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Arthneeti Finance Newsletter June 2011
Arthneeti Finance Newsletter June 2011
Arthneeti
A SIMSREE Finance Forum Initiative | June 2011
Special Feature: Mr. Bharat Sampat, CFO & EVP, DCB Meeting Infrastructure Needs of Indian Economy Interview with Mr. Sujan Hajra, Chief Economist, Anandrathi
The world economic outlook has been shadowed by rising debt problems in the Euro region and with the contagion expected to affect the other PIIGS nations as well. There are also concerns about United States unsustainable fiscal deficits, which is one of the greatest challenges it faces. The US problems have been further aggravated with the unresolved debate on debt-ceiling creating an impression of US default on public debt. Back home, the Indian economy grew by 8.5 percent in FY2011, which is lower than expected but better than the global growth standards. In the backdrop of higher inflationary pressures in the system, RBI continued its monetary tightening measures because of the high domestic inflation which is much above the comfort zone. It increased the repo rate & reverse repo for the tenth time by 25 bps to 7.5% & 6.5% respectively. The monsoons are expected to be good which would taper down the food prices and moderate the inflation within RBI limit. Other emerging economies such as China and Brazil have also been battling inflation for the past one year. In this issue, we have interviewed a prominent banker and an economist on the banking scenario and economic outlook respectively. The issue brings to you some more interesting topics relating to infrastructure development in India, the Pharma sector and Brazilian economy. As part of our forum activity, we were fortunate to have Mr. Sunit Joshi, EVP & HeadCapital Markets Group, SBI Capitals on campus for an insightful session on Capital markets. We do look forward to views and suggestion from the readers to help us improvise the content of the Newsletter and make it more relevant and informative. Hope you enjoy reading.
eDITORS vIEW
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CONTENTS
Special Feature
An Interview with Mr. Bharat Sampat CFO & EVP Development Credit Bank (DCB)
Expert Talk
An Interview with Mr. Sujan Hajra Chief Economist & Co-Head-Research Anandrathi Financial Services
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Meeting the Infrastructure Needs of Indian Economy 20 Sectoral View: Pharmaceuticals Macr-O-nomics 25 30 Lessons On Finance 23
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Mr. Bharat Sampat CFO & EVP Development Credit Bank (DCB)
A Chartered Accountant and Cost Accountant along with a Post Graduate Degree in Law. Mr. Sampat has over 25 years of experience in senior positions with reputed organizations such as ABN Amro Bank, ANZ Grindlays Bank, Standard Chartered Bank, Hoechst India and Larsen & Toubro.
and Indias economy. Having said that, the existing banks will face number of challenges in terms of retaining good talent and customers. Newer banks will seek to hire industry experienced staff from existing banks, especially in customer and regulator facing roles. They will also seek to cherry pick from existing customer base of the banks. Q: Whom do you think would be preferred to grant licenses - NBFCs or well established Corporates? A: RBI would take the final call, but if you see in the past they have given licenses to Developmental Finance Institutions (DFIs) like ICICI, Cooperative Banks that is how DCB was issued license to operate as a commercial bank and NBFCs thats how Kotak was converted into bank. So, I dont think there is any bias towards any sort of player coming in. I think RBI will be looking at corporate governance standards and ability to support the bank in the long run. Q: When there is so much demand for capital from telecommunication, infrastructure, power, why there is need for them to go abroad and borrow? Is the Indian Banking system not capable of providing the money at same cost? A: Indian banking sector is well equipped to support capital demand from these sectors. Cost of domestic funds is high due to prevailing high interest rates. However, in long run, this cost is free of currency and sovereign risk. Lower policy change risk and better management of execution risks can result in better credit rating for firms in these sectors and lower costs. Q: What do you think about the possible consolidation in the banking industry to firm balance sheet size and increase size of assets? A: Given the RBI requirement of dispersed shareholding and limited voting rights, takeovers are not easy unless a very compelling premium is offered over existing market price. This makes consolidation a difficult proposition. Regulator could force consolidation of banks which have serious governance issues or have burnt away their capital through losses. Another possible trigger is a minimum capital requirement which is presently at Rs. 300 crores. As
Q: RBI for the tenth time has raised repo rates. To what extent would this affect the liquidity in the banking system? A: The rate hike has increased the cost of funds but liquidity continues to remain available. In other words, sufficient liquidity is available in the system but at a higher cost. Q: There has been much debate over deregulation of Savings Account rate by RBI. How would such deregulation affect the margins of Banks? A: Over a short period, Savings Account interest rate has increased from 3.2% p.a. (effective rate when 3.5% p.a. interest was paid on minimum balances between 10th and last day of the month) to 3.5% p.a. (when paid on daily balances) and further to 4.0% p.a. Banks have passed on some of the cost increase through base rate increases. However, net interest margins are expected to compress in current quarter. If deregulation is implemented, the pace and manner of implementation will have transitory impact. Over the long run, this will provide greater room for product innovation and will help customers obtain products which suit their specific requirements. Q: RBI has proposed to grant new licenses to new players. What is your view on it? A: In the past, new licenses have brought fresh players with different approaches who have infused new technology, deepened markets and created fresh business segments. Over the long run it has had a positive impact on banks in particular and economy in general. The new round of licenses will have similar impact on the industry 4
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the regulatory regime over there. If you declare your capital adequacy as per Basel II and if the world has moved onto Basel III standards, then how will they value your credit worthiness? So, yes Basel III will come in and RBI has already been taking steps on that front. Q: How can Banks play an active role in strengthening the Bond market? A: I think there has been intermediation of routing wholesale bonds through mutual funds for example. That route has been to some extent restricted and curtailed by RBI. Traditionally banks have offered good fixed deposit rates and vis-a-vis the riskiness of the bonds there was to some extent an aversion to bonds in retail investor community. However if you see recently, L&T Finance as of this week and Sundaram Finance came out with some Rs. 1000 crores bond issue. Sundaram issue has been oversubscribed 8 times in the first day. There is a significant appetite decent corporate bond. Price differentiation will also then start emerging and yield curve could be more effectively embedded into the banking system if we have a deep corporate bond market. So yes, it is required but it would take time before it develops. For an emerging economy which aspires to be a developed economy needs to have a deep corporate bond market in place. Q: What has been the significant change in the global banking system post the financial crisis? A: Bigger Is Better no more holds good. There is less emphasis on pursuit of higher market share and bigger balance sheet size. Bigger banks face continuous scrutiny from regulators on their liquidity, capitalisation levels and corporate governance practices. Proposed Basel III implementation will further strengthen the bank balance sheets. Emerging markets have become the new growth engines of the world economy and this provides a unique opportunity for banks of these countries to grow rapidly. Q: How much would the depressed US economy & Euro crisis affect the Indian growth story? A: Muted US economy and Euro crisis would result in greater capital flows into high growth emerging markets like India in terms of FIIs and FDIs. Economies of skill and scale offered by Indian economy make India attractive as a quality low cost production destination for many
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Even Sriram Transport Finance Co. has emerged successful by focusing on one segment. Each has its own space and one has to play according to its strengths and weaknesses. Q: What are DCBs growth strategies in the years ahead? A: DCBs focus is on building low cost deposit franchise with strong capital position. We have a strong focus on retail CASA (Current & Savings Accounts) balances and retail Term Deposits. On the asset side, we want a balanced growth in advances which are secured and repriceable. Our chosen areas of growth are Retail Mortgages, Micro SME (businesses with turnover up to Rs. 10 crores) and SME (businesses with turnover up to Rs. 100 crores). We have a significant presence in MidCorporate space. Agri & Inclusive Banking (AIB) helps us achieve priority sector targets and promotes inclusive banking. Q: Is DCB looking forward to expansions through M&As in India? A: In near future, inorganic growth is not being pursued by us. Q: Do you think the Indian government is going slow on financial reforms, critical to sustainability of Indias growth? A: I think a lot of work continues to happen at the governments end. It is just that these structural reforms needs lot of doing before the reforms becomes visible. I am sure at the government level; huge amount of work is going on. We would see the results coming out in future sooner or later. Q: RBI & Indian government have been targeting to reach out to the unbanked population across India. How according to you can Banks play a more active role in financial inclusion? A: Banks have a vital role to play to achieve the financial inclusion objective in the country. Through expansion of rural network, extension of no frills banking, micro-credit, extension of banking facility through business correspondent (BCs) model etc, we can achieve further development of banking services in the untapped regions.
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intact and it would seek returns and if these economies are not prospering then it would seek returns where there is growth. This is where emerging markets like India would win. We should be ready to attract it. An economy would never go on a linear path, it experiences Ups & Downs, but what you got to look is the secular trend. Q: How should students prepare to make a career in the field of Banking & Finance? What according to you are the attributes required to be a successful banker? A: It is essential to have a strong grounding in Financial Management and Economics. Financial management for taking micro decisions, where the decisions come to your table and Economics to understand strategically where things are moving towards - macro picture. The interplay of the markets can be understood only when you understand economics, which is very important. Financial management helps you to assess what is working for you and what isnt working for you in the micro sense. It is also very important to keep up with the events happening in financial services world. Reading of books like Liars Poker by Michael Lewis; Too Big to Fail by Andrew Ross Sorkin; Barbarians at the Gate by Bryan Burrough & John Helyar; One Up on Wall Streets by Peter Lynch; The Money Guide by Paul Erdman, etc gives a good practical insight into the world of Banking & Finance. The books which have been mentioned have their own significance, because it gives you an all-round view of the financial industry. Usually what you study is theory but in practice various important aspects needs to be considered. Liars Poker, very famous book- gives you deep insights into the practical working of the debt markets, Too Big to Fail would help you understand what has changed post the Lehmann brothers (crisis), Barbarians at the Gate would give you some insights about how do the Mergers & Acquisitions market work, Leveraged Buyouts (LBOs), Management Buyouts (MBOs) and consolidation issues; One Upon Wall Street would help you understand how does the mutual fund industry works and the fifth book The Money Guide which is a non friction book helps you understand the linkages between the markets - financial markets which exists. I feel if you put all these as a sort of curriculum, you would come up with more practical insights that would help you develop an all round abilities in financial field.
By Gopidalai Muralidhar Rao, MMS 2010-2012
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Mr. Sujan Hajra Chief Economist & Co-Head-Research Anandrathi Financial Services Q: To what extent would RBI raise rates and what is the comfort zone for RBI?
A: RBI in the medium term would expect to see inflation at a range of 4 to 5 % and in the long term below 4 %. That doesnt necessarily mean that RBI would keep on raising rates until inflation settles at the targeted levels. RBI as you know is doing the tightening for more than 12 months and the major impact of policy tightening and inflation happens with a lag of almost 18 months. RBI would now start expecting the impact of its past tightening measures on the overall inflation situation. So my sense is that, RBI is pretty close to the end of policy tightening cycle, though we would expect inflation to correct in the second half of the current year.
Q: Economies especially emerging economies have been facing Inflationary pressures. Is there any global perspective or is it something fundamentally wrong with inflation in India?
A: I think, it is a bit of this and bit of that. If you see inflation dynamics in India, Wholesale Price Index (WPI) is taken as the headline inflation which includes 4 major components. One is the food component, which is predominantly domestic because India doesnt either export or import any major quantity. So, there the kind of food inflation which we are expecting is basically influenced by the domestic factors. The second component is Non-Food Primary, which basically includes cotton, jute, oil seeds etc. Here, the international component exists. For example, if you look at the cotton prices in India, today inflation is almost 100 %. So there is an international component to that. The third segment is Fuel, Electricity & all. The fuel prices, of course, a significant amount has international linkage. All the petroleum products are affected by the international trends. Since, 1/3rd of the petroleum products are decontrolled in India this directly passes through to end users. Other things which are controlled in particular Diesel, LPG and Kerosene there is some amount of lag passthrough. So there the international impact is pretty significant. The biggest segment with significant international impact comes from the manufacturing product prices. Almost 65% of Indias WPI weightage is for manufacturing products especially the engineering products and all. Manufacturing products are highly internationally traded. The part of high inflation which is taking place in India now is a domestic phenomenon. The lack of investment in agriculture, high dependence on rains is the major factors leading to the current inflationary pressures. On the other hand, internationally transmitted component particularly fuel and manufacturing have also a significant effect on prices and commodities are also being affected from international prices.
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November 2010. It remained flat, while the growth rate fluctuated between high teens and low single digit numbers simply because of the asynchronized base. But internationally you look at growth more as a seasonally adjusted 3 months over 3 months moving average. If we take this method, we see that after November, there has been significant pick up in industrial growth from a (-) 8%, the growth has become to (+) 8%, so there is a delta of 16% points. So, in that sense I dont subscribe to the view that there is any serious slowdown in industrial production in the second half. Similarly, one can also look at the GDP numbers. In the (1st Half) FY12, you would see subdued numbers because of the high base of the (1st Half) FY11. Similarly, in the (2nd Half) FY12 we would see a significant pickup in growth. It is more of a base effect rather than any slowdown or pickup.
Q: Our Finance Minister has projected that fiscal deficit would come down to 4.6% in FY12. Do you think this is achievable given the government finances going haywire?
A: The funds available to the government last fiscal from 3G & BWA was close to 1.05 lakh crores, but a significant part of the amount has been carried forward to this fiscal year i.e..approx 30,000 crores. So actually there is a positive externality in that way. We are talking about fiscal deficit as a percentage of GDP and you basically need to understand that the denominator is also increasing. So, if your real growth assumed is 8 % and inflation is at about 8 % so roughly speaking, you are talking about 16 % growth in the denominator. So, that in itself brings down fiscal deficit. If you look at the indicators as of now such as Tax commission and everything, they are ahead of the budget target. From that aspect, I dont see any significant slippage from the fiscal deficit perspective. Even if there is a slippage, it wont be significant. It would be well below 5%, may be something around 4.8% if there is any slippage.
Q: Standard & Poor (S&P) has recently warned US about downgrading its economy ratings. Do you think there are chances of US defaulting?
A: US technically cant default because it has unlimited power to print money. Its like India has internal debt and government cant default on internal debt because at the end of the day they have recourse to the printing press. But yes, fiscal issue is a major problem not only in US, but also in Europe particularly in PIIGS economies. So, this is something that would dominate the economic developments for the times to come. There is already a school of thought which is predicting that the next crisis would happen in government debt. This is a serious issue and the international community has been looking at it, otherwise this can result in a prolong period of low growth.
Q: The FY11 4th quarter GDP has declined to 7.8% and there are also signs of Industrial slowdown by recent data. Do you see slowdown in Indian economy?
A: To the contrary, I believe that from November 2010, there has been significant buoyancy in the industrial production. We need to understand the relation of FY11s data particularly IIP & GDP against the previous financial year i.e...FY10 was an abnormal year. In the first half of the financial year FY10, there was a subdued growth and in the second half there has been significant buoyancy. The base for last year (FY11) is FY10. So when you started in the year FY11, your industrial production was in high teens and in course of the year growth started faltering mostly because of the asymmetrical base effect. What happens is that actually, if you look at the IIP, the index shows a no change between the periods April 2010 to
Q: US have reached its debt ceiling. The president and congress are at loggerheads to raise the limit. So, how do you see these developments?
A: As far as the fiscal reforms are considered, the congress and president are at loggerheads. This in actually could be a blessing in disguise because US economy has not completely recovered from the global financial crisis, which now you are calling as the great recession of 2008. It may be too early for the government to take up further fiscal reforms because the quantitative easing (QE2) has just ended and if the government starts doing fiscal
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as a currency. It is quite possible that some of the weaker nations might leave the union. Some people like Mr. Soros are talking about it to happen as early as January 2012. I dont have a definite view on whether European Union (EU) will disintegrate, but yes it is increasingly under pressure. Its members are at different stages of development, so they need different kind of macro policies.
Q: There has been a decline in capital flows (FIIs & FDIs) for the past one year. How will this affect the investments in the country?
A: Firstly, we must understand that 94% of the investment in India is domestically funded and the role of foreign capital in funding investments in India is limited. Secondly, when you are looking at foreign capital, you have to take a holistic view rather than considering only equity capital. FIIs are basically portfolio investments are mostly equity capital. But if you look within FIIs, there is a component Portfolio Debt Inflow. Portfolio debt inflows have been significantly increasing, because there is a significant interest differential between India and the rest of the world. Other forms of debt inflows-External Commercial Borrowings (ECBs), Banking Capital and NRI Deposits are also pretty robust. But having said that, deceleration in FDI inflows is something to be looked at. See, it is more to do with the procedural delays in India. If you look at the last RBIs monetary policy document i.e...Macro document which is issued before the monetary policy, you would notice that RBI has been extremely critical of the impact of procedural delays on the investment climate. So, this is a serious issue which needs to be looked upon.
Q: How do you view the role of IMF in handling the crisis like situation?
A: IMF obviously doesnt have adequate resources to address the debt problems faced by developed nations and from that perspective IMFs role is pretty constrained. Whenever, IMF comes with an adjustment program, they generally address more domestic adjustments basically because the debtors generally have less muscles than the creditors. This is a clear criticism of IMF. Most of the developing economies including India feel that IMF must restructure itself hence providing more active role to the emerging nations. India is a very good campaigner of such reforms in IMFs structure.
Q: An IMF Chief from an emerging economy would be a positive development for the emerging nations in international affairs. Whats your view on this issue?
A: Not necessarily. Historically, if you see the World Bank chief has been from United States and IMF chief from European region. Obviously this cannot be a happy situation and developing nations need much bigger voice. But, I dont think it really matters who is the chief of IMF. What is more important is the issue of disproportionate quota that exists between the developed and developing nations. So, I think the reform of the basic structure of IMF is far more important rather than who is heading IMF.
Q: Euro zone especially the PIIGS economies has been facing serious challenges to sustain. What according to you is the major reason of crisis in Euro zone?
A: The problem with Europe is that different nations are at different phases of the economic cycle. The economies are not synchronized. For example, if you are at the upper part of the business cycle, you need higher interest rates, exchange rate appreciation and things like that. But if you are at the bottom of the business cycle, you need the other way round. Thats what we are calling it as Two-Track development in Euro region. Germany and France obviously are going pretty well, while the PIIGS economies are facing problems. If Greece could devalue its currency, a major part of the problems could get resolved. Obviously Greece cant devalue its currency because it doesnt have its own currency as euro is the common currency. So, there is a clear threat to the integrity of euro
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Q: Indian government has been slow on reforms. Do you think this would stifle growth in near future?
A: If you look at corporate debt market, government has actually increased the limit from USD 10 billion to USD 20 billion and now to USD 40 billion. Government is actually bending backwards to attract fund flow particularly for infrastructure funding. I think thats one area where government has done a lot. The issue here is more of regulatory delays which are happening whether to start a mine and land acquisition has become a serious issue. All these challenges we have to address. Otherwise we would stifle growth very significantly.
Q: What are the key Lessons learnt from the financial crisis?
A: What you have seen in the last crisis, the central reasons of the crisis has been the mispricing of risk. That has happened because there wasnt appropriate mechanism regulatory or supervisory mechanism. There was some kind of regulatory arbitrage which has allowed this kind of event to happen. We have seen that by nationalising the private debt, we have come out of the crisis. So actually the public sector has taken the burden on its balance sheet. Every time we have seen that the resolution of one crisis has actually set in the seeds for the next crisis starting from the investment crisis in US or the dotcom bubble. All these things increasingly have set up the seeds for the next crisis. Public finance particularly in the developed nations is a major risk area going forward. So in that sense there is obviously large level of regulatory forbearance which has led to the current crisis. Even now, we are mispricing risk and arent properly pricing the sovereign risk, which is an issue. We have of course learnt the price paid for allowing an institution to be too big to fail. Bank for International Settlements (BIS) recent initiative says that the systemically important financial institutions must have a better capital adequacy ratio. Those are the kind of steps taken to safeguard as there is nothing called a full proof system and mostly it is learning by doing. Prior to the crisis, many of them knew that the housing sector in US had problems and issues, but not much concern was raised then. So long you are making money as a financial institution; you have to go with the model. So, thats the problem of capitalistic system under which we work.
Q: Will the problems in Japan further increase after the natural calamity and nuclear disaster? Do you feel any positive signs from Japans perspective?
A: Japan obviously, what we have seen is the Lost Decade in the 90s for certain policy mistakes. Over and above that what we have seen in Japan is that Japan is the most negatively impacted nation by population ageing and issues associated with that. Japan is technically into recession. As per US definition, 2 quarters of negative growth is recession and Japan obviously is under recession. But, the immediate positive effect would be reconstruction because of the destruction by a series of natural calamities and nuclear disasters. This should actually push Japanese economy upwards, but at any case the potential growth for Japan is not high and Japan has to deal with public debt problem. But since, most of the public debt in Japan is domestically held; they have some amount of comfort factor. But definitely Japan is withstanding problems since 90s and that is still persisting. Beyond the reconstruction Japan has serious issues which have to be addressed.
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Q: What are the key takeaways for a student from the crisis?
A: It is very important to understand the business cycle and phase of business cycle where you are. You are now experiencing the crisis period as a student. You should understand the logic of business cycle and you should not interpret everything linearly. So if inflation is 5 % yesterday, 6% the next day, 7 % the other day, then you shouldnt necessarily draw a line that it would go to 9%. One needs to understand that it is also cyclical. You should also understand that there is a non-linearity in it. It would top up and it would go down. So understanding business cycles is very important for you as students. One needs to be aware of the events happening around and needs to assess why things are changing. You shouldnt try to be conformist. Just because people are telling you that FY12 growth would be lower than FY11, you shouldnt believe that. At the end of the day you would be paid for your logic no matter in which profession you are. So long you have logic, it would be fine and logically you should try to understand rather than following anybody. Economics and finance are very innovative subjects; you try to understand for yourselves.
It is very important to understand the business cycle and phase of business cycle where you are. Understanding the business cycle is very important for you as a student
By Gopidalai Muralidhar Rao, MMS 2010-2012 & Sangeet Srichandan, PGDBM 2010-2012
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lagged in the previous quarter as compared to its competitors because of wrong anticipation of recovery in US and Europe. Wipro has done lot of changes in management to bring back the growth in its favor.
Pratip Chaudhuri appointed SBIs New Chairman Wipro Buys SAIC Unit In US
Wipro technologies, Indias third largest exporter of software services has acquired the oil and gas IT practice of US headquartered Science Applications International Corp. (SAIC) for $150 million. The acquisition is mainly done to bring back the growth on track. Wipro 13 State Bank of India, the countrys biggest lender, got a new chairman. Pratip Chaudhuri will take place of O P Bhatt who retired on 31st March after a five year stint with SBI.
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K V Kamath To Be New Chairman Of Infosys
Infosys appointed K V Kamath as the new chairman in place of its founder N R Narayna Murthy. The job of new chairman is to draw a succession plan for the exit of all founders and appointment of young professionals to run the company. K V Kamath has the expertise to perform this job as he did the similar thing when he was the chairman of Indias largest private bank ICICI. A lot of restructuring at top management level is expected in the tenure of new chairman.
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Aditya Birla Group Acquires Columbian Chemicals
Aditya Birla Group acquired Columbian Chemicals Company for $875 million. This acquisition has placed the Indian group at the top in the list of carbon black producers. Kumar Mangalam Birla has been appointed the chairman of the newly constituted board of directors of Columbian Chemicals.
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grade, stating it has "robust growth prospect" and solid external financial condition. The agency affirmed long term 'BBB-' rating for the country with stable outlook. 'BBB' denotes a moderate default risk relative to other nations for investors. However, it cautions that changes in circumstances or economic conditions are likely to affect the capacity for timely repayment than in the case of higher rated category. The foreign exchange reserves of the country stood at USD 313.5 billion at May-end. Besides, Fitch said that the current account deficit estimated at 2.6 per cent of GDP in 2010-11 is not a significant risk in the current stage of economic development. Indian economy witnessed a growth of 8.5 per cent during the last fiscal. In addition, India's authorities look to be tackling the challenges of a continuously large fiscal deficit and rising inflation pressure with greater vigor, according to Fitch Asia Sovereign Ratings Director Art Woo. Although the central government fiscal deficit target of 4.6 per cent of GDP for 2011-12 may not be met due to the rising cost of subsidies, the potential slippage is unlikely to be significant. The new fiscal consolidation strategy is vital if the government want to ensure that the sovereign's public debt dynamics stay on a more sustainable path and are brought into line with other 'BBB'-range rated sovereigns, it said. On the GDP growth, Fitch said, the economy is expected to expand at 7.7 per cent during the current fiscal.
SEBI Allows Bourses To Offer Sops To Brokers For Raising Volumes In Illiquid Derivatives
SEBI has allowed stock exchanges to offer incentives to brokers for generating volumes in illiquid securities in equity derivatives segment. Exchanges can reward brokers dealing in derivatives of scrips where average trading volume for the past 60 trading days is less than 0.1% of market capitalisation of the underlying stock. The regulator has asked exchanges to keep liquidity enhancement schemes (LES) transparent and measurable.
Brushing aside apprehensions of slowdown, global rating agency Fitch retained India's sovereign rating at investment 16
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Fiscal Policy
The objective of fiscal policy of any government is to strike a balance between its expenditures and the benefits out of it both tangible and intangible. At a per capita GDP of $10816, the seventh largest economy in the world, Brazil is considered to be one of the worst examples of wealth distribution and social exclusion, despite the huge social spending by successive governments. Between 2001 and 2009 the income inequality measured by the Gini index fell from .59 to .54, however the country is still marred with widespread inequality and many believe that a Gini index of .54 is still quite high for a middle income country. In 2010 the Brazilian government reported a budget deficit of 14.4 billion Reais, well above the forecasts of certain economists. The net debt to GDP ratio stood at 40.3% and the nominal deficit at 2.3%. In 2010 Brazil struggled to achieve its budgeted targets. Even though the Brazilian government did not have much option in cutting the spending ahead of the 2014 World Cup and 2016 Olympics, the Dilma government, in an attempt towards fiscal consolidation, has gone for a reduction in its social spending by as much as 50 billion Reais in its current budget and would also cut loans it provides to the Brazilian Development Bank. The move is supposed to help the country reduce inflationary pressures and avoid hard landing even though it might have a down side effect on the GDP of the nation.(IMF has reduced the GDP forecast of Brazil for 2011 to 4.1%). At the same 17
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Business Survey had stated that it took 120 days to start a business in Brazil, far above the regional average of 45.5 days. The challenge for the newly elected government would be to curb the rising inflation without adversely affecting the investment scenario of the country.
Monetary Policy
Drafting an effective monetary policy is the tricky answer to most critical question for developing economies, how to maintain a sustainable growth keeping inflation under control? Current ICPA inflation index of 6.77% (May 2011) has crossed the upper limit of the target range (4.5% +/-2%) estimated by the Brazilian Central Bank (BCB) for H2 2011. Inflation & Unemployment Rate Inflation Unemployment 2003 10.4% 12.3% 2004 6.2% 11.5% 2005 5.1% 9.8% 2006 4.2% 9.3% 2007 3.6% 8.7% 2008 5.7% 7.9% 2009 4.3% 8.1% 2010 5.9% 7.4% 2011 *5.7% *7.2%
Investment
Its quite unlikely that if you had told me 10 years ago that I would buy the Brazilian Real, I would have thought you were crazy. In the last five years -the Brazilian currency in terms of the American currency, has doubled. This is what Warren Buffet had said, when he was questioned about Brazil as an investment destination. The South American power house was widely believed to be the first country to come out of the economic downturn. It was in 2008 that Fitch and S&P upgraded the Brazilian economy from speculative to investment grade. According to Baker and McKenzie Brazil will continue to enjoy a steady FDI inflow, however, the government needs to reconsider its taxation policy on FDIs and FIIs. In 2009 Brazil became oil self-sufficient and it does not need a huge chunk of the oil it has (worlds largest oceanic oil fields is in Brazil), the government can attract loads of foreign currency by exporting this oil. With the world cup and Olympics not far away the Brazilian government is expected to invest nearly USD 93 billion. This investment will certainly give a boost to the economy in terms of employment and infrastructure development. PWC, in its report on emerging economies, has predicted that Brazil by 2050 would be as large an economy as Japan. Having a look at the different sectors of the economy gives us an idea as to why people expect Brazil to be the next big thing. The major ongoing steel projects and the new mining code and the governments plan of investing USD 40billion to reduce the housing deficit, would certainly foster the economy. In 2010 itself Brazil saw a spike of 23% in assets under management, the private-equity firms controlled had business worth $36 billion, the primary reason behind these developments is a maturing capital market, several IPOs and the support of the government. Despite all these in 2010 the World Banks Doing
Year
So far in current fiscal year policy makers have raised benchmark interest rates twice but the lagged effect of this is expected in third and fourth quarters. Current lending rate (Selic) of 12.25% (as revised on June 8, 2011) vis--vis 10.75 % (January, 2011) shows the urgency of the issue. This has got clear response from the market as Bovespa (Sao Paulo exchange) has dropped by 12% since January, 2011.The confliction and dilemma of fiscal and monetary policies will keep Banco Central Do Brazil (Brazils central bank) and government under continuous watch. Though, announcement of a 50 billion Reais ($30 billion) cut in spending and increase in interest rate, similar steps are expected in near terms. Finally the pressing question for Brazil is; how long can it restrict spending when large international events like the FIFA World cup (2014) and the Summer Olympic Games (2016) are around the corner?
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to come. More structured and long term investment plan should be drafted to cater to the increasing domestic demand with increased market confidence and more foreign investments. Currently, inflation is the major issue and needs to be addressed with utmost priority. This will ensure a favourable environment for the sustainable long term growth and this would be possible only when the government will have a perfect blend of fiscal and monetary policy in place. Brazil is amongst the leading exporter of commodities like coffee, orange juice, sugar, beef and soy. Other positive factor is the increasing trade between BRIC nations which has opened up new fronts for trading. In addition to these events, the FIFA World Cup and the Olympics will provide a perfect foundation for the anticipated growth in coming years. All that Brazil needs to do is, to capitalize on these opportunities of international events to direct the incremental investments in the primary sectors which will form the base of future growth. The world is keeping a close look at Brazil as an emerging economy. Its just a matter of time to see when Brazil is going to score winning goal? Till that we bid adios and keep watching Economy Scorecard: Brazil
GDP Growth Rate GDP (sector wise) Agriculture Industry Services Budget Balance Inflation Unemployment Exports Imports Gross External Debt S&P Credit Ratings 7.5%(2010) 4.1%(Q1 2011)
According to the scale of global competitiveness index of infrastructure developed by World Economic Forum, Brazil ranked at 74th Position out of 133 countries which is slightly better than India but far behind compared to Chile (30), South Africa (45) and China (46). With focus on ports and transportation as the priority sectors, improvement in these segments can boost Brazils GDP growth to around 6-7% in coming years. Brazil must double its infrastructure investment rate to live up to the expectations for a BRIC member. Overall investment-toGDP ratio averaged 17% in the past 5 years, vs. Chinas 44%, Indias 38%, and Russias 24%. To grow at 5% per year in the next decade, infrastructure investment must double from the 2.1% of GDP average in recent years. There are four key known drivers of higher infrastructure spending in the near future: the 2014 World Cup, the 2016 Olympics, the development of the pre-salt oil reserves, and the government-sponsored Growth Acceleration Program (PAC).
6% 26.40% 67.60% -2.30% 6.77%(May,2011) 7.4%(2010) USD 201.9 BILLION USD 187.7 billion(2010) USD 310.8 billion(2010) BBB+(Domestic) BBB-(Foreign) USD328 billion Investment Grade
Outlook
Although too many restrictions and barriers are imposing challenges to Brazil, in a medium term perspective the Brazilian economy is expected to remain positive. Sustaining the growth by means of maintaining the control over the above mentioned factors will prove critical in time 19
Foreign Reserves Public Debt
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(Source: Mckinsey)
The Planning Commission estimates investments in infrastructure projects in India will be more than $1100 billion over 2010-11 to 2016-17, an amount higher than its 20
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Indian government to facilitate the flow of investments towards this direction. The government should consider a series of policy measures to remove these barriers and steer more capital into Indias infrastructure sector by ensuring flows from existing sources of capital and allow new investor groups to enter infrastructure sector.
From examples seen in the United States with Municipal bonds and Malaysia with infrastructure bonds, bond markets have played an important role in channeling capital into infrastructure. Unfortunately, the bond market penetration in India is currently only 2 percent of the GDP significantly lower than other developing countries like China (8 percent) and Malaysia (15 percent). The government should make continued efforts to grant further access to the bond market for FIIs on an ongoing basis. The present limit of $10 billion for government securities, $15 billion for corporate bonds and $25 billion for long-term corporate bonds (for infrastructure) should be enhanced in order to ensure adequate liquidity is available in the debt markets. Efforts should be made allow institutions (including banks) to offer credit enhancement/ guarantees to bond issuances in the onshore market by companies engaged in infrastructure projects/ infrastructure finance companies. Interest rate futures markets should be developed. Poor and lengthy enforcement laws relating to default proceedings, and limited participation by domestic institutional investors should be removed. Besides, the regulations regarding securitization also need to be changed to make it more attractive to the players. Therefore, its high time the appropriate measures to provide thrust to the debt market, which would be a significant step to boost infrastructure investments in future.
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Debentures, FCCBs, warrants etc, have recently witnessed a number of regulatory changes. There is a need to widen the net further and look for more creative solutions for funding.
Outlook
India has a long way to go given the lack of adequate infrastructure across cities, towns and rural areas. The potential solutions would help enhance timely flow of funds to support the debt requirements of infrastructure projects. Lot of opportunities exists for both domestic and international players to tap. The policy actions taken by the government towards infrastructure sector would determine the fate of Indias growth over the next few decades.
By Smruti Ashar, MMS 2010-2012
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Macr - O - nomics
Lending / Deposit Rates
Base Rate (9.25% - 10%) Savings Bank Rate (4%) Deposit Rate (8.25% - 9.10%) Category/ Index Broad SENSEX MIDCAP SMLCAP BSE-100 BSE-200 BSE-500 Sectoral IT POWER TECH CG OIL&GAS HC CD 5,867.22 2,599.58 3,587.93 13,778.50 9,211.39 6,550.79 6,902.34 12,910.58 4,068.40 8,644.81 2,208.93 9,034.39 14,733.00 5,924.55 2,616.37 3,615.64 13,843.26 9,211.39 6,566.20 6,946.38 13,465.21 4,079.99 8,658.03 2,239.44 9,064.82 14,885.81 5,837.91 2,586.33 3,563.33 13,674.49 9,097.19 6,503.56 6,869.35 12,699.61 4,034.79 8,530.51 2,174.64 8,949.56 14,574.29 5,856.64 2,597.20 3,570.90 13,739.69 9,121.12 6,518.25 6,886.48 12,846.94 4,039.31 8,541.96 2,186.65 8,993.51 14,610.04 5,835.19 2,596.17 3,570.11 13,738.37 9,130.46 6,532.54 6,902.34 12,879.34 4,056.41 8,587.43 2,198.46 9,047.06 14,735.26 18,694.19 7,014.77 8,359.93 9,803.17 2,318.19 7,303.53 18,936.43 7,053.88 8,403.04 9,877.10 2,336.40 7,345.21 18,513.22 6,995.45 8,354.11 9,718.41 2,302.55 7,247.69 18,561.92 7,006.75 8,363.22 9,740.64 2,307.37 7,261.52 18,618.20 7,014.58 8,356.39 9,767.42 2,313.23 7,277.46 Open High Low Current Value Previous Close
Policy Rates
Bank Rate (6%) Repo Rate (7.50%) Reverse Repo Rate (6.50%)
Currency
Commodities
US Markets
European Markets
Asian Markets
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Growth Rate
14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Growth (%)
2004-05 10.30
2005-06 9.70
2006-07 12.20
2007-08 9.70
2008-09 4.40
2009-10 8.00
2010-11 8.10
GDP Calculations on Purchasing Power Parity Basis International Monetary Fund (IMF) (In USD Billions)
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(Source: McKinsey)
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2. Doctor comfort derived from prescribing medications on the basis of brand name. Generic programme in India is the government run Jan Aushadi. This programme provides no-name generic drugs at subsidized prices in 24-hour pharmacies that are located all over the country.
Branded Generics
The prescription products that are either novel dosage forms of off-patent products produced by a manufacturer that is not the originator of the molecule or a molecule copy of an offpatent product with a trade name .In India, any nonpatented molecule with a brand name other than the innovators name is termed as a branded generic. In the global context, substitution when an innovator product goes off-patent - is the key driver for generics. In India, its about driving a difference using the core equity of a brand, over a competitors product.
Patented Products
The market size for patented drugs as of today is very small. Only about 1-2% of the market is made up of patented drugs, which are being sold by multinational innovators. There are multiple Indian companies that have drugs in the pipeline, with a greater focus on R&D, but estimates suggest that it would be at least 7 to 10 years before these begin to have a serious impact on the industry. Industry experts believe that the current size of the patented drug market is estimated at US$120-130 million. Due to weak patent laws in the past, and multiple, cheap generic versions of drugs present in the market, multinational players were hesitant to introduce their patented products. In the future, with growing affordability,
Generic Generics
A generic drug is the bio-equivalent version of a brand name drug. Currently, the market share of generic generics is very low. The reasons being: 1. Lack of generic generics regulations and guidelines for the establishment of bio-equivalence, for example the Abbreviated New Drug Application (ANDA) guidelines that exist in the U.S. 26
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Franchising: Indias retailing industry also offers huge opportunities for foreign companies to either set up their own retail franchisee or enter into collaboration with existing players. Franchising arrangements can leverage on purchasing power from the franchisor buying in large quantities and passing down savings to franchisees. Continued business support from the franchisor such as technology, products, training and marketing is an added advantage. Joint Ventures: Joint ventures (JVs) are becoming a more prevalent option for companies looking to capitalise on the opportunities presented in India. Foreign companies are increasingly looking at local partners to work with in order to increase their presence in India. Domestic partners bring together extensive local expertise due to their familiarity with the business environment, knowledge support and the networked capabilities of other local pharmaceutical companies. These advantages, along with low production costs, skilled labor and faster drug development can be productively utilised by western pharmaceutical companies coming into India. Partially or Wholly owned subsidiaries: Some multinational companies have also increased their stake in their Indian subsidiaries to take advantage of the India opportunity. Unlike in some other sectors, fully owned subsidiaries in the pharmaceutical industry offer little risk in terms of sharing critical data and competitive advantage, as most are subject to strong control by the parent company. Pharmaceutical companies willing to have wholly owned operations in India can gain value from being present across the value chain, from drug discovery to clinical trials through to manufacturing. Other benefits may include tax advantages.
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Increased Competition
The industry has seen a legion of new market entrants, increased competition among key players and industry consolidation. Competitive advantage within the industry is being constantly redefined and to maintain their presence, key industry players are being forced to revamp their organisational structure, overcome huge barriers in R&D and clinical trials. Consumers are now better informed and there are expectations on the industry to show that their products deliver better health and greater economic value. In the past decades governments were either the sole or major purchasers but the current trend shows that healthcare industry is now driven by insurance companies and individuals. The increasing price sensitivity of the consumer and financial muscle of health insurance companies is forcing firms in the industry to cut product prices thereby reducing margins.
Ageing Populations
Due to ageing global populations there has been a rise in the demand for medicines all over the world and because of increased investment in research and development cure for diseases which were considered non curable earlier have been invented. This, in addition to the market requirement for the industry to improve current medicines and lower product cost
Merger activity has been intense within the industry in the last decade. Analysts believe that three firms; GlaxoSmithKline, Bristol-Myers Squibb and Merck are likely candidates to be directly involved in the next round of industry consolidation.
The pharmaceutical industry is facing increasing political pressure to reduce prices and control costs, particularly in developing economies, government are increasing pressure on pharmaceutical firms to act on social interest and this is likely to intensify in the future.
Over the last decade the knowledge base of the pharmaceutical sciences has changed dramatically and continues to change rapidly. As new technologies and bodies of scientific knowledge emerge, whole new set of opportunities and threats are being introduced. Over the last decade, we have seen this happen as companies that were not very effective in research and new product development were acquired.
Medical doctors, general practitioners and pharmacists usually act as agents of the final consumer and they are largely responsible for the consumers purchasing decisions. As a result of this pharmaceutical companies direct a sizeable proportion of their marketing efforts at these agents. But with the advent of internet consumers have easier access to medical information and treatments, which is changing the scenario for Branded drugs.
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Lessons On Finance
is the extra capital that an insurance company is required to hold. It is the minimum excess on an insurers assets over its liabilities. Like capital adequacy ratio in banks, solvency margin is a part of the prudential norms and indicates how solvent the company is.
Solvency Norms
Solvency Margin
Major Purpose
Reduce the risk that an insurer would be unable to meet claims & reduce the losses suffered by policyholders in the event that a firm is unable to meet all claims fully and promote confidence in the financial stability of the insurance sector
insurers of the inherent business risks in the industry and the allocation of sufficient capital to cover them. Globally Solvency II is replacing the minimum requirement, which is similar to the Basel II capital adequacy requirements for banks. It is often called shareholders funds [in the UK] or policyholders surplus [in the USA].
Solvency Ratios
A parameter called the Solvency Ratios means the ratio of the amount of Available Solvency Margin to the amount of Required Solvency Margin. Available Solvency Margin: Denotes the items such as capital/funds, various reserves (Includes price fluctuation reserves and catastrophe reserves) and a portion of unrealized profits obtained from real estate and stocks. Required Solvency Margin: Refers to the risks like Underwriting Risks (Risk of miscalculating premiums and miscalculate technical provisions), Risks on the expected interest rates (It is considered to be an important factor contributing to the insolvency of an insurance company) and Risks related to asset management (Growth risk arising out of exercise growth not matched by sufficient resources or due to wrong selections or wrong pricing of products).
Solvency I
Solvency margin requirements have been in place since the 1970s and it was acknowledged in the third generation Insurance Directives adopted in the 1990s. The Directives required the Commission to conduct a review of the solvency requirements and following this review, a limited reform was agreed by the European Parliament and the Council in 2002. This reform is known as Solvency I.
Solvency II
For better regulation and reporting, Solvency II was proposed. The proposed Solvency II framework has 3 main pillars.
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National
Council
of
Confederation of Indian Industry (CII). He is an independent Director on the Board of Directors of Infosys Technologies Limited, Lupin Limited, The Great Eastern Shipping Company Limited and Schlumberger Limited. He has been a co-chair of the World Economic Forum's Annual Meeting in Davos and is a member of the Board of the Institute of International Finance. Mr. Kamath was announced as the next Chairman of Infosys Limited from 21st August 2011 onwards.
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Who is a Dellionaire? Identify the personality & the company he is associated with?
Finance - Q ?
Who coined the word blue chip and where does the word originate from? What is underwear indicator and name the person associated with it? Connect the following:
Which is the only state which has three stock exchanges? The Companys stock exchange ticker symbol is PKX and it has signed a pact with an Indian state, which makes the deal the single largest FDI in India. Name the state and the company and its origin? What are Max Keiser and Michael Burns known for? (Think about Hollywood) Connect the following:
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Sydenham Institute of Management Studies Research & Entrepreneurship Education (SIMSREE) was founded in the year 1983 by Government of Maharashtra. Since then, SIMSREE has been continuously ranked as one of the Premier Institutes of our country, and it attracts the finest management minds from India. SIMSREE has been consistently being ranked among Top 20 Business Schools in India. CRISIL has recently rated SIMSREE with A*** at state level (Maharashtra) and A** at National level.
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Sources: McKinsey Quarterly,
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