August 31, 2014
Volume 10
India records 2.5 year high GDP growth in
first quarter
Exchange Traded Fund
India’s persistent inflation hurting growth prospects
New Term, New Challenges
While Juniors beginning their Second Term with new zeal and
enthusiasm and Seniors preparing for their End Term Exams, we bring
to you yet another illuminating edition of FinXpress.
This week, the In Focus section talks about the India’s GDP which
grew at a two and a half year high rate of 5.7% for the first quarter. The
Opinion provides how India’s persistent inflation is hurting its growth
prospects.
The term of the week describes "Exchange Traded Fund", a security
that tracks an index, a commodity or a basket of assets like an index
fund, but trades like a stock on an exchange. Do have a look at the
Market and News section to bring yourself up to speed with market
volatility and the reasons behind it. Towards the end “Fun corner” to
juggle with some in trend questions and financial parody.
Club FinNiche welcomes any comments, suggestions or criticism
regarding the magazine. Please do write to us and share your ideas.
Happy Reading!
Regards
The Editorial Team
Club FinNiche
From The Editorial FinXpress Volume 10
August 31, 2014
FinXpress
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.
FinNiche
AUGUST 2014 Page 1
CONTENTS
From The Editorial
In Focus: India Records 2.5
Year High GDP Growth in
First Quarter
Opinion: India’s Persistent
Inflation Hurting Growth
Prospects
Term of the Week: Exchange
Traded Fund
Market This Week
News
Fun Corner
IN FOCUS
Finally bringing some respite and the much
needed cheer, the Indian economy gave a
glimpse of hope that it is back on track by
recording 5.7 percent GDP growth; a record
high in the past 2.5 years.
Indian economy recorded a 4.6 percent
growth in the fourth quarter and 4.4
percent growth in the first quarter of the
last financial year. The GDP growth
recorded for the last two fiscals was below 5
percent except in the second quarter of the
last fiscal when it recorded a growth of 5.2
percent.
One of the main reasons behind the low
GDP for the last two fiscals was the
faltering growth in the manufacturing
sector. Manufacturing sector saw a decline
of 0.7 percent in the financial year 2013-14.
In the new fiscal year 2014-15
manufacturing sector recorded a 5 percent
growth in May and 3-4 percent growth in
June i.e. positive growth in for three
straight months.
The growth is not contained only to
manufacturing sector but a substantial
growth in other sectors is also visible. The
services sector recorded a growth of 6.8
percent as compared to 6.4 percent quarter
on quarter basis (QoQ).
The industrial sector recorded a growth of
4.2 percent compared to a 0.2 percent
decline QoQ. The mining sector,
construction sector, electricity gas and
water supply, trade, hotels, trade, hotels,
transport and communication all recorded
a positive growth. The highest growth rate
was recorded by financial services sector at
10.4 percent. There was a dip recorded only
in agricultural sector to 3.8 percent as
compared to 6.3 percent QoQ.
FinNiche
India records 2.5 year high GDP growth in
first quarter
AUGUST 2014
—— By Abhinay Gandotra
Page 2
IN FOCUS
Narendra Modi led government can be
attributed to the turnaround seen in the
economy. Relaxing FDI cap in railways and
defense, higher allocations in infrastructure
sector, cutting red tape etc. are some of the
decisions that have helped in reviving back
the growth.
There is not only an increase in GDP for the
first quarter but at the same time inflation
level is also contained around 10 percent
level. Citigroup has predicted that inflation
will further decline to 8 percent in financial
year 2015 and 6.5 percent in financial year
2016. The current account deficit has also
reduced from a staggering 4 percent of GDP
in financial year 2013 to 1.7 percent in
financial year 2014. As per the predictions
made by the Citigroup the deficit is likely to
be contained within 2 percent levels for the
coming financial years 2015 and 2016 also.
Narendra Modi’s promise to make doing
business in India easier with stable tax
policies, speedy clearances especially in
case of forest and environment allocations
has given investors confidence to invest in
Asia’s third largest economy in hope of a
better future after years of declining growth
and increasing inflation. This hope has led
to increase in foreign capital inflows in the
country making Indian market shares the
best performers in Asia this year. Though
still there is a long way to go and Mr.
Narendra Modi has not yet announced any
big reforms that will bring back the
economy to double digit growth. The three
month old administration has set the pace
for the revival of Indian economy. The
challenges ahead are formidable but the
government change has inspired
confidence.
Economists often predict that India needs
at least eight to nine percent of robust
economic growth for creating jobs catering
to the humongous population and the first
quarter results are a step forward.
So going by the notion set by the
government “Achche Din Aane Wale Hain”
presumably it can be said “Achche Din Aa
Gaye Hain” but at the same time the
government should have no feeling of
complacency as there is a long road ahead.
FinNiche
AUGUST 2014 Page 3
Page 4
Opinion
Expected policy reforms and robust
investors sentiment poised India for
accelerated GDP growth ,but inflation
remains high from a global standpoint
weighing down a promising economic
recovery. Even though India's potential for
growth looks better now inflation constrains
its sovereign rating as it keeps domestic
capital costs high, erodes domestic
purchasing power as well as savings and
lowers international competitiveness.
India has been rated as Baa3 with a stable
outlook by Moody’s analytics. Indian
economy expanded 4.6% in the first
quarter of 2014,accelerated 5.1% in the
second quarter of 2014.India's potential
growth is around 6%, but it could move
towards 7% if some modest economic
reforms are enacted. The factor which is to
be worried the most in India’s inflation is
food prices, which can't be controlled with
increase in interest rates. Food inflation in
India is much higher than the global
average. India's consumer price inflation
increased to 7.96% in July, from 7.31% in
June. As food comprises a significant
portion of the average consumer basket it is
a key contributor to India's overall inflation.
India's large, young population and rising
wages among low earners who spend most
of their incomes on food have raised the
demand for food. However, there was no
equal supply response due to poor
irrigation and rural infrastructure, sub-
optimal fertilizer use, and conversion of
agricultural land to alternative uses. Food
supply constraints have been worsened due
to inefficiencies in the government directed
food distribution system.
Inflation trends will depend on policies to
address agricultural supply issues. Indian
authorities recognized that the current
recovery will be difficult to sustain if
inflation persists. Several measures have
been announced by them to curtail food
price pressures which include a
stabilization fund to lower market prices,
greater food price monitoring by state
governments and harsher penalties for
hoarders.
FinNiche
India’s persistent inflation hurting growth prospects
AUGUST 2014
------ By J.Sindhuja
Page 5
Opinion
Though these policies alleviate the food-
price spikes stemming from lower food
output due to this year's relatively weak
monsoon but they do not address the long
term widening of the gap between food
demand and supply. Bridging of this gap
will depend on the implementation of
government plans to re-orient fertilizer
subsidies to encourage best usage,
increase spending on rural infrastructure
and restructure the Food Corporation of
India, which is solely responsible for
executing the government's storage
operations and food grain procurement.
However, the authorities are yet to set out
concrete plans vis-à-vis certain other major
constraints on supply. It is hard to see the
significance of private investment in cold
storage facilities, if current restrictions on
foreign direct investment in the retail sector
remain in place. There is no clarity on
whether officials will substitute the
previous practice of ad hoc trade bans on
food items with a medium-term trade policy
that would enhance predictability in food
supply.
Risk of inflation spreading is high as growth
accelerates. The central government's
efforts to implement effective supply-side
policies may be complicated by the intricate
nature of current agricultural market
practices and the fact that agriculture is a
state-level subject in India's federal system.
But if the gap between food demand and
supply does not narrow, food costs will
keep mounting. In absence of a significant
increase in output of food, the risk that
inflation could limit India's growth
prospects remains salient.
Robust growth in agriculture is key to
India’s economic growth prospects. A
growth rate of 4.8% for agriculture was
projected by prime minister’s economic
advisory council compared to 1.9% last
year. Agricultural growth is expected to
support industry and services, and increase
employment opportunities in rural India.
Pressure on government employment
schemes might also be reduced.
Approximately half of India's workforce is
engaged in agriculture, as it remains the
backbone of the Indian economy. Food
Security Act and the ongoing National Rural
Employment Guarantee Scheme views
greater significance of agriculture’s
performance. The majority of low income,
poor and vulnerable people in the country
are supported by agriculture. An average
Indian spends almost half of his/her total
expenditure on food. Low agriculture
growth pulls down overall growth because
of its indirect connection to industry and
services. There is a low pressure on public
spending and employment schemes due to
rise in agricultural activities. Logically it
should lead to lower inflation for a common
man in urban areas. In rural areas,
demand for employment in both farm and
non-farm activities will be increased.
FinNiche
AUGUST 2014
Page 6
FINANCIAL KNOWLEDGE
Exchange Traded Fund has a similarity
with mutual fund as it tracks an array of
assets, an index or a commodity but it
differs on the point that it trades like a
stock on an exchange. So, in a simple term
we can say ETF—a basket of stocks.
Types of ETF:
In BSE following types of ETFs are traded:
1.Equity ETFs: It is a gamut of stocks that
reflects the composition of an index. E.g.
S&P CNX NIFTY .
2.Gold ETFs: This tracks the price of Gold.
E.g. Birla Sun Life Gold ETF
3.Liquid ETFs: The objective of Liquid ETF
is to provide money market returns. E.g.
Goldman Sachs Liquid ETS.
Trading of ETF:
Like any other stock ETFs can also be
bought or sold through any trading
terminals. All clearing and settlement
activities are performed through stock
exchanges. Therefore in case of any
untoward situation the exchange provides
immunity to the investors. ETF units can
be utilized for paying margins to the stock
exchange.
ETF and other Financial Instruments:
Trading value of ETF entirely depends on
the underlying net asset value (NAV) of the
stocks that it represents. The NAV of ETF
changes in real-time whereas NAV alters on
daily basis in case of Mutual Funds.
Besides, throughout the day price change is
observed for ETFs whenever they are
bought or sold. Futures trade much larger
in size when compared to that of ETFs.
Pros and Cons of ETFs:
In recent times ETFs have become coveted
financial instrument for the following
reasons:
Diversification: ETFs can track wide
range of stocks including multiple
sectors, companies and market
segments.
Lower cost: Expense ratio is quite
lower compared to other managed
funds.
Stock-like: ETFs can be traded in
similar fashion like a stock trading.
Reinvestment of Dividend: Dividends
of open-ended ETFs are reinvested
immediately.
Capital-Gain tax: ETFs are more tax-
effective when compared to others.
Price fluctuation: Due to the
involvement of arbitrage price cannot
fluctuate much beyond its actual
value.
There are demerits also.
Dividend yield: Dividend yield may not
be as high as having high-yielding
stocks.
Actual cost: once compared to stocks
actual cost comes out to be higher
for ETFs.
Intraday pricing: For long-term
investors this intraday-pricing is a
deterrent.
Considering all these aspects we can
comment positive aspect of ETFs outweigh
few demerits of this comparatively new
financial instrument, first introduced in US
in the year 1993. ETFs facilitate investors
to gather wide exposure to different stock
markets with relative ease, on a real-time
basis and at a lower cost. Hence, we can
say ETF has created a new investment
opportunity for all sorts of investors.
FinNiche
ETF: Exchange Traded Fund
AUGUST 2014
Page 7
FINANCIAL KNOWLEDGE FinNiche
Market This Week
This week the Indian markets have shown a turn of events which triggered the entire
market volatility. With the reforms slowly coming into picture and the harsh fines
which were imposed on DLF and the automobile companies threw a gambler’s dice into
the market. The sentiments were not respected last week as scripts fluctuated for about
5-8 % and some even like DLF had shown a downfall.
Though the domestic markets were not stable still they stayed on the higher side and
sentiments of positivity moved with all rise as the spokesperson of Citi Bank showed
immense confidence to invest in the Equities of Indian listed companies. Long Term in-
vestments still stay an unturned stone as speculations persist about the expected turn
around in the Indian indices.
SENSEX Simple Moving Averages
BSE SENSEX
CNX Nifty
Thirty Days 26,626.69
Fifty Days 26,625.98
Hundred Days 26,614.99
Two Hundred Days 26,544.86
AUGUST 2014
Page 8
FINANCIAL KNOWLEDGE FinNiche
Bank Rate 9.00%
Repo Rate 8.00%
Reverse Repo Rate 7.00%
Cash Reserve Ratio 4%
Statutory Liquidity Ratio 22%
INR / 1 USD 60.48
INR / 1 Euro 79.86
INR / 100 Jap. YEN 58.27
INR / 1 Pound Sterling 100.35
Commodity Unit Rs / Unit % Change
Gold 10 grams 27,996 -0.28
Silver 1 Kg 42,255 -0.35
Crude Oil 1 bbl 5,831 1.22
Base Rate 10.00%-10.25%
Savings Deposit Rate 4.0%
Term Deposit Rate 8.00%-9.25%
Nifty Simple Moving Averages
Commodities
Lending / Deposit Rates
Thirty Days 7,952.77
Fifty Days 7,953.31
Hundred Days 7,950.42
Two Hundred Days 7,930.63
Key Policy Rates and Reserve Ratios
Exchange Rates
AUGUST 2014
FINANCIAL KNOWLEDGE
RBI eases procedure of ECB refinancing
The Reserve Bank of India has eased the
refinancing procedure of external
commercial borrowings where borrowers
can repay any existing debt by raising fresh
ECB at lower all-in-cost but subject to the
condition that the outstanding maturity of
the original loan is maintained.
"It has been decided to simplify the
procedure by delegating powers to the
banks to approve even those cases where
the average maturity period of the fresh
ECB is exceeding the residual maturity of
the existing ECB under the automatic route
but subject to some conditions," RBI said in
a notification on Wednesday.
ADB to provide up to $9 billion loan to
India over 3 years
Committing to support infrastructure
development in India, Asian Development
Bank today said it will provide up to 7-9
billion loan to the country over the next
three years. "ADB's operations for India will
maintain high level of lending, amounting
to a total of $7-9 billion over the next three
years," ADB president Takehiko Nakao said
Besides, the multilateral funding agency
will provide around $30 million for
technical assistance grants, especially for
building institutions and capacity at the
state as well as the local levels.
Signing of India-ASEAN FTA
Eager to expedite the implementation of the
free trade agreement with the South East
Asian countries, India will soon propose
circulation process for signing the pact in
services and investments with the ASEAN.
Under the circulation process, each
member will separately sign the agreement
and it will become effective only after the
last member signs the pact.
RBI eases norms for overseas investors
buying government bonds
The Reserve Bank of India has eased norms
for overseas investors buying government
bonds, allowing them to invest directly in
secondary market debt. "Consequently, the
eligible investors can acquire such
securities in any manner as per the
prevalent/approved market practice. "With
a view to provide flexibility in regard to the
manner in which government securities can
be acquired by eligible investors, it has now
been decided to remove any stipulation as
to the manner of acquisition from the said
regulations."
Startups in a fix over RBI’s extra
verification circular
Startups operating through foreign
payment gateways that allowed them to
sidestep the mandated two-factor
authentication are in a quandary after the
Reserve Bank of India recently insisted on
additional verification for all credit.
Besides the US-based taxi hailing app Uber,
this move by the central bank is expected to
FinNiche
NEWS
AUGUST 2014 Page 9
FINANCIAL KNOWLEDGE
affect companies that have subscription-
based business models and those that sell
software and applications on Google and
Apple stores, among others. In addition to
additional authentication, the central bank
also wanted transactions to be carried out
in Indian rupees and not dollar.
Petrol price cut by Rs 1.82 a litre, Diesel
hiked by 50 paise
Petrol price was on Saturday cut by Rs 1.82
a litre, the third reduction in rates this
month, but diesel rates were hiked by 50
paise per litre. The revised rates are
effective from midnight tonight, oil
companies announced on Saturday. With
international oil rates on the decline, petrol
price was cut by Rs 1.51 a litre, which after
including local sales tax or VAT translated
into a reduction of Rs 1.82 a litre in Delhi.
PM Narendra Modi's 100 days: Smart
cities set for take-off, state governments
asked to identify cities
Among PM Modi's pet plans, few would be
more significant to India than building 100
smart cities, as the country is in the middle
of a massive wave of urbanization. Modi
was smitten with the idea of a smart city
long ago, and he had set the ball rolling in
Gujarat with the Greenfield Gujarat
International Finance Tec-city (GIFT). This
venture is now proceeding rapidly, as it has
been allotted 11 million square feet for
construction. As he moved to the Centre,
Modi started work on implementing the
idea all across India. It is among his few
plans that are moving smoothly ahead.
India Inc. to spend Rs 2,000 crore on ads
during Onam-Diwali
“Achhe din” are almost upon us — this
festival season will see India Inc. spending
over Rs 2,000 crore on advertising,
marketing and promotions, which will be a
five-year record, and a sharp contrast to the
pessimism of past few years. ET spoke to
scores of companies, media planners and
advertising agencies, and they were
unanimous in predicting a record spike in
advertising spends.
Indian School of Business to launch Big
Leap Club for North India-based SMEs
The Indian School of Business (ISB)
announced the setting up of a 'Big Leap
Club' meant exclusively for SMEs spread in
and around Punjab, Haryana and Himachal
Pradesh to help them get access to the best
industry practices. The objective of the Big
Leap Club is to help small and medium
enterprises (SMEs) get access to the latest
and best practices across the world,
interact with ISB and international faculty,
network with leading industry experts and
leaders from large Indian corporates and
MNCs.
FinNiche
NEWS
AUGUST 2014 Page 10
FinNiche
FUN CORNER
FinQuiz
1. _________ is a measure of continued rise in the
worth of an asset.
2. _______is a set of conditions against which a product
or business is measured.
3. ________ is amount paid by the bond at maturity.
4. ________ is when a business funds growth is purely
from personal finances and revenues from the busi-
ness.
5. IFC is headquartered at __________.
Last Week’s Answers
1) Tarini Vaidya, KBC Bank of India and South Asia
2) Part of capital not repre-sented by assets
3) Ticker 4) Covenant 5) Economy
CARTOONS
FUN CORNER
Page 11
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AUGUST 2014
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