Indian markets estranged for the foreign investors. The reduction in the input of desperately needed foreign investment will further slowdown. Amidst the entire cry by the industry against the decision of RBI to keep the policy rates unchanged, RBI has its arguments of not changing the Repo and Reverse Repo rates. The primary argument of RBI revolves around inflation, which is still above acceptable levels. The consumer Price Index which gives a clearer picture of Inflation is not only in double digits but is moving upwards giving more sleepless nights to the governor. The downward movement in WPI is perhaps taking longer to trickle down to the movement in CPI. While the Governor highlighted the importance of controlled inflation for sustainable long term growth, he also accepted that growth was being sacrificed in an effort to tame inflation that has been on a rampage. RBI has also maintained that it is doing all it can to bring down inflation but its only half the job. The other half needs to be done by the government to curb the fiscal deficit that has been hovering above comfortable levels by reducing its expenditures and bringing in certain austerity measures. The days ahead for RBI are also not quite good, as the nation that is heavily dependent on rainfall for a good agricultural produce is staring at the

Varun Sanghi is in the 2nd year at MDI, Gurgaon. He has 21 months work experience with Evalueserve (KPO), where he was working as a business analyst. He is Senior Security Analyst of Unnati, the student run mutual fund of MDI. He is also core team member of Monetrix, the finance club of MDI.

August 2012

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FACEBOOK IPO
A REPEAT OF THE DOT COM BUBBLE?
From a crazy idea to being a world over phenomenon, Facebook has evolved to define what the world calls Social Media, but is this sustainable?
Shreya Jain Neeraj Mishra IIFT, Delhi

ll this within a span of 9 years, from a dorm room to just under a million user base, the growth and penetration of Facebook has been phenomenal. Facebook received a number of investments from the venture capitalists and biggies like Microsoft, which helped it in growing further. After having developed a large customer base, the next obvious step was to launch an IPO. Facebook was hoping to get another Like when it staged the eagerly awaited initial public offering (IPO) of 12% of its equity on America's NASDAQ stock market on May 18th. Welcomed with frenzy and celebrations, Facebook and its 27-year old founder have been translated to mean global internet icons! After planning for an IPO launch to raise $10 billion with valuation at $100 bn, the IPO was launched with the company valuation at $96bn and with share of each

price ranging from $28 to $35.The Facebook IPO in effect, was priced at $38 bn based on valuation of $104 bn. Investors spent some $16bn in cash on Facebook shares, raising the share prices to $38.23 on the closure of the very first day. Facebook planned to spend a part of the money generated on other firms, which will increase their value, as well as the value of all other similar companies. This however is an absolutely breathtaking valuation, propelling Facebook ahead of the likes of big companies in the internet domain like Amazon, Dell and Hewlett-Packard to name a few. Early trading in a stock, whose price initially soared, was disrupted by unfortunate technical glitches in NASDAQ's system, which temporarily caused confusion amongst investors who were not clear whether their orders had been

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The Financial
sustain the bright brains behind the successful run of Facebook once the lock-up period on their shares expires. And the lofty valuation applied to its shares in the IPO could limit any increase in their price, making it even more difficult for the firm to use stock options to hire bright engineers. The 2000 Bubble It is vital to know the facts and figures associated with the similar incident which happened on March 10, 2000 which is more popularly called as the Dot-Com Bubble. This analysis will not only help us make an informed judgment regarding the current situation, but also would give us a comparative analysis tool to see the current situation in the lenses of the past. to make money even though they did not manage to achieve that

But soon enough, some analysts could foresee that the firm's share price would almost certainly dip without support from Facebook's investmentbanking friends. Some analysts reckoned that it would fall to around $30 as the euphoria surrounding the world's largest internet IPO fades. This was in view that the initially thought share price of Facebook ($28 to $35) would have been good enough for a company whose future prospects were not so uncertain. It had a bleak possibility of falling at the same rate as it had risen. Facebook's IPO caused investors to reassess their holdings even in other publicly listed internet firms. It had generated a negative sentiment in the market. Reason for this hypothesis was that the firm had mostly high profile investors, investing in large amounts. But following the first day performance, where the share price fizzled instead of Source : Wall Street Journal

popping, these investors began to reappraise the prospect of other high-profile web outfits. Mark Zuckerberg, now faces big challenges! With a stake in the company as large as $19 billion, he needs to prove his mettle. He, along with his team need to show that they can increase revenues fast enough to justify the stock market valuation which is more than 100 times its 2011 profit and they will also have to deal with ongoing concerns about the network's approach to data privacy. A further challenge would be to

feat for a long time after their inception. The model of the time was to grow as large as possible and scale the operations in all possible areas reaching maximum number of consumers. For example, Boo.com managed to spend more than $188 Million of Venture Capital money in just a span of 6 months. After remaining unprofitable for close to a year, the company was liquidated after the bubble burst. Now, let us take a deep dive into the factors

August 2012
which were responsible for this mammoth collapse of a business model which was supposed to drive our future. First and foremost, it was the lack of proper business understanding of the basic need to have a viable plan which will help companies make profits in the long run. Due to low interest cash availability, these companies raised heavy capital from desperate venture capitalists and hungry investors who were even ready to leave their job to get involved in this section of trading. Secondly, there was a major jump in the growth of internet users during the 1990s which is shown alongside. This large user base helped these companies make a case for themselves when going for the IPO. Another factor which differentiated these startups from conventional businesses was the fact that they were very radical in their business modeling. Companies engaged in unusual and daring business practices which the investors found attractive due to the high potential of profits. The impact these companies had on the investor decision making can be understood by the fact that having an e or a .com in their name was sufficient to create a mad rush among the investors for their stocks. This became phenomenon better known as prefix investing. The money raised was spent in providing free products and services, creating extravagant advertisement campaigns and lobbying. Effectively, this was a burnout process of the VC money at a dramatically fast rate and without a feasible profit making plan, was sure to take most of these companies to their doom.

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Let us look at the flip side of the coin now. As the markets kept on inflating and hundreds of companies kept coming on a weekly basis, many of the companies were dragged to court for following unscrupulous business and accounting practices. But the major trigger which caused the panic among the investors was the Federal Reserves decision to increase the interest rates by 6 times the current value. This slowed down the growth in economy and reduced the liquidity available dramatically. Also, less availability of cash made sure that companies reduced their spending towards IT which was the focus area of a large number of start ups. The trigger came in the form of a loss for Microsoft in a case of monopolistic business practice. The results declared Microsoft a monopoly which was widely expected as the outcome. On the next day, April 04, 2000, NASDEQ saw one of its biggest intraday falls. Most of the so called large dot com companies lost their stock value with a single trading session. Amazon lost 86% of its stock value while many other companies were completely liquidated. The total loss value in this crash was estimated to be close to $5 Trillion. Is this the beginning of a new bubble? Shreya Jain is currently pursuing her MBA(IB) at IIFT, Delhi (batch -201214 ). She worked in TCS for 21 months. Neeraj Mishra is also pursuing his MBA(IB) at IIFT, Delhi (batch -201214 ). He worked in L&T for 21 months.

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The Financial

WHICH IS BETTER: CENTRAL BANK OR THE WEATHER FORECAST DEPARTMENT?

ow many times have you observed rain when the local weather forecaster predicted about it? Well we are not questioning the ability of the forecaster but the underlying assumptions itself. We still dont have the technology to come out with concrete predictions. The same is with the Counter-cyclical buffer proposed by Basel Committee on Banking Supervision (BCBS) in the Basel III Accord. After the recession of 2008 it was clear that Basel II was not strong enough to keep the banking industries afloat, and so the necessary changes were made to it. BCBS after recession came out with Basel III, increasing proportion of Tier I capital in minimum capital requirements and introducing two new elements in it. The two new elements proposed in Basel III accord are Capital conservation buffer and Counter -cyclical buffer. According to Basel III, in addition to minimum capital requirement, banks have to maintain a capital conservation buffer of 2.5% of common equity and countercyclical buffer of 0-2.5% on the discretion of central bank. Capital conservation buffer of 2.5% level is to be reached by January 1, 2019 in a phased manner. This brings the minimum common equity capital requirements of the bank to 7% of its risk weighted assets. Countercyclical buffer which is on the discretion of Central Banks is still a new concept to be understood. It is a risk based requirement and rationale for it was given in following terms in the proposal As witnessed during the financial crisis, losses incurred in the banking sector during a downturn preceded by a period of excess credit growth can be extremely large To understand it, we need to put a buffer which

Prince Behl Dinesh Gupta NMIMS, Mumbai

can accommodate the losses and reduce the effect of excessive credit growth. In theory everything seems right, but how will a central bank decide whether current credit growth is excessive credit growth or not. The transparency goes for a toss when it comes to setting up the capital for counter-cyclical buffer. Now the questions which come forward are: 1. What would be the assumptions for determining excessive credit growth? 2. Is the economy running fundamentally strong or a possibility of bubble is there? 3. Which variable or factors should be taken into account while getting answers to above questions? Last but not the least, when is the rainy day? Basel stated that as an example, one variable which is being considered is the difference between the aggregate credit-to-GDP ratio and its long term trend. As per the above example, central bank tried to find correlation between credit in the economy and GDP. It has to prepare the trend line on the basis of past data which will help it to forecast the future trend in credit in relation to GDP. If credit in the economy deviates from the trend line, it shows that there is either excessive credit levels or lack of credit in the economy. As per the findings, central bank has to announce the percentage of countercyclical buffer

August 2012
requirement. Now we are again left with another question, will central bank be able to devise a fool proof model which can exactly predict the

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excessive credit levels in the economy or will it behave as a weather forecast department?

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ACROSS 1. If you get the wind up youll pay more for it 5. Youre scared to lend your books to him 6. Monopoly and others 8. Extremely valuable chip 10. This animal was used by Americans for trading purposes before the days of paper money. Hence the slang _____ to describe money 11. Counterpart of stock with A View to A Kill 13. Always pressed for money 15. Its outstanding! 17. The books of a hundred noblemen 18. Advanced Home Security System

DOWN 2. Having an affair with money 3. Ingvar Kamprad 4. A Sly Crab 7. Cattle Class 9. It is milked for profit 10. Uses Bins 12. Freely falling 13. Always a plus to have 14. Some people win by 16. This is an interesting place

Compiled by: Anirudh Kowtha , MBA(1st Year), NMIMS Mumbai

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The Financial

SECURITISATION

he financial crisis of 2007-08 brought to light the role of securitization in the functioning of the world economy. Securitization is the process by which non-tradable or illiquid financial assets are transformed into tradable securities. It involves the transfer of an asset or a pool of assets, directly or indirectly, by the owner of the assets (Originator) to a special purpose vehicle (SPV) which is funded through an issue of debt securities or notes backed by the cash flows generated by the assets. Securitization removes the illiquid assets from the Originators balance sheet, thus allowing capital to be used for other purposes. It improves the liquidity position by replacing illiquid assets by cash. The above diagram clearly elucidates the complex mechanism of securitization in a simplified manner. It shows the roles of all the components in the securitization process. The originator is the company which is interested in securitizing its real estate (i.e. liquefying its illiquid assets). The Special Purchase Vehicle (SPV) initiates the process of liquidity of these assets by creating Asset Backed Securities (ABS). The investors are the ones who purchase the ABS for fixed returns. It is important to note here that

Debottama Das Sharma NMIMS, Mumbai

there seems to be an apparent analogy with the bond market in the lower half of the diagram. Hence, the phrase notional principal of bonds has been used. The role of the credit enhancer cannot be undermined in the securitization process, particularly in the light of the 2007-08 financial crisis. The role of the Credit Enhancer is to recognize the probable rating of the security followed by exploring the possible ways of credit enhancement. Credit enhancement can be of two typesinternal (Subordination and credit tranching, excess spread and maintenance of a reserve account) and external (Surety bonds, Wrapped securities, Cash collateral account). The role of the Servicing Agent assumes importance according to the scale of securitization. Often the role of the Servicing agent is performed by the Originator itself. The functions of the servicing agent include maintenance of records and carrying out the regular payment processes in the securitization process. Securitization was implemented for the first time in February, 1970 in the USA by a public law vehicle of the US Housing Ministry. The aim of

Finknowledge

August 2012
the applied securitisation mechanism was to shift the credit risk off the balance sheet of the company which is the originator. Financial institutions originate a number of relatively homogeneous loans on their balance sheet (i.e. the loans that have similar characteristics in terms of purpose, maturity, interest paid etc.) and then carry out the securitization process. The Special Purpose Vehicle (SPV), the vehicle created exclusively for servicing securitization transactions, buys the bundle of loans, financing the purchase from the proceeds of issue of the asset backed securities (ABS). Asset Backed Securities is a general term that represents the securitization of the cash flow backed by the asset (e.g. house, debt obligation etc.). The first use of housing estates for creating Asset Backed Securities was in the USA to support the housing in the country. The riskiness of securitization arises from the fact that the returns on an asset are decided based on its perceived value at a point in time. Separation of funding from origination can create moral hazard, generating higher than expected risks and leading to conflicts between investors, firm shareholders, and firm creditors. Lack of complete information about the market by the agent is an acute problem. Also, the complexity of the structural reforms creates a lack of transparency which could actually lead to market failure. The occurrence of bad debts emerged as one of the main reasons behind the global meltdown of 2007-08.The securitization of mortgage loans and the subsequent rise in default rates triggered the sub-prime crisis of 2007.The implementation of the process rather than the process itself should perhaps be blamed for the apparent failure of the securitization process. A lax lending policy by the banks was at the root of the problem. By securitization of loans, banks transferred

Page 43

the credit risk to the final investors thereby having no incentive to make a strict assessment of the risk of insolvency. In this context, it seems that securitization of the sub-prime mortgages contributed to the deterioration of credit granting process, with dramatic consequences on the value of the mortgage-backed securities. How-

ever, it should be stressed that the failure of the process should be attributed to the lack of adequate regulatory procedures rather than the process itself. The banks in their quest for profit maximization eased their credit assessment techniques thereby creating a false bubble of security. Hence, what is required is the restructuring of the credit rating and credit assessment procedures by the banks and the rating agencies. Only proper implementation of the regulatory procedures can ensure success of the securitization process.

Debottama Das Sharma is in the 1st year of MBA (Banking Management) at NMIMS Mumbai. She graduated in economics from St. Xaviers College, Kolkata (2012 batch).

Finknowledge

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The Financial

Global news:

UPDATES
Team IRG, Finomenon

The month started with a backdrop of a commitment by Mr. Draghi, President of ECB, to do whatever it takes to save the euro. His comments fuelled expectations of a bond buying programme and sent stock, bond, and oil prices soaring. Renewed fears of a double-dip recession also raised hopes of another round of Quantitative easing by the Federal Reserve. ECB and Fed meetings too turned out as non-events after both decided against any immediate easing, choosing to appease markets with their commentary. U.S jobs reports released on Friday provided a pleasant surprise with the economy adding 163,000 non-farm jobs in July. The market cheered the job report with a near 2% rise in the S&P and a 4.8% rise in the Euro Stoxx50. The Dutch central bank said it was investigating the role, if any, of local banks in the interest rate rigging scandal which rocked the financial markets and resulted in large fines. Eurozone sentiment fell for 5th straight month and touched its three year low showed an index from Sentix Research. It said its monthly index tracking investor sentiment in the 17-nation currency bloc dipped to -30.3 in August, down from -29.6 in July. Standard Chartered lost a fifth of its market value after US regulators alleged that Standard Chartered helped Iran launder up to $250 billion. Stan-C chief rejected NY claims on Iran. S&P cut Greeces outlook to negative on the possibility of Greece seeking more help from international creditors. UK industrial production slumped to its lowest level in 20 years. The index level slumped to 97.3 which is the lowest since May,1992 Unemployment rate in Euro zone rose to a fresh high of 11.2% in June, 2012. Bank of France (BoF) predicted a 2nd recession in 3 years for France. OPEC hiked 2012, 2013 world oil demand forecast. For 2012, it predicted a world oil demand at 88.72 million barrels per day (mbpd), up from the 88.68 mbpd July estimate. Japans nuclear-shutdown resulted in record trade deficit in H1 2012. Data released this month suggested that US applications for unemployment aid fell by 6000. Google to pay Apple $22.5 million for internet privacy infringement. China factory output at a 3 year low, spurring hopes for interest rate easing in China. Libor review: Managing director of the Financial Services Authority, Martin Wheatley acknowledged and said that the system must change. Polands unemployment rate at a 5 year high due to Euro crisis, despite it not still being a member of the Euro-Zone Food & Agri products register an increase in the price level as bad weather creates a supply deficit Manchester United lowers stock float value of its IPO at $14 each from previous range of $16$20.

August 2012

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Pepsi to re-enter Burma with new distribution agreement. Weak China trade data stall market rally. Euro falls below $1.23 as Spains two-year yield hits 4%. US drought threatens food price surge Private Banks try to become more exclusive. UK clients with 100,000 or less asked to move on. Manchester United IPO Failed to excite the retail and institutional investors. The stock remained around the IPO price level with the share price registering a dip in the price level in the 3rd week of August and trading at lower than IPO-level of $14

Domestic news:

The 1st quarter registered a GDP growth of 5.3% down from 6.1% in the same quarter of previous year. This has been the slowest rate of growth since 2003 and has largely been attributed to a widening trade gap and poor investment levels. There were expectations of a rate cut after Q1 GDP growth skidded to 5.3%. However, RBI decided against cutting repo rates and reduced the SLR ratio to 23% instead. However, Indian markets showed remarkable resilience quickly reversing losses caused by the above disappointments. This resilience, in part, could be attributed to healthy FII flows, who maintained their inflows despite a gloomy economic environment. P.C Chidambarams appointment as Finance minister also appears to have boosted market sentiments. The positive jobs report seems to have provided fresh momentum to the rally, which could well spill over to next week. Indian markets, though, can be expected to face resistance at higher levels and any break out would be contingent on FII flows or government action. Govt. of India set the base price for spectrum auction at 14000 crores. Trading glitch at Knight Capital group roiled trading in over 150 stocks at NYSE. The trading loss was estimated at $400 million The finance minister announced a fiscal consolidation roadmap to control both inflation and interest rate to stimulate investment and ease burden on consumer. FAO (Food and Agriculture Organization) negatively revised the global paddy production by 7.8 million tons due to poor monsoon rains in India. Reports that Reliance had a fruitful meeting with the oil ministry led the market sentiments in its favor. Tata motor soared as S&P upgrading the companys long term credit ratings to BB from BB-. GAIL and Vadodara Municipal Corporations decision to ink joint venture created a positive sentiment for GAIL in the market. Irish group CRH set to buy 51% stake in Jaypee Cements Gujarat plants at an enterprise value of Rs 4200 crore. Foreign investors bought a net $17.94 million in the Indian stocks in the first week of August, according to data released, their biggest purchases since the week ending July 6. According to official data, foreign inflows in the stock markets for the year 2012 now stand at a net $9.37 billion.

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The Financial
The National Stock Exchange of India (NSE) became the world's largest bourse in terms of the number of trades in equity segment for the first six months of 2012. Reliance Industries managed a conditional approval for a $1 billion investment in KG basin. Veritas Investment research raised corporate governance issues in 3 companies of the Indiabulls group which led to heavy selling of its shares on the Indian market. Indiabulls accused the group of publishing an inaccurate group and also filed a complaint in the Mumbai jurisdiction against the primary researcher Nikhil Monga In a report published this month, June IIP numbers were released. The Index of Industrial Production (IIP) contracted to -1.8% versus 2.5% in May. Hindustan Unilever (HUL), the personal care giant, is back in the top 10 ranking in terms of market capitalization (m-cap) after a gap of more than three years. HCL Info systems clinched a Rs.2200 crore UIDAI project contract which saw a an increase in its share price RIL sold its stake in Yemen oil block to Indonesian firm. The management will be bidding for road projects worth Rs 40,000 crores. The Government appointed the former IMF chief economist Raghuram Rajan as the Chief economic advisor to the finance minister. Rajan has also served as an honorary economic advisor to the prime minister of India. BHEL plans to invest Rs 1,000 crore for modernization. SBIs Bad Loans registered a nearly double increase against the expectations. The Bad -loans hit a figure of Rs.108 billion as against previous guidance of Rs. 55 billion

Highlights of Quarterly Results: 1. ONGC Q1 net profit increased to Rs 6,077.7 crore 2. Tata Motors Q1 profit up 12% at Rs 2244 cr. 3. Bharti Airtels profits fell for 10th straight quarter at 762 crore for Q1 (37% dip YOY). 4. Mahindra & Mahindra profit rose to 726 crore in Q1 (20% increase YOY). 5. Kingfisher Q1 loss jumps 147% to Rs 650.8 cr.

Answers to Crossword :

Down : 2.FINANCE 3.IKEA 4.BARCLAYS 7.ECONOMY 9.CASHCOW 10.BUSINESS 12.RUPEE 13.ASSET 14.DEFAULT 16.BANK Across : 1.INFLATION 5. AUDITORS 6. BOARDGAMES 8. BLUECHIP 10.BUCK 11. BOND 13.ATM 15.DEBT 17.ACCOUNTS 18.MORTGAGE

THE EDITORIAL TEAM

Photograph Courtesy : Muthu Narayan

From the Top (Left to Right)Second Row (Left to Right)Third Row (Left to Right)-

Prakash Nishtala, Anirudh Kowtha, Tirthankar Behera, Akshay Goyal, Srijan Srivastava, Achal Mittal, Sagar Gupta Ellina Rath, Komal Poddar, Debottama Das Sharma

"Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game." - Donald Trump

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