BlueChip Apr-Jun 2012 Monetrix MDI

In conversation with

Mr. Sanjay Bakshi Especially for readers of the 1st Is-

sue

Reliance Industries Ltd. The Heavy Weight of Indian Indices

APRIL—JUNE 2012 | ISSUE 1

Book Review

Ascent of Money Financial History of the World

BLUE CHIP

ISSUE 1

All images, artwork and

design are copyright of

Monetrix

Finance and

Economics club of

MDI, Gurgaon

The Team

Aditya Mittal

Amit Garg

Anupriya Asthana

Keyur Vinchhi

Nihal Mahesh Jham

Sandeep Patil

Uday Das Gupta

Varun Sanghi

For any information or feed-

back, please feel free to write

in to us at

[email protected]

From the Editor’s Desk

Dear reader,

With the monsoons hitting northern India and giv-

ing everyone a pleasant relief from the scorching

heat, I am proud to present the first ever issue of

Blue Chip and hope that it adds to the merriment

around!

We generally associate the word ‘Blue Chip’ with

the companies that make up the broad market indi-

ces such as Sensex & Nifty. To some with a flair for

playing card games such as poker, it has tradition-

ally been a token of prestige. Both the stock market

and the game of poker are based on a combination

of skill and luck – luck dominates in the short run

and skill if you are in it for the long run!

In both these situations, possession of a Blue Chip

has always been equated to having a token of safety

or confidence. Our namesake magazine hopes to

serve its readers with the same goal, of being a

companion of MBA undergrads, like yourself, that

can be banked upon for being there when in-depth

understanding of recent happenings is needed or

simply for the fun of reading it.

Keeping in line with the spirit of a Blue Chip, we

present the cover story on a company that is a phe-

nomenon in itself — Reliance Industries Limited,

traditionally, one of India’s most trusted blue chip

companies.

To make the first quarterly issue of Blue Chip spe-

cial, we present a candid interview of our beloved

and respected professor & revered investor Mr.

Sanjay Bakshi especially for budding investors like

you.

By now, in the game of life you have already been

dealt the cards and now you also have the Blue

Chip in your hands, then what are you waiting for?

Play on and have fun!

~Anupriya

Editor for Blue Chip

CONTENTS

Tutorial ( 8

Active & Passive Investing

Forex Management ( 22

Foreign Exchange Management

An Indian Perspective

Beginner’s Corner ( 15

Stock Markets

A mystery?

Hysteresis Effect ( 32

Hysteresis Effect on the Indian

Economy

Market Update ( 39

Market Movement

Sector Wise Snap Shot

In the News

In Depth ( 36

European Crisis

Still anybody’s guess

Rupee Depreciation ( 18

The Sliding Rupee

Mr. Sanjay Bakshi

In conversation with ( 26

Guru Speak

Cover Article ( 10

Reliance Industries Ltd.

The heavy weight of Indian indices

Book Review ( 35

The Ascent of Money

Financial History of the World

Disinvestement in India ( 4

Disinvestment in CPSEs

Disinvestment in CPSEs

A Haphazard Process Leading to Loss of Value Mansi Batra

PGDM 2011-13, S.P. Jain Institute of Management & Research

Disinvestment – An Overview

The concept of privatisation was born on the

belief that private ownership can result into bet-

ter use of resources and more efficient allocation.

Gradually the concept has gained worldwide ac-

ceptance. Globally, as the economies have ad-

vanced, there has been a rise in preference for a

market economy as the governments could not

efficiently support the high level demand placed

by the booming markets, and effectively manage

the wide-spread enterprises. Hence, we have wit-

ness large-scale disinvestment of government

stakes in state-owned enterprises in different

economies.

Further the gradual transformation of frag-

mented markets worldwide into a global village,

which is ever more technologically advanced and

highly competitive, has fuelled the need for pri-

vatization and forced the governments to off-

load their stakes.

Additionally, the adoption of anti-competitive

polices, birth of regulatory and trade institution

in different sectors and development of compre-

hensive laws and regulation have severely diluted

the need of government intervention to ensure

protection of consumer interests and prohibition

of monopoly development across most sectors.

Disinvestment in India – A Historical Per-

spective

Historically, public sector units (PSUs) have

played a critical role in the development of the

Indian industry and the progress of the economy.

They have not only been instrumental in steering

India towards becoming a self reliant economy

but have also met the rising need for public utili-

ties.

In India, the objectives of Central Public Sector

Enterprises (CPSEs) have been sourced from the

Industrial Policy Resolutions and the Five Year

Plans. At the beginning of the First Five Year

Plan in India, there were five PSEs, which had a

total investment of Rs. 29 crores. By the end of

the Seventh Plan in 1990, the number of PSEs

had reached 244, with the total investment rising

to Rs. 99,329 crores.

However, while the PSEs had been established to

promote economic development and social jus-

tice, over the years, large scale inefficiencies had

crept into them and the financial position of these

companies fell much below the expected levels.

Despite some of the companies being monopo-

lies in their respective sectors, the PSEs lacked

clear visions, strategic direction and suffered from

rampant corruption.

In 1991, when a severe economic crisis led by the

deteriorating condition of the Balance of Pay-

ments was knocking on the doors of the country,

the Indian Government decided to work out a

plan to offload their stake in the PSEs as they

were acting as a drag on the country’s fiscal posi-

tion and were becoming counterproductive to the

economic growth. Additionally, disinvestment

was necessitated by the withdrawal of the budget-

|DISINVESTMENT IN INDIA|

© Monetrix, Finance & Economics Club of MDI, Gurgaon

4

5

ary support of 60% by the Government to the

loss making units.

Hence the Government turned its focus on draw-

ing up a divestiture strategy and the Disinvest-

ment Policy received a major thrust in the Indus-

trial Policy Statement 1991. The policy stated that

the Government would disinvest a part of their

equity in selected PSEs; however, it did not throw

any light on the amount of limits of disinvest-

ment. The policy stated the objectives of disin-

vestment as follows:

To improve performance of units

To reduce budgetary deficits

To overcome the problem of political in-

volvement in PSUs

Enable the government to concentrate on

Social development

In 1993, the Rangarajan Committee was consti-

tuted by the Government. The committee pro-

vided certain important observations, such as:

Disinvested could be made up to any level,

except in defence and atomic energy where

the Government should retain the majority

holding

Disinvestment should be a transparent

process duly protecting the right of the

workers

Suggested setting up of an autonomous

body for the smooth functioning and

monitoring of the disinvestment pro-

gramme

The Committee’s recommendations led to the

formation of the Disinvestment Commission in

1996. The Commission was designed to act as an

advisory body having a full time chairman and

four part-time members. The Commission was

required to advise the Government on details

such as the extent, timing and pricing of disin-

vestment.

The Current Process and the Lost Way

The divestment in CPSEs in India is much

needed to make them more competitive, reduce

the level of political influence on their operations,

generate funds for their expansion plans, improve

their planning and execution capabilities, make

them more competitive and to provide the much

needed cash to the Government for various other

economic activities.

The process not only covers the listing of the new

CPSEs on the bourses, but also includes the dilu-

tion of Government stake in the already listed

enterprises. While the Government aims to offer

a level playing field to the CPSEs to compete

with the private sector, it plans to maintain at

least 51% ownership and management control in

these enterprises.

However, during the course of time, the disin-

vestment process appears to have lost its way,

and the focus has been narrowed down on using

it as a tool to reduce budgetary deficits. Over the

last few years, a key feature of the disinvestment

strategy in India has been to sell minority takes of

5-10% in profitable PSUs in quick successions to

raise money in an environment of low revenue

receipts and to unlock value for investors.

The Government’s short-term focus on raising

the money and failure to adopt a well devised

strategy has made the disinvestment process hap-

hazard and unreliable. This not only indicates at

loss of opportunity and direction but is also re-

sulting into a loss of credibility and high level of

criticism for the Government and the entities in-

volved in different ways.

The ad-hoc approach and the lethargic process

have cast doubts in the minds of Indian corpo-

rate, the business fraternity, the foreign investors

as well the retail investors. The industry and busi-

ness have been put into dilemma of whether to

raise such high amount of funds to buy out and


APRIL—JUNE ‘12 | BLUE CHIP ISSUE 1

acquire PSUs. The foreign investors are also

evaluating the opportunity critically based on the

process and the resulting changes.

Failure of the process to gain traction for

almost two decades

The divestiture of the Government’s stake in

PSUs in India started back in 1991-92, however

the process failed to gain any traction until 2009-

10. This resulted in a tremendous loss of oppor-

tunity and value, especially during the period of

high economic growth in India, which had wit-

nessed multi-scale jump in the Indian stock mar-

kets.

Supported by the recovery in the equity markets

in 2009, the disinvestment drive started to gain

some feet. Over 2009-10 and 2010-11, stake-sale

in CPSEs provided the Government total earn-

ings of INR 45,667.13 crore, accounting for

approx. 40% of the total disinvestment receipts

since 1991-92.

However, despite supportive market conditions,

in 2010-11 the Government failed to achieve its

disinvestment target. While it had planned to raise

an ambitious INR 40,000 crore, it ended-up rais-

ing only INR 22,144.20 crore through partial

stake sales by way of IPOs and FPOs in six PSUs

– SJVN Ltd., Engineers India Ltd., Coal India

Ltd., Power Grid Corporation of India Ltd., Man-

ganese Ore India Ltd. and Shipping Corporation

of India Ltd. The stake sale in Coal India Ltd. was

a new landmark as it was the largest IPO in the

Indian disinvestment history. The Government

raised INR 15,199 crore by selling a 10% stake in

the coal mining giant.

Missing the disinvestment targets more

than 2 out of 3 times

The Government has missed out on the target of

receipts from disinvestments on a large number

of occasions since the year 1991-92. However,

despite the failures, there appears to be no signifi-

cant changes in the approach to the disinvest-

ments process and the Government appears to

continue on its ambitious spree.

In the budget for the fiscal year 2011-12, the Fi-

* Note: 1) In 1993-94, equity of 6 companies was sold by auction method but proceeds were received in

1994-95.; 2) There were no fixed disinvestment targets over 2005-06 to 2009-10. The disinvestment re-

ceipts in these years were 2005-06: Rs. 1,569.68 crore, 2006-07: Nil, 2007-08: Rs. 4,181.39 crore, 2008-09:

Nil and 2009-10: Rs. 23,552.93 crore.

Source: Ministry of Finance, Department of Disinvestment



6

7

nance Minister of India had announced plans to

raise INR 95,000 crore from disinvestment in the

PSUs over the next three fiscal years.

In pursuit of the set target, the Government had

planned to raise INR 40,000 crore in 2011-12.

However, it is yet again on the verge of missing

the target by a wide margin. The adverse condi-

tions in the financial markets on account of the

euro-zone crises and macroeconomic climate in

India have slowed down the disinvestment proc-

ess. The Government is expected to receive

approx. INR 14,000 crore from the divestitures in

the current fiscal.

In the fiscal budget for 2012-13, the Government

has announced plans to raise Rs. 30,000 crore

through disinvestments, a feat that remains unat-

tained till date in the history of the divestment

process in India.

The ONGC FPO Debacle

Nearing the fiscal budget for 2012-13, the Gov-

ernment attempted to take charge of the deterio-

rating fiscal position for the year 2011-12 by di-

vesting a 5% stake in the state-run oil explorer,

ONGC.

However, what appeared to be a hastily planned

issue spilled water over the expectation of the

Government and led to embarrassment. The tim-

ing of the FPO was a severe issue as the an-

nouncement of the auction was made only two

days prior to the process, leaving a large number

of investors unprepared for the process. The

floor price for the ONGC auction was set at Rs.

290, which was at a 2.3% premium to the previ-

ous day's closing price, contrary to the market’s

expectation of a discount. Further, the lack of

clarity on ONGC's share of oil subsidy resulted in

lack of participation from the large foreign insti-

tutional investors. Even the process of the auc-

tion drew high criticism. The websites of the two

main exchanges failed to update the bids after

3:20 p.m., which was 10 minutes before the

scheduled close of the auction process.

The issue was subscribed only to the extent of

98.3%. Against an offer of 42.77 crore shares, the

final demand was for 42.04 crore shares. The

state-owned LIC saved the day by purchasing

around 37.7 crore shares. The process yielded the

Government Rs. 12,766 crores.

Hence, an initiative that was designed to pave way

for disinvestment in other PSEs, ended-up cast-

ing a shadow of doubt on the entire disinvest-

ment process.

In the end

If the disinvestment program has to successfully

see the light of the day and cushion the long-term

fiscal consolidation, the Government needs to

work out a long term strategy supported by a

strong discipline and well planned mechanism. It

has to reduce the focus on short-term funding

needs and allow the program to be guided more

by the market conditions and a long-term strat-

egy.

As part of a successful disinvestment program,

the Government needs to identify the companies

that will be part of the disinvestment process, the

stake it plans to offload in each of them, work

out a clear strategy for disinvestment in every

CPSE, identify the suitable market condition and

other pre-requisites for a successful stake sale and

abide by the plans. Additionally, it needs to create

higher fiscal room during the short-run to reduce

pressure of stake sale in volatile or weak market

condition.

References 1. Department of Disinvestment, Ministry of Finance,

Government of India

2. Union Budget, Ministry of Finance, Government of

India

3. JurisOnline.in

4. Financial Express

5. The Times of India

6. The Economic Times



|TUTORIAL|

highly efficient, reflecting much of the publically

held information into the prices. The large capitali-

zation stocks particularly in countries with well de-

veloped stock exchanges can be considered as

highly efficient. But other markets like real estate

markets, small capitalizations stocks, many of the

emerging markets are less efficient mainly because

not all information is publically available and so it

leaves a lot of scope for analysis and finding the

intrinsic value.

Standard & Poor’s Indices Versus Active (SPIVA)

has been tracking mutual funds performances for

over a decade and comes out with an annual score-

card on how different styles of investing have fared.

The 2012 report states that “There are no consistent or

useful trends to be found in annual active versus passive fig-

ures. The only consistent data point we have observed over the

five-year horizon is that a majority of active equity and bond

managers in most categories lag comparable benchmark indi-

ces”.

Active Management a negative sum game:

Since the universe of stocks remains the same for

every active investor, for every active investor who

wins, there will be one who loses and so they add to

zero. However, it is costly to actively manage a

portfolio, remove management fees from the zero

sum and we have a negative sum. So the average

returns of all the active investors would be less than

the average returns of the passive investor.

A look at average performance of the small cap and

the mid cap funds in the 2002 and the 2008 bear

markets by SPIVA reveal that the S&P MidCap 400

and S&P SmallCap 600 which can be taken as proxy

for the market, have outperformed more than 70%

of all actively managed small cap and mid cap funds

over the three year period.

Dimensional Fund Advisors have shown that less

than 1% of the actively managed equity funds have

been able to beat the benchmark over the five year

period from 2005 – 2009 as shown in the chart

(please turn over).

ACTIVE & PASSIVE INVESTING Team Blue Chip

Active Portfolio Management or Active Invest-

ing stems from the belief that through thorough

analysis of the investing options, one can always

beat the benchmark index and can attain a positive

Alpha. It however comes at a price, and funds

which follow this approach charge a considerable

amount of management fees because someone has

to pay the portfolio manager and the analysts for

all their brain smashing stock recommendations

and analysis.

Passive Portfolio Management proponents be-

lieve that an investor cannot beat the market in the

long run, and the best way to maximize returns is

therefore to minimize the overheads-the manage-

ment fees. So passive investment invests with a pre

determined strategy and does not entail any fore-

casting.

A concept which needs to be introduced here is

“Efficient Market Hypothesis” (EMH).

"An 'efficient' market is defined as a market where there

are large numbers of rational, profit-maximizers actively

competing, with each trying to predict future market values

of individual securities, and where important current infor-

mation is almost freely available to all participants. In an

efficient market, competition among the many intelligent

participants leads to a situation where, at any point in time,

actual prices of individual securities already reflect the effects

of information based both on events that have already oc-

curred and on events which, as of now, the market expects to

take place in the future. In other words, in an efficient mar-

ket at any point in time the actual price of a security will be

a good estimate of its intrinsic value.” (Eugene F. Fama,

Random Walks in Stock Market Prices Financial

Analysts Journal, September/October 1965).

So according to EMH markets are efficient and so

trying to beat the market is nothing but playing on

luck. The “efficiency” of market has been subject

to thousands of empirical studies. While not going

into the debate of whether markets are efficient or

not, we can safely assume that markets vary with

degrees of efficiency. Some markets like developed

government bond market, bullion market are


8

9

Figure 1: Benchmark [Source: Dimensional Fund Advisors]

The above graph debunks the myth that active in-

vesting returns are based on skill rather than luck as

just 1% of the funds remained winners for a long

period.

Passive Investing

The most common and synonymous technique

with passive investing is called indexing or index

investing. Indexing aims to replicate the move-

ments of an index by holding all the securities in

the index in same proportions as the index

(tracking). The most popular indexes are the FTSE

100, S&P 500, and Nikkei 225.

The above philosophy aims at minimizing the man-

agement fees and thereby offers higher net return

to investors over a long period.

Another Strategy is “Buy and Hold” where investor

buys stocks and holds them for long periods re-

gardless of market fluctuations, thereby reducing

his tax outgo and transaction costs. A lot of people

confuse indexes with markets. Index is just a repre-

sentation of the universe of stocks in the stock

market. An index may or may not contain some or

all the stocks traded in the exchange.

There are two parts to an index creating-the 2 C’s

of indexes which are Selection (Constitution) &

Weighing (Contribution). These two are exe-

cuted differentiate one index from another.

Selection: At the selection stage you decide which

stocks would be a part of your index. It could range

from all traded stocks in the stock market to as little

as maybe a 5-10 stocks which you feel are an ade-

quate representation of the market. Practically it is

very important to choose a universe of stocks from

which you will choose your stocks because the

sheer number of stocks in an exchange can be un-

wieldy. For example, you can choose your universe

as all stocks that are part of BSE 500 or BSE 200, or

all stocks with average turnover above a certain

minimum level.

Weighing: Weighing means the weight each scrip

has in the index. Although one can use any measure

for weighing, some of the most popular ones are:

Market Capitalization: Each scrip‘s weight is just a repre-

sentation of its market capitalization with respect to other

stocks in the index. So if there are 10 scrips in the index and

their total market cap is 1000 Cr , Stock A’s market cap is 150

Cr. Then stock A would have 15% weight in the index. Al-

though popular initially, this has now been replaced by free

float market capitalization.

Free –Float Market Capitalization: Free Float Methodol-

ogy is similar to Market Capitalization methodology with only

difference being that instead of full market capitalization, free

float market capitalization is taken. The free float market

capitalization takes into consideration, only those stocks

which are available for trading on the exchange. This is the

most popular approach and majority of the indexes of the

national stock exchanges such as Sensex , Nifty , S&P 500,

Nikkei 225 are free float market cap weighed indexes.

Price Weighed: The weight of each scrip is in proportion to

its price relative to other scrips in the index e.g. if there are 10

stocks in the index. Sum of the prices of one share of each

stock is Rs 1000. Stock A’s share is priced at Rs. 250, and

Stock B’s share is priced at Rs. 40 then weight of A would be

25% and weight of B would be 4%. The Dow Jones Indus-

trial Average is the most popular price weighed index.

Equally Weighed: If all the stocks in the index are given an

equal weight irrespective of its price or market cap, then it is

an equally weighed index. The main motive behind this is to

remove the bias of overweight stocks which come up if price

on one of the stock in the index rises sharply in comparison

to others. So if there are 10 stocks in an index, each would

have a 10% weight. Russell Investments has created some of

the more popular equal weighed indexes such as Russell’s

2000 Equal Weight, Russell BRIC Equal Weight.

Fundamentally Weighed: The weight of the scrip is de-

cided by the fundamentals of the company such as sales,

profit, book value, turnover, or a combination of these or any

other parameters. It was pioneered by Research Affiliates

which circulated the methodology in 2005. Fundamental

Indexing blurs the line between passive investment and active

investment as both of them do not consider the market based

price of the stock to be a true estimation of its intrinsic value.

The FTSE RAFI index is a fundamentally weighed index

developed by RAFI for FTSE.

|TUTORIAL|


ance stock has seen it all and stood the test of

time. Over the last 34 years, RIL has seen its

sales grow from Rs 120 crore (Rs 1.2 billion) to

Rs 339,792 crore (Rs 744.18 billion). This re-

markable performance was reflected in the

stock markets as well. Reliance has always been

hailed as one of the prominent Blue-Chip stock

of the Indian equity markets.

During its initial years following its inception,

RIL mainly followed the organic growth strat-

egy. The sad demise of Dhirubhai Ambani,

more famously

known as Poly-

ester Prince,

ushered the be-

ginning of a

new chapter in

the tale of Reli-

ance Industries.

It marked the

beginning of

succession plan-

ning in the larg-

est private sec-

tor company of

India. The year 2004 went down as a remark-

able year in the history of Reliance Industries.

The company’s net profit crossed the $1 billion

mark. It figured among the top 150 companies

globally in terms of net profit and among the

top 450 in terms of sales. During the same

year, in November 2004, Mukesh Ambani in

an interview, admitted to having differences

with his brother Anil over ownership issues.

Eventually the Reliance Empire was split be-

tween the Ambani brothers, Mukesh Ambani

The Reliance Group, founded by Dhirubhai

H. Ambani, is India's largest private sector

enterprise, with businesses in the energy and

materials value chain. The flagship company,

Reliance Industries Limited, is a Fortune

Global 500 company and is one of the largest

private sector company in India. The Group's

activities span exploration and production of

oil and gas, petroleum refining and marketing,

petrochemicals, textiles, retail and special eco-

nomic zones.

Reliance stock

debuted via an

Initial Public

Offering in

the year of

1977. At the

time when

Reliance went

public, the

Indian Stock

Market was

accessible only

to a handful

of elite inves-

tors. How-

ever, more than 58000 investors from across

India subscribed to the Reliance IPO. Since

its listing on the stock market, the stock has

seen many ups and downs. Be it the rumours

of controlling the stock market in the year

1982, the series of articles published in the

Indian Express alleging Reliance (and Dhirub-

hai) of using unfair trade practices to maxi-

mize the profits or be it the issues of opacity

in corporate governance practices, the Reli-

The heavy weight of the Indian indices

Reliance Industries Ltd.

Cover Article

M o netr i x

Figure 1: Revenue Breakup


10

http://en.wikipedia.org/wiki/Mukesh_Ambani

http://www.ril.com

11

production. RIL and the government entered

into PSC (Production Sharing Contract) and

the plan was to drill 31 wells and extract

70mmscmd of gas from the wells by 2012.

However, the sweet times did not last long. A

dispute with the Ambani brothers over the

pricing of the gas broke out. How much

should Anil Ambani's firm Reliance Natural

Resources Ltd. (RNRL) pay RIL for the gas?

RNRL says it should be US$2.34 per mmbtu

(million metric British thermal unit). RIL

counters that it should be US$4.21. This is the

price according to the production sharing con-

tract (PSC) signed by the government and RIL.

Soon the government of India became a party

to the dispute as the government will get its

royalty and profit share according to the PSC.

All the parties went to the Supreme Court

which ruled that the price of the gas should be

pegged at US$4.21, as mandated by the PSC.

However the woes of RIL did not end here.

The output from

the gas fields

started falling,

after steadily ris-

ing to 43mmscd

in March 2011.

As per the PSC

the plan was to

drill 31 wells and

extract 70mmscd

of gas from the wells by

2012. The reason cited

by RIL for the fall in output was the shutdown

of one-third of the wells following the ingress

of water and sand. The output from the basin

is expected fall further to 27.6 mmscd in April

2012 and to 22.6 mmscd in the next year. RIL

also went on to slap arbitration against the

govt. to have the company's entitlement to re-

cover its costs related to KG-D6 block, off the

country's east coast. Reliance said in a state-

ment that it was concerned by media reports

getting RIL and IPCL & his younger sibling

Anil Ambani heading Reliance Capital, Reli-

ance Energy and Reliance Infocomm.

During the late nineties and early 2000’s, Reli-

ance went on to diversify into multitude of

businesses including a diversified and inte-

grated biotechnology initiative under Reliance

Life Sciences; transportation, distribution,

warehousing, logistics, and supply chain ser-

vices under Reliance Logistics; development

and operation of cross-country pipelines for

transporting petroleum products under Reli-

ance Industrial Infrastructure Limited and

retails business under Reliance Fresh and Re-

liance Retail.

The fortunes of the company started taking

an ugly turn with the discovery of vast re-

serves of Natural Gas in the Krishna-

Godavari (KG) basin. In a country which had

till then been primarily dependent on imports

for its energy requirements, the discovery of

KG gas was a remarkable

event. However, since the

discovery of the gas the

Reliance group has con-

tinuously been in the news

for all the wrong reasons.

The long standing dispute

between the two brothers

over the pricing of the gas,

the disputes over supply

of KG gas or very re-

cently, the fall in the out-

put of KG D6 output – all this has led to a

beating of once a Blue-Chip stock in the In-

dian equity markets.

RIL began production of natural gas from its

deep sea discovery on Wednesday, April 1,

2009 just after six and a half years from the

discovery. The discovery and production was

considered to be a historic feat and expected

to save India, $9 billion per year, in imports.

Dhirubhai-1 and Dhirubhai-3 were put to

Figure 2: Falling Gas Output, Source: Motilal Oswal

|COVER ARTICLE|


http://en.wikipedia.org/wiki/Anil_Ambani

http://en.wikipedia.org/wiki/Warehousing

http://en.wikipedia.org/wiki/Logistics

that kind of crude and RIL has the manufac-

turing reliability, efficiency and technical capa-

bility. It has world-class logical infrastructure

capable of bringing in 2 million barrels in each

shipment and also they possess flexibility of

evacuation infrastructure. The Reliance Jamna-

gar refinery is one of its kind in the world. Re-

c e n t l y ,

RIL re-

p o r t e d

GRMs at

a dis-

count to

t h e

b e n c h -

m a r k

S i n g a -

pore re-

f i n i n g

marg ins

a s

s p r e a d s

on fuel oil were better during the quarter.

While RIL product slate does not contain any

fuel oil, benchmark Singapore margin consid-

ers fuel oil production at 23%. Its gross refin-

ery margin has fallen down to a level of 9 from

the peak levels of 13, a feat for which the Jam-

nagar re-

finery is

k n o w n

for world-

wide. The

company

attributed

the fall to

the fol-

lowing:

Widening spread of Brent over WTI.

Lower spreads of gasoline and naphtha,

which contribute relatively more to RIL

slate than benchmark Singapore slate.

that the oil ministry would seek to restrict the

amount of the costs recovered by the com-

pany from its revenues from sale of gas pro-

duced from the D1 and D3 fields in the KG-

D6 block. Recent developments suggest that

the govt. has agreed to allow RIL to recover

some of the costs involved in the exploration,

devel-

opment and production of hydrocarbons

from KG-D6.

RIL also underperformed on the Oil refining

front. Historically, RIL has beaten Singapore

benchmark consistently. This is because the

c o s t

o f

sourcing crude -

RIL imports sour, heavy, challenged category

crude - is on the cheaper side. Globally, only a

couple of refineries have capability to process

Figure 4: GRM Trend

Figure 3: Comparison of GRMs, Source: Motilal Oswal

|COVER ARTICLE|


12

13

June 2010. Reliance is looking to invest in new

areas such as shale gas, natural gas exploration

and retail to expand the portfolio of its com-

pany which is currently restricted to petro-

chemicals. Back in April 2010, reliance paid

US$ 1.7 billion to US based Atlas energy and

formed a joint venture. The JV gave Reliance a

40% stake in Atlas’ Marcellus Shale operations

in the eastern United States, giving it around

120,000 acres in net holding. Further in August

2010, reliance again announced acquisition of

Shale gas asset by forming a joint venture with

Texas-based Corrizo Oil and Gas in a deal

worth US$ 392 million. The deal gave Reliance

access to 60 percent stake in 104,400 undevel-

oped acres of the Marcellus Shale natural gas

field in the north-eastern state of Pennsylvania.

Some of the notable achievements of the vari-

ous JVs of Reliance in the shale gas area in-

clude:

Two additional rigs mobilized in the JV

with pioneer

Nine additional wells in the RIL-

Chevron JV with a production rate of 51

million standard cubic ft per day

A total investment of close to US$400 million

in three months ended June 30, 2011. Also the

company is planning raise close to US$ 1 bil-

lion in Foreign Currency Convertible Bonds to

fund its Shale gas ventures in the US and invest

in its refineries.

"The company is entering one of the fastest-growing

opportunities emerging in the US unconventional gas

business." The deals "will materially increase Reliance's

resources base and provide Reliance with an entirely

new platform from which to grow its exploration-and-

production business while simultaneously enhancing its

ability to operate unconventional projects in the future."

- P.M.S. Prasad (Executive Director).

Coal Bed Methane

RIL holds 3 CBM blocks in Sohagpur (East),

Sohagpur (West) and Sonhat. So far, RIL has

So does that mean that the once Blue Chip

stock and a darling of the stock market has

lost its lustre? At least the market reactions to

the RIL stock suggest so. It has received a

severe beating from the market and the com-

pany’s stock price has fallen sharply from Rs.

1039 levels in Apr 2011 to Rs. 737 in June

2012. This poor performance comes against

the backdrop of a dismal performance in

terms of its balance sheet and profit and loss

statement. Therefore a legitimate question

pondering a retail investor’s mind is whether

they should exit the stock or there exists a ray

of hope. It is difficult to figure out, however

our analysis suggests that in future there exists

some opportunities on which the Reliance

can hope to cash upon. In the recently held

AGM, the company has disclosed some long

term investments over the next 3-4 years. Al-

though the investments look promising yet

the shareholders might not realize immediate

benefits of these investments as the new pro-

jects have a high gestation period. We have

identified some of the major investments that

might help turn the fortunes of RIL.

Shale gas is one of the most rapidly growing

forms of natural gas along with other non-

conventional sources of natural gas. The in-

crease in its production is estimated to be

from 42 percent of the total gas production in

2007 in US to 64 percent by 2020. The de-

mand for natural gas is expected to be strong

despite the current decline due to the global

meltdown. Shale gas is produced from Shale

deposits that are found in abundance across

the Gangetic plain, Assam, Rajasthan and

many coastal areas. But most of these sources

are still untapped in India even though many

companies around the world have started

work on Shale gas. In India, ONGC an-

nounced its plans to start a pilot project in

2011 to get gas from shale formations.

Reliance was a quick mover and it acquired a

stake in the Texas Shale gas field as early as

|COVER ARTICLE|


At the close of offer on 17th February, the total

number of bids received by RIL was 70. The

total demand was in excess of 90 million stan-

dard cubic meters per day. This is several times

more than the peak output of 3.5 mmscd that

is planned to be produced at the end of 2014

from Sohagpur block in Madhya Pradesh.

Reliance-BP Deal

Reliance Industries Ltd (RIL) has signed a joint

venture (JV) with British Petroleum (BP). Ac-

cording to the press statement, British Petro-

leum will get 30% stake in the 23 oil and gas

blocks including the KG-D6 oil fields of Reli-

ance Industries. The total valuation of the deal

is 9 billion dollars. It has also been one of the

biggest Foreign Direct Investments (FDI) in

India. British Petroleum and Reliance Indus-

tries Ltd will also form a 50-50 joint venture

for marketing and sourcing of gas in India. The

expertise of Reliance Industries Limited is in

project management and operations. British

Petroleum brings to the table its expertise in

deep water exploration and development in

which Reliance is a nascent player. The 23 oil

and gas blocks together cover approximately

270,000 square kilometers. The deal is very

significant and is being viewed as positive sign

for the company Reliance Industries Limited.

The strategic part of the deal is that it covers

the entire value chain from sourcing to market-

ing. However, since the signing of the deal,

much has not transpired into actual perform-

ance.

Last words

Our analysis suggests that given the above op-

portunities, the RIL stock may perform better

in the future and once again regain the status

of a Blue-Chip, however in the near term the

stock is expected to continue its dismal per-

formance especially due to the shadow of mul-

tiple controversies surrounding it.

Team Blue Chip

completed the following work in the Sohag-

pur (East) and Sohagpur (West) blocks:

Over 45 core holes drilled, logged and tested for gas content, permeability and coal properties

Drilled over 85 production wells

75 hydraulic fracturing jobs done

5 cavitations completion wells and 2 sets of in-seam horizontal wells

RIL has proposed that the government

should pay not just a price pegged higher than

the price of ordinarily available domestic gas

but RLNG price of about $13/mmbtu for gas

coming out of its Sohagpur blocks, more than

thrice the price at which domestically pro-

duced gas is sold. The formula is the same as

the one at which RasGas of Qatar sells LNG

on a long term contract to India. According

to the formula, RIL wants 12.67% of the pre-

vailing Japanese Crude Cocktail (JCC) plus

0.26/mmbtu as the cost it takes for shipping

the gas in cryogenic ships. If JCC is taken as

$100/bbl, then the price would be $12.67 +

$0.26 per mmbtu totalling $12.93/mmbtu.

Industry gurus however, argue that the price

was unviable on the ground that the Qatari

gas is rich in ethane and propane which are

useful in manufacture of LPG and petro-

chemicals. CMB gas is just methane and

should be priced at least 15-20% below the

price of compound rich gas. Also, LNG pric-

ing cannot be applied for domestic gas as

huge investments go into putting the liquefac-

tion plant that turns natural gas into its liquid

state by cooling it at as sub zero temperature.

Great Eastern Energy Corp (GEECL) sells

CBM produced from its Raniganj block in

West Bengal at USD 6.79 per mmbtu while

Essar Oil has proposed a rate of USD 4.20

per mmbtu for CBM it plans to produce in

the same state. On top of the CBM price set

by the government, RIL will charge USD 0.15

per mmbtu as a marketing margin.

|COVER ARTICLE|


14

15

Stock Markets– A Mystery?

Mukul Aggarwal, Team Monetrix

Let me begin this

article with some

basic questions re-

garding the stock

markets around the

world- why people

make money in

stock markets (equities, stocks), why peo-

ple like Warren Buffett (popularly known

as god of investors in stock markets),

Charlie Munger (partner at Berkshire

Hathaway Inc.) etc. are so successful and

rich by just trading stocks in the stock

markets despite the fact that less than 2%

of total investors in the stock markets

make money (i.e. more than 98% of the

investors lose money in the stock mar-

kets). Isn’t it really intriguing and interesting?

Let us demystify the core premise behind all

these questions and try to clarify some basic

fundamentals of the stock market. Imagine a

scenario in which there is a company whose

fundamental value (the real worth of a com-

pany depending on the quality and quantity of

its business and its future prospects) is known

to everyone publicly. Then what do you think

are the chances of anyone making

the money by trading that company

stocks in the stock markets – It’s

pretty simple- nil (no one will

make money by selling/buying

stocks of the company in the mar-

ket as everyone has the clear idea

about the real worth of the busi-

ness of the company, the only way

to earn money is to earn divi-

dend on the stocks owned). This

kind of market is known as per-

fectly efficient market where the

market capitalization of the company truly

reflects the fundamental or true value of that

particular company and everyone has the

equal symmetric knowledge.

Fortunately or unfortunately this kind

of situation does not happen in practi-

cal world where public/investor sen-

timents play an important role in de-

ciding the market price of any stock

which leads to inefficiencies in the

market (i.e. market price does not reflect the

true value of the company) and that’s why peo-

ple make money in the stock market. When-

ever there is a positive or bullish sentiment

in the market it leads to excessive buying

of the stock (overvaluation of the stocks as

demand will be much greater than the sup-

ply). In contrast to this whenever there is a

negative sentiment in the stock markets it

leads to undervaluation of the stocks. One

of the recent and relevant examples is the In-

dian stock market in the year 2011 where there

are so much negative sentiments like euro

debt crisis, low IIP numbers, a depreciat-

ing rupee and the foreign investors outflow

because of risk aversion which lead to a plunge

in the stock markets and the stocks were

traded at an undervalued/discounted price. On

the other hand as the quarterly financial num-

bers of the Indian

companies are stabi-

lizing and more policy

reforms are being

initiated by the Indian

government, Indian

stock market is the

best performing mar-

ket in the world in

2012. This is all be-

cause of the investor

sentiments (the real

worth or the funda-

mental value of the companies has not changed

much as compare to the fluctuations in the

market index).

|BEGINNER’S CORNER|


tries especially the Indian stock market where

there are lot of inefficiencies in the small and

mid-cap stocks.

It is pretty clear that

investors prefer a

stable and certain

environment to in-

vest/trade in the

stock markets. Now

if we know this sim-

ple fundamental

concept behind the

working of stock

markets then the question arises: What one

should do to earn money? What is the key

to earning money in stock markets? To

answer these questions firstly we need to an-

swer why such a large number of people (I

am talking about retail investors- individual

people who buy/sell stocks in stock market)

lose money in stock markets.

The answer is simple- the common and the

most prominent mentality among retail inves-

tors is that stock market is an easy and lucra-

tive platform to earn money. One only needs

to buy stocks, there is no work/time involved

and one will get handsome returns on his in-

vestment. They trade stocks on basis of herd

mentality/ word of mouth (brokers report,

other investors etc.) without knowing what

they are trading which leads to losses in the

long run. This leads to a very important con-

cept called Stock Analysis. Stock analysis is

defined as taking an informed decision

on trading stocks after doing proper

analysis. Therefore the key to earn

money in the stock markets is to do

sound analysis before investing.

There are two very different schools of

thoughts on how to do analysis (these

are completely different to each other).

These are:

Fundamental Analysis

Technical Analysis

Fundamental analysis is related to finding

the true value of any particular stock. The basic

principle behind this approach is that when

you are buying a stock then you

are just not buying a paper

but you are purchasing a

part of a particular business

(becoming an owner of a part

of that business) so it is very

important to find the real

worth of the business depend-

ing on its present state and

future prospects so that you

can decide when to buy/sell

the stocks to earn profits. This

approach assumes that in the long run

markets tend to achieve efficiency i.e. the

market price of any stock reflects its true

value. Fundamental analysis is done in two

stages – Qualitative Analysis and Quantita-

tive analysis.

Qualitative analysis involves studying various

external factors that influences the business/

company i.e. the study of economic environ-

ment, the study of industry/sector in which the

business is operating, the growth potential of

the business etc. The study involves finding

whether these factors are affecting the business

favourably or unfavourably.

Quantitative analysis is about studying the

financial strength and fundamentals of the

company by analysing the financial statements

i.e. Balance sheet, Profit and Loss and Cash

Flow statements and studying various financial

ratios (profitability, lever-

age etc.). The important

thing to keep in mind

while doing the quantita-

tive analysis is that one

should analyse three year

financial statements to

verify the trend and also

negate seasonality factor if

it is present (Hospitality

sector companies during

peak seasons).

Value investing is one of the famous ap-



16

17

It requires a lot of thorough understanding

and analysis of the business so that one can

properly value the business/company and

find its real worth. It stresses on quality of

stocks rather than quantity. There are lot of

approaches to do valuation of the company

like DCF, Relative valuation etc. which de-

pend on the business and the amount of data

available.

On the other hand, Technical Analysis does

not consider the real worth of the business. It

is all about analyzing the historical price

movements of stocks to take buy/sell deci-

sion. Rather than measuring the true worth of

the stock, it analyses the investors’ sentiments

behind the stock. It has the following as-

sumptions:

1. Investors pattern will be repeated after

a certain time period

2. Market price already reflects the true

worth of the company and it immedi-

ately reflects/discounts any market in-

formation related to the business.

There are many approaches for technical

analysis such as the help of technical charts,

technical patterns, indicators etc. which can

be easily learnt. Apart from this difference

between the two approaches, there is one

more difference which is the time horizon.

Fundamental analysis is generally more

suitable for long term investing while

technical analysis is more suitable for

short term investing.

Now that we have a basic and clear under-

standing of the two approaches that can be

followed while doing the stock analysis, the

next question that arises is what approach

I should follow. Should I follow funda-

mental analysis which involves studying

the underlined value of the business or

follow technical analysis which involves

studying the investors’ sentiments regard-

ing the stock? The ideal scenario for sound

investing is to follow a combination of both

the fundamental analysis and technical analysis.

One should consider both underlying value

and investors’ sentiments while taking any trad-

ing decision.

Lastly a few useful fundamental tips for the

beginners who want to start investing

in the stock markets. These are as follows:

1. In beginning try to identify 2-3 sectors/

industries which you find interesting for

example banking, aviation, real estate etc.

Try to know about basic fundamentals of

that particular sector i.e. how revenue is

generated, key terminologies, external fac-

tors that affect the sector etc.

2. Try to keep yourself updated with all the

latest news related to that particular sector

i.e. what’s happening in the sector, how

various companies are doing etc.

3. Try to study 2-3 companies within that

sector which you think are performing

well and try to look for businesses/

companies which are trading at a discount

to the real worth because of one reason or

another (this is defined as “circle of competence”

by Mohnish Pabrai in his book “The Dhandho

Investor”).

4. Finally try to analyse the historical price

pattern of the stock of these companies to

take a fool proof investing decision.

I hope this article has helped you in under-

standing how stock markets work and how to

approach investing in the stock markets. All

the best for your future investing endeavours.

Happy investing!!!



|RUPEE DEPRECIATION|

In fiscal year 2012,

India registered a

sharp rise in its Cur-

rent Account Deficit

(CAD) on account of

subdued external de-

mand and relatively

inelastic imports of

POL (Petroleum, Oil

and Lubricants) and

precious metals (gold and silver). The CAD

increased from USD 46.0bn (approx. 2.7% of

the GDP) to USD 78.2bn (4.2% of the GDP).

The deficit in trade balance widened as the

growth in exports declined sharply from

37.5% in 2010-11 to 23.6% in 2011-12 while

the rate of growth in imports increased from

26.7% in 2010-11 to 31.1% in 2011-12.

2. Movement of Investments by Foreign

Institutional Investors (FIIs)

The year 2011 was disappointing for the in-

vestors in the Indian equity markets. After

nearing the 8,000 level in March 2009, SEN-

SEX, the benchmark index of the Bombay

Stock Exchange gained a whopping 81.0% in

2009 and 17.4% in 2010. However, the index

lost almost a quarter of its value until the end

of 2011.

In an environment

of high internation-

alization of the In-

dian economy, the

recent fluctuations in

exchange rate of the

Indian Rupee against

the U.S. Dollar have

exposed the entire

corporate sector to

high levels of risk.

In CY2011 the rupee depreciated against the

dollar by approx 20%, bringing joy to the com-

panies with an export oriented model and exert-

ing high pressure on the importers. In Q1’

CY2012, the momentum turned and the rupee

appreciated by approx. 10% until mid-March

2012. However, the relief for the

importers and companies with

foreign currency loans was only

temporary as the rupee again en-

tered the depreciation mode.

The erratic cycles of rupee appre-

ciation and deprecation are con-

stantly pressurising the risk man-

agement strategies of the Indian

corporates and have put the entire

economy in a cautious mode.

Currently, the rupee is into a depreciation mode

and is hovering around 56.05 (INR/USD) after

hitting an all time low of 57.37 (INR/USD) on

24th June 2012. Owing to the combination of

weak domestic macroeconomic indicators and

uncertainties in the global environment, the ru-

pee is expected to remain under pressure in the

medium term.

Factors behind Rupee Depreciation

1. Deficit in the Balance of Payments

The Sliding Rupee

PGPM 2011-13

Management Development Institute, Gurgaon

Source: Oanda

Note: (P) Preliminary, (PR) Partially revised Source: Reserve Bank of India

Krishna Prem Sharma Shashank Kumar Jha


18

19

Indian economy have declined. In January

2012, the Reserve Bank of India (RBI) revised

down the baseline projection of GDP growth

for 2011-12 from 7.6% to 7.0% on account of

high global uncertainty, weak industrial

growth, lower investment activity and decline

in resource flow to the commercial sector. In

April 2012, Standard & Poor's cut India's out-

look to negative from stable, quoting large

fiscal deficit and policy paralysis as key rea-

sons. Currently, India’s rating is BBB-, which

is just a notch above the junk

status.

The negative outlook for the Indian

economy has made the foreign in-

vestors cautious of the Indian mar-

kets. The key factors responsible

for the negative sentiments are:

Persistent Inflation

Over the last two years, the Infla-

tion in India has remained around 9

-10%. While, initially the high inflation did not

create a significant impact on the investor sen-

timents, however, the persistence over the last

couple of years has turned it into a structural

issue and has disturbed the investment senti-

ments in the economy. Over the recent past,

the inflation has been relatively easing out;

however it is primarily due to the base-effect.

Persistent Fiscal Deficit

In March 2012, the government announced

that the fiscal deficit for 2011-12 was pegged

at 5.9% of GDP, against the target of 4.6% of

GDP. The government has target by a wide

margin on account of lower tax and disinvest-

ment receipts as well as the rise in expendi-

ture, mainly for subsidies. The government is

targeting to bring down the fiscal deficit to

5.1% of GDP in 2012-13. The high fiscal defi-

cit is leading to an adverse impact on the ex-

change rates.

Policy Paralysis

“Policy Paralysis” has become the new buzz-

word circling the Indian Economy as the UPA

-II government has been unable to success-

A key factor behind the sharp fall in the index

was pull out by the FIIs, largely over August to

November 2011. The FIIs registered a net out-

flow of INR 7,902.5 crore in August 2011, led

by withdrawals from the equity markets, which

were to the tune of Rs.10,833.6 crore. It was the

highest outflow of FII investments in a single

month since October 2008. Over August to No-

vember 2011, there was a net FII outflow of

INR 9,952.6 crore from the equity and debt

markets.

The pessimism among the FIIs which triggered

the outflow was casted by the international fac-

tors such as the ongoing Eurozone crisis and

slow recovery in the U.S., coupled with domes-

tic factors such as high inflation, slower growth

projections and policy paralysis in the country.

The large scale pullout by the FIIs, fuelled the

depreciation of the rupee, which gained momen-

tum in August 2011 and continued until the end

of 2011. The economy was offered some respite

from the deprecating currency by the renewed

optimism of FIIs towards India, which led to

large scale capital inflows over December 2011

to February 2012. The renewed faith was pegged

to relative insulation of the Indian economy

during the global meltdown and steps taken by

the Securities and Exchange Board of India

(SEBI) to attract investments in corporate

bonds and government securities. Investments

in debt accounted for approx. 57% of the FII

inflows over December 2011 to February 2012.

3. Adverse Economic Outlook for India

Over the last fiscal year, the prospects of the

Source: Securities & Exchange Board of India



caused due to the debt crisis and in the Euro

zone and concerns over likelihood of default

by a few member nations. Secondly, volatility

in the global markets which has driven inves-

tors to sell off their financial assets and main-

tain cash reserves in dollar. Thirdly, Federal

Bank’s policy measures to contain the supply

of dollar while still increasing liquidity by re-

placing long term bonds with short term

bonds instead of printing additional currency.

Lastly, the ‘safe haven’ status associated with

the US dollar due to which all major central

banks still continue to buy treasury securities.

Measures Available/ Adopted by the

RBI to Stem Rupee Depreciation

Over the recent past the RBI has taken a

number of steps to increase the inflow of for-

eign capital. However, the measures are only

remedial in nature and not really designed to

check the fundamental exchange rate adjust-

ment. The interventions by RBI have been

unable to provide a support to the falling ru-

pee and have just been

able to impact the pace

of currency deprecia-

tion.

Summarised below are

some of the recent steps

taken by the RBI:

1. High Policy Rates

Historically, rise in the

policy rates has been

adopted as a measure

by many nations to pre-

vent sudden capital out-

flows thereby check

meltdown of their re-

spective currencies.

However, RBI has

raised interest rates sev-

eral times since March

2010 to tame inflationary expectations. Thus,

further increasing the policy rates is not the

most attractive proposition for Indian policy

makers, as it has already dented the economic

fully drive home many economic reforms and

improvements in the governance. The failure

has tarnished the Brand Indian image and ad-

versely impacted the long-term foreign invest-

ments. The economy is awaiting reforms in criti-

cal areas such as the Goods and Service Tax

(GST), Direct Tax Code (DTC) and FDI in sec-

tors such as Retail.

4. Global Uncertainty and Appreciation of

the US Dollar

While the US is still struggling with its weak

economy, high debt and downgrade of its long

term debt, the US dollar strengthened against

major currencies in over the last year.

Over July 2011 to June 2012, the EUR has de-

preciated by approx. 14.1% again the USD while

the GBP has deprecated by approx. 2.4%

against the USD. Over the same period, the

INR has deprecated by approx. 24% against the

USD.

This can largely be attributed to four reasons.

Firstly decline in value of Euro which was

Source: Oanda



20

21

200 basis points (bps) to 6 months Li-

bor + 350 bps

Increasing the ceilings on interest rates

payable on non-resident deposits – a

move which was later deregulated to

give banks the necessary autonomy in

deciding their own deposit rates

4. Administrative Measures

Since the second half of 2011, the RBI has

undertaken several administrative measures to

curb market speculation. These include:

The RBI withdrew the provisions of

rebooking forward contracts after can-

cellation, thereby ensuring that forward

contracts are booked only by hedgers

and volatility is reduced.

The Board of Directors of Authorized

Dealers was allowed to fix suitable lim-

its for various treasury functions. The

net overnight open exchange position

and aggregate gap limits need to be ap-

proved by the RBI.

All cash as well as spot transactions

executed by authorized dealers on be-

half of clients will be undertaken for

actual remittances and cannot be can-

celled/ cash settled.

References

1. Economic Survey 2011-12, Ministry of Finance, Government of India

2. “Rupee Depreciation: Probable Causes and Outlook” – STCI Primary Dealer Ltd.

3. The Economic Times

4. Reuters

5. The Hindu Business Line

6. Business Standard

7. India Today

8. Oanda

9. The Reserve Bank of India

10. Securities & Exchange Board of India

growth.

Most economists are concerned that current

interest rates in India, which are already higher

than most countries, could not attract capital

flows. However, any decrease in these rates

could potentially lead to further capital outflows

and hence the RBI is adopting a cautious ap-

proach in reducing the rates. In June 2012, the

RBI left its repo rate and cash reserve ratio un-

changed at 8.0% and 4.75%, respectively, against

the expectations of the industry in favour of a

rate cut.

2. Using Forex Reserves

Since November 2011, the RBI has been selec-

tively selling forex reserves and buying the In-

dian Rupee to stabilize demand for the currency.

However these interventions have been limited

as the liquidity in money markets is already con-

strained and any such actions will only tighten it

further.

3. Relaxing Credit Controls

As increasing supply of foreign currency is the

best way to fight domestic currency deprecia-

tion, relaxing credit controls to allow more mar-

ket participation and capital inflows has been

the most favoured approach by RBI to fight the

current crisis.

Various measures adopted by RBI in this direc-

tion include:

The ECB limit under automatic approval

route has been enhanced from USD 500

million to USD 750 million for eligible

corporate. For borrowers in the services

sector, the limit was enhanced from USD

100 million to USD 200 million.

The limits of investments by FIIs in gov-

ernment securities and corporate bonds

has been increased by USD 5 billion each

to USD 15 billion and USD 20 billion,

respectively.

In Trade Credit, the all-in-cost ceiling has

been increased from 6 months Libor +



Introduction

Foreign exchange reserves are the foreign cur-

rency deposits and bonds held by the central

banks generally in US dollar, though at times they

can be held in other major currencies such as the

Euro, Pound sterling or the Japanese Yen. For all

purposes in this write up the official gold reserves

of a sovereign will be outside the scope with

which we treat the foreign exchange reserves

(hence forth referred to as forex reserves).

Given below are some of the most important

uses of foreign exchange reserves:

1. Reserves are used to manage external pay-

ment obligations arising out of current ac-

count deficits.

2. They are used for exchange rate manage-

ment. This can help make a country’s ex-

ports competitive in the international mar-

ket especially during times of a financial

crisis.

3. Psychological factor: A depreciating cur-

rency can create a negative outlook about

the economy as a whole which in turn can

lead to lower confidence among foreign

investors.

4. Helps nations, particularly the ones with

relatively large reserves (China, UAE, Sin-

gapore) create a sovereign wealth fund

which can help these countries fund their

overseas investments

Given the importance of the reserves, the duty of

a central bank becomes crucial since it is the only

authority regulating it.

Forex management

The management of reserves by a central bank

depends on a number of factors such as:

Whether a country is CAD positive or runs

a CAD deficit

Whether the currency is market driven,

pegged or partially floating

Whether the country is export driven or not

Whether the country is outward looking in

that it feels the need to make overseas real

estate investments (a case of sovereign

wealth fund)

Based on which of these brackets a country comes

under, the central bank may decide to take up a

particular style of reserves management

For instance the United States holding the world’s

reserve currency never feels the need to indulge in

practices to control its exchange rate. The country

despite running a huge current account deficit (the

highest in the world) never maintains a large forex

reserve because the nation has for years held a

AAA rating which has helped it borrow cheap

internationally and meet its payment obligations.

At the other end of the spectrum is the People’s

Republic of China .The People’s Bank of China

regularly intervened before 2010 to keep the Chi-

|FOREX MANAGEMENT|

Foreign Exchange Management : An Indian Perspective

PGP 2013

IIM Bangalore

Kunal Ashok Abhishek Baid Sudeep Mohapatra

Apart from the traditional roles of a central bank to ensure price stability and growth through its monetary policy,

one of its more important functions particularly in the context developing countries is managing foreign exchange

reserves. This role is critical since the Central Bank is the only national authority which can take any significant

step in times of a foreign exchange crisis. This article talks about the various ways a central bank can intervene to

manage foreign exchange reserves and control exchange rates. A detailed analysis of the foreign exchange concerns in

the current Indian economic scenario is presented.


22

23

nese Renminbi pegged to the USD. In order to

keep its exports competitive the bank prevented

the Renminbi from appreciating vis-à-vis the dol-

lar by buying the USD and thereby building its

reserves. The Chinese behemoth built up re-

serves up to 2.8 trillion USD becoming the cen-

tral bank with the largest foreign exchange re-

serves and an enviable sovereign wealth fund

carved out of it. That the central bank could

achieve this is commendable, but then in China’s

case this ability was helped by their huge surplus

in trade balances.

Fig1: China’s Foreign Exchange Reserves

India seems to follows the middle path. The RBI

generally allows a floating exchange rate, how-

ever, it does intervene in the currency market to

meet temporary demand-supply imbalances.

What follows below is how India has managed

its exchange rate and reserves and our recom-

mendation as to how it could have been better

managed.

Forex Management in India

From a time in 1991 when the nation had no

more than 600 mn USD to finance its interna-

tional payments and had to, in a major instance

of embarrassment, airlift 67 tons of Gold and

pledge it to the Bank of England and the Union

Bank of Switzerland to serve as collateral for a

2.2bn emergency assistance from the IMF, the

nation has come a long way. Indian forex re-

serves as of 24th Feb 2012 stand at 295 bn USD[1] (Peak of 318 bn USD) enough to finance im-

ports for the next eight and a half months.

While this looks like a formidable amount, ap-

pearances could be deceptive. With a current

account deficit at 3.3% of GDP India has in-

creasingly relied on foreign investments to meet

Fig2: Growth of India’s Foreign Exchange Reserves

its balance of payment requirements. While Janu-

ary’s FII numbers should be encouraging for our

central bank, a 3rd quarter GDP growth of 6.1%

may suggest a future loss of investor confidence in

the economy. This could lead to a subsequent

withdrawal of investments which could lead to a

1991 like crisis taking into account the fact that

our fiscal deficit for the current year is going to be

around 5.6% of GDP. This might get the Moody’s

and the S&P’s interested for a credit rating down-

grade. Given this situation it will be worthwhile

analyzing some questions which the RBI will need

to give a serious thought to – the major one’s be-

ing:

How much reserves should the RBI be comfortable maintaining

Should the RBI intervene (have intervened previously) to prevent a downward slide of the rupee

Should we create a sovereign wealth fund out of our seemingly strong reserves

How much Reserves should the RBI be

comfortable maintaining

India belongs to the twin deficit club i.e., the

country runs both a current account deficit and a

fiscal deficit – the high CAD being attributed pri-

marily to a large trade deficit mainly due to huge

oil imports. For the year 2011, the current account

deficit was 44.3 bn USD [2]. This was balanced by

a capital inflow of 59.8 bn USD allowing approxi-

mately 13 bn USD to flow into the Indian re-

serves. The net change in the previous 2 years has

been an outflow of 20 bn USD in 2008-09 and an

inflow of 13.4 bn USD in 2009-10. While the RBI

can take solace in the fact that reserves are bur-

geoning, a closer look into the BOP shows that

more than 60% of the entire capital account in-

flow is due to foreign investments in the country

|FOREX MANAGEMENT|


|FOREX MANAGEMENT|

(50% FII and 10% FDI). While the net foreign

infrastructural investments are permanent in na-

ture the portfolio investments are fickle and to a

large extent depend upon the macro-economic

outlook of the nation. This leaves the country at

the mercy of these institutional investments who

may already have started doubting India’s growth

story due to a higher than expected inflation and

a slowing GDP growth (See graph below to see

the impact on reserves when investments dried

up in 2008-09)

Table1: Net foreign investments and impact on foreign

exchange reserved

All other things remaining equal if in the current

fiscal year the portfolio investors turn flat(net

buying and selling being equal), the nation will be

left literally gasping for breath with the RBI hav-

ing to deplete reserves or borrow foreign money

to the extent of an additional 24bn USD a year

to meet its BOP commitments. With fiscal con-

solidation going for a toss this year (even an

ONGC auction having its share of controversy),

India’s international credit rating may itself take a

hit. Borrowing from abroad will be more expen-

sive and India may actually prefer depleting some

of its reserves than taking loans from abroad.

From a doomsday perspective assuming India is

unable to borrow and uses its reserves, our 295bn

USD of reserves will be depleted in about 12

years. Not an immediate problem one might

think but take into account the scenario when the

investors turn net sellers. In such a case the RBI

will have to buy rupee with its dollars to prevent

the depreciation of the rupee which is bound to

happen with an FII pull out. All of a sudden the

RBI does not have the sort of cushion that ac-

companies large reserves. With the foreign ex-

change trading market running into trillions of

dollars in just one afternoon billions of dollars of

fire fighting reserves may be consumed by specu-

lators hell bent on shorting the rupee. Even if we

borrow instead of depleting our reserves, a higher

interest payment (made worse by a falling rupee)

will only worsen the fiscal deficit leading to fur-

ther deterioration of our credit standing thus

sucking India into a downward spiral. One may

call us fierce pessimists especially with the FDI

expected to reach a record high of 35 bn USD

and FIIs have already pumped in a net of 12 bn

USD in the new year alone. One could expect

another positive flow into the reserves this fiscal

year (figures awaited). But the point we are trying

to make should be clear. No central bank of a

country with a twin deficit problem can rest on

its foreign exchange reserves no matter how

large. Our belief is that in India’s case the forex

reserves should be used with the intention of ex-

change rate stability and not for CAD financing.

Long term monetary and government policies

should be framed to strengthen our exports so as

to reduce our trade imbalance. With oil imports

accounting for a third of the country’s imports,

the problem of large imports is going to stay with

us for the foreseeable future unless the country

(and the RBI governor could play a coaxing role

in this) shifts to alternate energy sources.

Should the RBI intervene to prevent a

downward slide of the rupee

While we mentioned that the primary job of RBI

with its reserves should be to maintain a competi-

tive exchange rate, how much intervention is

needed, is a tricky question. The rupee depreci-

ated more than 15 per cent over the last 4

months (see graph below) primarily on account

of FIIs fleeing the Indian markets. Should the

RBI have intervened? The RBI did in fact inter-

vene – selling 845 mn USD last September [3].

But was that too little? With the Indian interest

rates fighting for a spot in the skies, Indian firms

thought it was worth their buck to raise money

from abroad where interest rates were lower.

While this meant lower interest payment in USD,

a falling rupee meant that firms needed to shell


24

25

|FOREX MANAGEMENT|

out additional Indian money to service their foreign

currency obligations. With their financial statements

being released in rupees, Indian firms were under-

standably disappointed with a rupee fall. Lowered

profitability due to higher interest expense meant a

further pull out of FIIs and further rupee deprecia-

tion. The Indian rupee was being humiliated in the

international market not because of bleak macro

fundamentals but because the portfolio investors

just love to buy and sell at the tiniest signs of

changes. This is where we feel the central bank

should have put its foot down and sold some of its

reserves to back the rupee at least to send a to in-

vestors to check their rampant selling. This would

have let Indian firms be more competitive and FIIs

wouldn’t have fled like they were in an apartment

on fire.

Fig3: Fall of the Indian rupee against the USD in late 2011

Should We Create a Sovereign Wealth Fund

out of our seemingly Strong Reserves

Sovereign wealth funds – are they essentially the

prerogative of the rich? China isn’t essentially rich

yet it has a sovereign wealth fund worth 567bn

USD carved out of its massive foreign exchange

reserves. For a developing country that is indeed an

achievement of sorts. China has used this fund to

buy real estate in Africa and other parts of Asia.

With the next resource battle to be fought in Africa,

should India carve a SWF for itself out of its re-

serves and use it for purposes of investment?

Clearly the central bank should restrain itself from

such an action. To begin we are no Arnold Schwar-

zenegger when it comes to forex reserve muscle

power (China is, see graph below). We are at best a

Tom Cruise – nice and handsome but not powerful

enough. Our entire exchange is not even half of

China’s SWF. If we are indeed to carve a SWF out,

it should be worth atleast 40-60 bn USD – there is

not much point in having an SWF worth 10 bn

USD or around that figure. India will need large

amounts of money for real estate projects outside

and in India. With India being a country with

large twin deficits, we will always need the full

force of our reserve to support a BOP eventual-

ity. Also, the government of the SWF will be a

matter of controversy – who will monitor the use

of the SWF? Will there be a free flow of money

into and out of the SWF. What if the SWF is not

appropriately utilized – that would serve a double

whammy.

Fig 4: Largest Sovereign Wealth Funds

Conclusion

The position of a central banker is riddled with

ambiguous questions. While its primary responsi-

bility is that of price stability and low unemploy-

ment, for a nation having emerged from an em-

barrassing BOP crisis, it has the additional re-

sponsibility of maintaining and monitoring forex

reserves. We opine that the reserve bank carve

out its policies favoring stronger exports to re-

duce CAD since relying on foreign funds for

deficit financing is like riding a tiger. Additionally

while market forces be allowed to play their part

in exchange rate determination the RBI should be

more proactive in saving the day especially when

the nation’s firms are exposed to foreign currency

debt.

References

[1] http://in.reuters.com/article/2012/03/02/india-reserves-idINDEE82109220120302

[2] http://www.rbi.org.in/scripts/PublicationsView.aspx?id=13728

[3] http://www.thehindubusinessline.com/industry-and-economy/banking/article2639510.ece


web was yet to dominate the world. I received

the Buffett letters within a week or so and when

I opened them, I could not put them down. I

was hooked to the idea of value investing.

Buffett was heavily influenced by Ben Graham’s

teachings at Columbia who taught him how to

evaluate stocks in 1930s. In his letters, Mr. Buf-

fett talked about Graham and his book, "The

Intelligent Investor," and so I went and bought

the book.

At the end of this book is a transcript of a talk

that Mr. Buffett gave at the University of

Columbia in 1984. The talk was titled “The

Super inves tor s of Graham -and-

Doddsville,” in which he lists the track

record of a bunch of ex-students of Gra-

ham who bought different stocks at differ-

ent times and ended up with astonishing

performance.

One of the best ideas Mr. Buffett gives in that

talk was to do with the relationship between risk

and return. Contrary to what I learnt at LSE,

Buffett said that that to get HIGH returns, you

should take LESS risk. When I read this, I imme-

diately experienced cognitive dissonance. On one

hand my profs at LSE were telling that risk and

return are positively co-related and markets are

efficient and humans are rational, while here was

a man, who had a fabulous track record, and who

said just the opposite. I promptly resolved this

dissonance by dumping the idea of efficient mar-

kets and picking up the teachings of Buffett and

Graham.

I also decided that I wanted to come back to

India and start up an investment partnership just

like the way Buffett did in his early years. So

You are known as an authority on value investing in India. How did you get into

value investing?

I got interested in stock markets in school. Like

many others, I was attracted by hot IPOs. My

friend and I used to pool our money together to

increase the odds of IPO allocation. If we made

any money, we did not keep it, because it went

in the next hot IPO and in the end we had huge

losses. Good early lesson!

I lost interest in the markets when I got into

college because I met this enchanting girl, who

many years later became my wife. So

she kept me more interested in her

than in the markets.

My interests in markets got re-

ignited, when I went to the LSE. I

attended a class called "Security In-

vestment Analysis," where I was

taught that markets are efficient and

that there is no point doing any analysis because

everything that is knowable is already in the

price.

So while I being taught that markets are effi-

cient, I came across an newspaper article which

talked about a fellow called Warren Buffett.

You see this was in 1990 when Mr. Buffett was

not the household name that he now is. Any-

way, the article said Warren Buffett has a fantas-

tic track record in investing and he has a knack

of explaining complex financial and business

topics to people in a wonderful way by writing

amazingly good letters to his shareholders.

I became interested in reading these letters and

I wrote to Mr. Buffett. Berkshire Hathaway did

not have a site then. Indeed, the world wide

Guru Speak

|IN CONVERSATION WITH|

Mr. Sanjay Bakshi A professor at MDI, Gurgaon, where he teaches two

of the most popular courses in Finance. Apart from being elected as the “Best Teacher” by

students year-on-year, he is also the CEO of Tactica Capital Management, a highly

sought after deep value investment boutique. He also writes articles for Outlook Profit

and delivers talks at prestigious institutions.

He blogs at http://fundooprofessor.blogspot.in, Site: http://www.sanjaybakshi.net

“Contrary to what I

learnt at LSE,

Buffett said that

that to get HIGH

returns, you should

take LESS risk.”


26

27

pany had a billion dollar valuation at one point

of time but it never made any money. If you

look at the cash flow statement and understand

the economics of the business with its need for

constant investment in new plant and machinery

because the old one becomes obsolete rapidly,

you will find that over its life, the company never

made any money for its stockholders. All of the

dividends paid out were funded not from what

Buffett calls "owner earnings," because there

weren't any, but out of new cash injections from

owners and lenders. That's the functional equiva-

lent of pyramid scheme where old speculators

are paid from money brought in by new ones.

This can't last. Today, the stock is worth almost

nothing. As Graham said, market is like a weigh-

ing machine in the long run but in the short run

it’s like a voting machine. So all sensible invest-

ing involves seeking value in excess of price paid.

Deep value is different only by the degree of

cheapness in a situation. Deep value means

"cheap now", not cheap based on "future pros-

pects." One form of "cheap now" would be a

profitable company which is expected to remain

profitable, having zero or very little debt, having

substantial cash on the balance sheet which is

surplus to the needs of the business and having

an aggregate market value less than net cash

alone. That's a cash bargain as an example of

"deep value".

Sounds ridiculous if you think about from the

viewpoint of a businessman. Let's say you walk

into a nice restaurant and approach the owner

and offered to buy his restaurant for less than

the cash in the till. The owner would think you

are insane and yet you get the functional equiva-

lent of such situations in the stock market.

At the beginning of your invest-ment career, how did you iden-tify the first stock to be included

in your portfolio?

My first stocks were IPOs as I men-

tioned. However they were not the beginning of

my investment career but the beginning of my

speculation career which ended very badly and

very quickly. But when I came back to India

after finishing my studies in the UK in 1994,

there were a lot of listed NBFC’s. Some of these

companies had very high dividend yields and

many of them sold well below book value. Some

that's how I got into

value investing.

Why did you select value investing over other

methods of analysis?

In his talk “The Superinvestors of Graham-and-

Doddsville” Buffet said that if somebody ex-

plains value investing to you, two things happen

- either it grabs you immediately or you don’t get

it. In my case it was the former. The idea of get-

ting something for nothing completely grabbed

me. There is a joke about two professors who

are walking down the corridors of their finance

department and one of them spots a hundred

dollar bill lying on the floor. He tries to pick it

up but the other professor stops him and says

well you can’t pick it up because it’s not there. If

it was there, it would have already been picked

up. There is a janitor who sees these two learned

professors walk away leaving hundred dollar bill

on the floor. He picks up the note and enjoys

the money. That’s fascinating because the idea

that you can get something for nothing is a very

seductive idea and to most people if you put it in

that way people will get it. That’s what value

investing really is.

How would you define value investing? How is it different from deep value in-

vesting?

For me, all investing is value investing. Con-

sciously paying more for anything than what it's

worth is speculation. Now, this might work in a

momentum-driven market where somebody else

will buy overpriced merchandise from at an even

higher price, which is what the Greater Fool

Theory says ("I know I am a fool to buy this

stock at this price, but I also know that a bigger

fool will come along and buy it from

me at an even higher price.")

IPOs are a form of the greater fool

theory if you think about it. Buffett

once said that value is destroyed not

created by any business that loses money over its

lifetime no matter how high its interim valuation

might get. In my class I like to cite examples of

companies which never generated any cash over

their life but nevertheless commanded gigantic

valuations for a while.

One example is that of Samtel Color. This com-


“Deep value means

cheap now, not

cheap based on

future prospects.”


buying high quality

companies and

holding on to

them for a long

time, and then

there are people

who have done

well by buying

mispriced securities in bankrupt companies un-

dergoing a debt restructuring operation,

and then there are those who have

bought statistical bargains like Tweedy

Brown does now based on the principles

taught by Graham.

I like to give exposure to all these invest-

ment styles to students and it’s for stu-

dent to decide what suits him or her the

most. It’s about trying to fit your personality to a

style, and it isn't necessary that you have only

follow Graham or only follow Fisher. You can

take bits and pieces of things that you like the

best from different role models and try to de-

velop your own investment personality. This will

happen automatically over a period of time pro-

vided you get a variety of exposure to different

styles.

The other thing which I want to tell your readers

is to look out for great businesses by having an

“investment” frame of mind. One favorite exam-

ple to explain this to think about what happens

when you go out for a dinner to a popular restau-

rant.

Let's say you walk into joint like Haldiram’s and

start thinking about Return on Capital in your

current location VS a situation in which you are

dining, let's say, at a much more fancy place like

The Oberoi. Return on Capital is the key ratio to

focus on but that's just a start. So let's break it up

into its two components: margin and turnover.

Which one of the two situations would have a

much more rapid turnover. Obviously that's

Haldiram’s where in a single lunch shift, a table

will turn over maybe five paying customers.

That's just not going to happen in The Oberoi.

So, a Haldiram’s restaurant may have a lower

margin on sales but the very fast turnover should

deliver it a much higher return on capital. This is

a very useful way of thinking about a variety of

businesses, so it makes sense to make a habit of

it.

of them were very conservative in terms of lend-

ing. One of them was Cholamandalam which

was selling at less than 50% of book value. It

was giving you a dividend yield of more than

10%. So it was a classic Ben Graham kind of a

stock.

I enjoyed investing in high yielding stocks. I also

loved the idea of stripping dividends from high

dividend yielding stocks which is an

operation where you buy them on cum

-dividend and then you sell them on ex

-dividend basis at the same or even

higher price, effectively stripping out

the dividend. The annualized return on

such operations can be very good. This

happened at a time when the dividends

were taxable and when dividends became

tax free, such operations became even more

interesting. I think in one of his talks, Charlie

Munger said that when you have very little

amount of money, then you can look at these

obscure bargains in tiny companies. You don’t

find such inefficiencies in large companies be-

cause those are tracked closely by hundreds of

analysts, so there is a lot of competition in that

space.

Identifying stocks for value investing is a difficult process. What would be your advice to young investors looking to get

into value investing?

My advice is to approach value investing with an

open mind and that is an advice that I give to my

students by exposing them to a variety of value

investing styles.

My own investment philosophy has evolved

over the years based on the different styles that I

have adopted, from different role models like

Ben Graham, the partners of Tweedy Brown,

Philip Fisher, Warren Buffett, Seth Klarman,

Martin Whitman, Richard Zeckhauser, Nassim

Taleb and others.

My advice to students is to go into this (or for

that matter anything) with an open mind and if

the idea of value investing grabs at you then

don't decide that you want to only do cash bar-

gains early on in your career. Get exposure to

different styles and see what suits you the best.

There are people who have done extremely well

by adopting the Fisher/Munger/Buffett style of


“It’s about trying to

fit your personality

to a style, and it isn't

necessary that you

have only follow

Graham or only

follow Fisher.”


28

works.

If you combine these two skills - accounting

and business economics, then you learn to

visualize what the accounting numbers of a

given company might look like under different

scenarios 10-15 years from now. There is a

famous ice hockey quote: "Go where the puck

is going, not where it is." Its quite applicable to

the field of security analysis and the combined

skill of accounting and business analysis would

enable you to go where the puck is going…

The last point I want to make is about under-

standing human nature. It’s important to know

the power of incentives, the power of perverse

incentives. Human nature has not changed

much in the last 1,000 years.

The idea that bad accounting promotes bad

behavior is a very powerful idea. If you have

aggressive accounting - let's say the rules allow

you to recognize revenues faster than you

should - and if you adopt such practices of pre

-poning your revenues and postponing your

expenses, you are not changing anything eco-

nomically but you showing higher current

earnings at the expense of lower future earn-

ings. People would do that because of perverse

incentives e.g. if their own bonus is tied to

reported earnings. That's how it starts. Then it

spreads and when almost everyone is doing it,

everyone else starts to do it too

(social proof) and it get's rational-

ized. Man is not a rational animal,

rather man is a rationalizing animal.

Evil in corporations almost always

starts with bad accounting, and then

human nature takes over and it

spreads. So, understanding human

nature that explains why people are

going to do wrong things and how

the good people end up making bad

judgements, and how that inevitably results in

blowups over time, is something you will learn

by reading a lot of books on financial history.

What readings would you suggest to an

aspiring value investor?

I mentioned some books before. Read up all

the books written by Graham. He wrote two

books for investors, but there are 6 editions of

Security Analysis and each is a bit different

The ideas of return on

capital and how it breaks

into margin and turnover

are not just abstract con-

cepts. These are practical concepts. So

my advice to students who are starting out is to

think in a much more common sense way about

what makes a business a great business and what

makes a business a lousy business and why.

In your opinions what are the virtues/qualities that a value investor should pos-

sess?

The single most important thing in my view is to

have the independence of mind. You can’t get

swayed by what everybody else is doing. In fact,

independence of mind is just one of the attrib-

utes of being "psychologically astute." People

who are not psychologically astute consistently

make errors of judgment, something I talk about

in the early part of my BFBV course.

There are about 15 biases and they are in us for a

reason. So one has to recognize that they were

given to us by evolution for a reason. For exam-

ple, "social proof" which is just a fancy phrase

meaning "herd mentality" was given to us by

evolution because it had survival advantage.

There is "safety in numbers" when you are living

in the caves and in the jungle. But when you are

trying to make a living by buying securities that

very tendency, which gave our ancestors survival

advantage, causes us to make foolish

mistakes in markets. You really have

to fight these automatic tendencies

which are hardwired into us, and there

are specific methods of fighting them.

Another important skill to acquire is

accounting and I realized this late,

despite being a Chartered Accountant

from a great firm, Price Waterhouse.

At PW, I learnt how accounting really

works but I never learnt what the

numbers mean from the viewpoint of business

economics. That's the part I got by reading Gra-

ham's "Security Analysis," Warren Buffett letters

and the books by other authors like Philip Fisher.

Those books really tell you how to determine if a

given business is good, bad, or mediocre, and

why. And its an enormously useful skill to have

answers to those questions and you get better

answers when you know how accounting really


“But when you are

trying to make a living

by buying securities that

very tendency, which

gave our ancestors

survival advantage,

causes us to make

foolish mistakes in

markets. ”


29

Euphoria," and

"The Great Crash,

1929." A great

book has come

recently which is

called "This Time

its Different"

which by the way

are the four most dangerous words in investing

according to John Templeton, who is

another role model.

So you have to read these books on his-

tory, and those written by famous inves-

tors but you also must read books on

multiple disciplines. You have to have a

multidisciplinary mindset, and that is a

thing which I like to teach in the early

part of my course. We are trying to buy good

businesses and you won’t understand what a

good business is unless you understand multiple

disciplines. One of them is evolution and you can

pick up any number of great books on the subject

including Dawkins' "The Selfish Gene" and learn

about the remarkable parallels between evolution

and business.

Pick up some of the greatest texts in social psy-

chology like "Influence: Science and Practice" by

Robert Cialdini, and "Social Animal" by Aronson.

I love books on and by Feynman who is one of

my role models. I love his way of thinking - the

scientific way. There are some video lectures that

have been put up on the net by Bill Gates who

bought the rights and gave them to the world.

I also highly recommend a course called "Justice"

by Michael Sandel from Harvard Law School. It's

on the net. See a few lectures and I guarantee you

will be hooked.

You have to know what to read and you have to

read a lot. So one of the things about this profes-

sion is that reading is required and it’s not going

to end just because you finished your business

school. It only begins after that. But you also

must know what not to read, because the world is

full of noise and that is only going to keep on

increasing because of distractions. My advice is to

keep away from television, except for entertain-

ment and not for news. Ignore the front page of

newspapers and do not read the stock market

pages.

with different examples, so read them all. Also

read all editions of The Intelligent Investor.

You should also read letters written by some of

the greatest value investors like the partners of

Tweedy Brown and Warren Buffett, and Seth

Klarman.

Warren Buffett’s letters I think are the best edu-

cation in finance that anybody can get,

and I can’t overemphasize this enough.

The thing is that these letters are free

and that if he had charged a thousand

dollars for them, people would value

them more. But he gives them away

for free and people think that these are

free and can't have much value, which

is completely wrong. My very strong

suggestion to your readers is to drop

everything and just download these letters and

print them out. Don’t read them on the screen.

Read them slowly, read a letter in four days and

try to absorb what he is saying. I think there is no

better place to learn about finance, about busi-

ness economics, about ethics and about a whole

lot of subjects related to the business world than

from the letter of Warren Buffett.

Read Seth Klarman's "Margin of Safety." Martin

Whitman has written a couple of books ("The

Conservative Aggressive Investor" and

"Distressed Investing"), and they are worth read-

ing although his writing style is a lot harder to

understand than that of Buffett.

Read up all the three books by Philip Fisher:

"Common Stocks and Uncommon Profits,"

"Conservative Investors Sleep Well," and

"Developing an Investment Philosophy." Then I

want your readers to read books on history. As I

said earlier that human nature hasn’t changed

much and people have made enormous mistakes

in the past and one can learn from the mistakes

made by our ancestors. There is a book called

"Extraordinary Popular Delusions and the Mad-

ness of Crowds" by Charles Mackay. It is one of

the greatest books on crowd psychology where

you read up on Tulipomania and South Sea Bub-

ble and once you read them you will automati-

cally relate them to recent bubbles and manias

and find that nothing has changed.

Then there are two books written by John Ken-

neth Galbraith: "A Short History of Financial


“Warren Buffett’s

letters I think are the

best education in

finance that anybody

can get, and I can’t

overemphasize this

enough.”


30

31

with one explanation that answers the question.

That's one hell of a way to think - like the fic-

tional Sherlock Holmes did. I think one should

read Judith Harris and Richard Feynman and

other great thinkers. Even if you don't under-

stand their subjects, you'd understand their

thinking styles.

I think its terribly important to have these role

models from multiple disciplines.

What is your opinion on the current In-dian macroeconomic environment with respect to investments in the equity mar-

kets?

None, I have no macro views. I think it is very

difficult to predict these things. I have read a lot

of studies by the experts who try to predict them

but they don’t do better than a toss of a coin. So

I don’t think it is worth it to try to predict where

the interest rates, GDP growth rates or stock

market levels are going to be in the next year or

two.

The idea that you can buy-well run companies

which are selling at low valuations occasionally in

the stock market is a very powerful idea. If the

business is good, the management is good, the

price you are paying is reasonable and you have

the patience to hold on to that stock for a long

time, then you will do well, particularly if you

have many of them in your portfolio.

Any special words of wisdom for

BlueChip readers?

First, find role models. One inter-

esting thing about role models is

that these are not necessarily the

guys who did the best. The guys

who did the worst, the guys who

messed up, the Nick Leesons, the

founders of LTCM, the Bernie

Madoffs and other people who

are, or until recently, were, in prison for frauds,

can also be good role models. They are great role

models because they are teaching you in a very

vivid way" hey guys look how I screwed up my

life, and I hope you don't end up like me."

An interview with Mr. Sanjay Bakshi

As told to Aditya Mittal & Mukul Aggarwal

Team Monetrix

You have to see how

funny this is. Pick up

newspapers of 5 years

ago and pick up the top

stories of that time and see how ir-

relevant they were in the whole scheme of

things. People think they were terribly important

but in the end they were not too important.

That's recency bias where people overweigh re-

cent but unimportant or irrelevant events.

So you have to know what to read and what not

to read. I like to think a lot about how to elimi-

nate distractions. I use tools to eliminate distrac-

tions like Facebook or Twitter or e-mail or SMS.

Being connected is good but so is being discon-

nected. Depth is also as important, perhaps more

important than breadth.

You are a role model for thousands of young investors/students across India.

Who is your role model?

I get new role models every year; they typically

come from books I read, or columns written by a

journalist. So if I really like a column written by a

journalist I would like to read his or her other

columns, so you have all these people who think

the way you want to think and who think better

than you think and you want to emulate them.

To give you an example, there is a lady by the

name of Judith Rich Harris, she writes on evolu-

tionary psychology which is a combination of

evolution and psychology. She has written two

books and one is called "The Nur-

ture Assumption" and the other

"No Two Alike: Human Nature and

Human Individuality".

When you read these books, you

not only learn about a new fascinat-

ing subject, you also learn how this

remarkable woman thinks, how she

develops her thesis and you really

have to read the book to under-

stand what she is saying, but the algorithm she

uses is a fabulous one, it’s the one which Charlie

Munger refers to as "inversion" or "proof by

contradiction."

Judith Harris has a question and she seeks vari-

ous answers to that question and with extremely

logical way to thinking she starts dismantling one

reason after another and in the end she is left


“I use tools to eliminate

distractions like Facebook or

Twitter or e-mail or SMS.

Being connected is good but

so is being disconnected.

“Depth is also as important,

perhaps more important than

breadth.”


The Indian economy has been seeing many

changes over the years owing to both domes-

tic as well as international forces. One of the

key indicators of economic health is the

nominal exchange rate of the country. It is a

well-established fact that India follows a man-

aged floating rate system in which it does not

intervene until there is a significant deviation

from the standard rates. The Central Bank,

Reserve Bank of India in our case does this

by buying or selling currencies. In an increas-

ingly integrated global economy, currency rate

fluctuations affect the economic health of the

country. Hence, almost all governments now

follow the managed floating system to control

sharp deviations in nominal exchange rates.

There are merits as well as demerits of this

system. However, we have attempted to un-

derstand the effect of changes in the net ex-

ports during the last 6-8 months owing to the

exchange rate variation.

Hysteresis effect –

In the aftermath of a large and persistent

overvaluation of the dollar in 1980-85, several

US firms were at a disadvantage in world

trade as dollar prices of imports declined.

These are normal effects of a currency appre-

ciation. However, the hysteresis argument

states that when there is a change is exchange

rate, there is a considerable amount of lag

before the economy reacts to such a change.

Once foreign firms have become established

in the United States and consumers have be-

come accustomed to their goods, even a re-

versal of the exchange rate to the initial level

will not be enough to enable US firms to re-

capture the share of the market. Similarly,

when US markets have lost foreign market

share and even left some foreign markets en-

tirely, going back to the initial level will not be

enough to bring US firms back. To return to

the initial trading pattern, exchange rates will

have to overshoot in the opposite direction,

making it profitable to incur the costs of start-

ing up export operations and competing with

foreign firms that supply imports. The evi-

dence on these hysteresis effects remains tenta-

tive. The hysteresis effect supports the argu-

ment proposed by the J-curve effect where the

net exports fall and later rise whenever the ex-

change rate is devalued.

Figure 1: J-curve effect on net exports due to devalua-

tion

Trend of net exports since July 2011 –

The graph shown below shows the variation in

exports, imports and nominal exchange rate

from November 2010 to Jan 2012. The figures

mentioned in the graph are in $ millions. An

average value has been considered for each

data point for the purpose of analysis. As we

can see from the graph, the exchange rate re-

mains steady at around Rs. 45 per dollar for the

period until July 2011 following which there is

a sharp devaluation in currency. The exports

depend primarily on two factors namely Real

exchange rate (R) and foreign GDP (Yf). On

|HYSTERESIS EFFECT|

Hysteresis Effect on the Indian Economy

Aditya Maira, Nitin Jain

Indian Institute of Management, Indore


32

33

the other hand, the imports are affected by

Real exchange rate and domestic GDP (Y).

Prior to July 2011, the net exports varied ow-

ing to changes in domestic GDP (Y) and for-

eign GDP (Yf). Since the outlook of the

economy had been good until this period,

both imports and exports rose causing the net

exports to rise. Thus, trade balance improved

during this period. even though there was

trade deficit (X<M). The graph below

shows the trend of rising exports and im-

ports during the period of October 2010 to

July 2011.

Figure 2: Trend of exports, imports & exchange rate

fluctuatin

For the entire period from July 2011 to Jan

2012, net exports has been more or less con-

stant, only varying slightly owing to changes

in domestic GDP, despite a devaluation in

currency. This can be attributed to the steady

& high level of inflation persistent in the In-

dian economy during the period. This has

caused a high domestic demand causing

prices to rise further.

However, from July 2011 to October 2011,

the exports fell from $29344 million to $

19870. Beyond this, the exports rose to $

25347. The J-curve effect can be noticed in

this change. Let us assume Qx to be quantity

exported at an average price of P. If Pf is for-

eign price level, ER is nominal exchange rate

and Qm is the quantity imported, we can see

that

Net Exports NX = Qx.P – Qm.Pf.ER

When the currency is devalued, ER increases.

This causes imports to increase but the exports

remain constant in the short run. Thus Net

export decreases initially. This occurred be-

cause there was a consumer response lag. The

price effect dominated quantity effect causing

consumers to take time to accommo-

date to cheaper domestic goods.

Following this drop in exports for 4

months, the consumers switched to

buying foreign goods. Thus, exports

increased and imports decreased. This

caused the trade balance to improve

subsequently. During this phase, the

quantity effect dominated the price

effect. This effect will now last long as

the lag due to consumer response has now

been surpassed. Thus the hysteresis effect can

be seen to affect the dynamics of net exports

even in the Indian economy but impact in not

so prominent.

Heavy imports of capital goods, fertilizers, pe-

troleum and some other essential commodities

have contributed to the rise of imports in In-

dia. India imports three fourth of its require-

ment for oil and a recent shortfall of coal has

further led to an increase in import figures. For

last few months the confidence of the inves-

tors in the Indian market is at all-time low

which is combined with the recent spurt of

corruption cases on politicians. This has led to

a huge outflow of money from the Indian mar-

ket, which in turn has increased the exchange

rate or the value of the rupee has depreciated.

|HYSTERESIS EFFECT|


Future of Indian economy, if the recent trend

continues, should see an increase in GDP

figures due to increased exports from Indian

sub-continent. India’s managed floating ex-

change rate system has actually benefitted the

exporters, but the recent increase in the im-

port of oil and coal combined with increase in

exchange rate will only mean further increase

in inflation. This would prove to be a huge set

back since India is already following a con-

tractionary monetary policy.

Since India has a managed floating exchange

rate with free capital flow, fiscal policy will

remain ineffective. In addition, expansionary

fiscal policy would delay the growth further.

In contrast, monetary policy will be highly

effective but again it would hit investments.

Seeing the recent trends, it is clear that India’s

net exports does not increase drastically with

an increase in exchange rate. It only leads to

increase in inflation due to increase import

bills on coal and oil. For a developing econ-

omy like India, a rupee appreciation seems

best for some time to come which can be as-

sured only through positive market senti-

ments. India has been always an attractive

destination for investment but for this the

sentiments of the investors and market need

to be corrected. Foreign investments in the

form of FII’s and FDI’s are needed for the

economy to grow further. This will only be

possible by improving market sentiments.

The composition of government expenditure

needs to lay greater emphasis on increasing

the productive capacity of the economy,

through increased investments in agriculture,

education and infrastructure. This would

make sure that we are less dependent on for-

eign markets for

basic needs. To create fiscal space to invest in

these critical areas, the government will have

to reduce subsidies. Monetary policy will re-

main less effective in inflation control, if fiscal

policy does not focus on improving supply of

key goods and services – agriculture, skilled

labour and infrastructure – but keeps stimulat-

ing consumption demand. Increasing agricul-

tural productivity will require the policy to fos-

ter a supportive environment of better irriga-

tion, better technology and infrastructure. A

developing country has to live with some infla-

tion and using monetary policy to control infla-

tion would only lead to reduced investments.

The only way to fill the demand and supply gap

is to increase productivity.

Linking wages to productivity will be critical

for managing demand pressures. Increasing

productivity will enable the economy to con-

trol inflation and enjoy higher growth. Else, the

economy could lapse again into a phase of

lower growth. We should use innovative tech-

niques, look towards east and west on how to

increase productivity, learn from our mistakes

and try to create an atmosphere for growth.

The hysteresis effect on Indian economy may

not be directly traced due to its over-

dependence on imports. A developing econ-

omy like India should try to decrease trade

deficit and device mechanisms to increase pro-

ductivity, maintain high investor confidence,

eradicate corruption and try to control inflation

by filling the demand supply gap.

References

1. Macroeconomics, 9th editon by Rudiger Dornbusch,

Stanley Fischer and Richard Startz

2. Essentials of Macroeconomics by Peter Jochumzen

- BookBoon , 2010

3. Macroeconomics: Principles and Tools (3rd Edi-

tion) by Arthur O’Sullivan, Steven M. Sheffri

|HYSTERESIS EFFECT|


34

35

The Ascent of Money: A Financial History of the World

is written by Harvard Professor Niall Ferguson

and it was later adapted into 6-part television

documentary. Logically structured into 6 chap-

ters – banks and banking system, debt and bond

market, equity and stocks, insurance, real estate

and finally Chimerica, which covers a unique

union that has been established between USA

and China, the author investigates right from the

history of credit and debt to the present day top-

ics like globalisation, obsession

with home ownership and

emergence of Chimerica.

Modern finance was born in

Italy in 15th Century. Initially,

Christians did not participate in

the money lending as the Bible

forbids usury. The Jewish

population construed this to

mean that they could not

charge interest to their own

family. This was one of the

first associations of Jewish

people with money. A Chris-

tian by the name of Giovanni

de’ Medici used to give ad-

vance money to a merchant and charge a fee

(Something what we call ‘Interest’ now).

There are lots of fascinating details about finan-

cial events including main innovation that hap-

pened in last few centuries. Perhaps the most

distinct aspect of the book is Ferguson's ability

to link the past events with the present scenario

and cases. For e.g. Spanish found gold and silver

mines in South America while on their explora-

tion. They mined this gold and silver and sent

them back to Spain which made it one of the

wealthiest countries. Whenever they needed

more money, they would mine more gold and

silver (Just like how money is printed nowa-

days). However, there was so much gold in the

market that it lost it value and the Spaniards

drag themselves into financial ruin. Also the

bond market has its origins in the state’s need

for money to finance war.

In Scotland, in the early 1700s, widow and chil-

dren of deceased ministers of Church of Scot-

land faced penury after his death. Robert Wal-

lace and Alexander Webster raised money from

the group of 930 Scottish ministers to profita-

bly invest it and pay out the widows of these

ministers from the profits of these invest-

ments. The keystone behind the success of

this first insurance fund started for Scottish

ministers was the mathematical precision

needed to calculate how much premium to be

paid out every year.

He explicates how China has

become banker to the USA

and until the current global

financial crisis, relationship

which seemed to be pretty reli-

able, now seems unstable.

American consumers over-

purchased goods and over-

borrowed from China and the

China in turn accumulated

huge dollar surpluses by cheap

exports and invested those

dollars back into Wall Street

and US treasury bonds,

thereby providing spendthrift

Americans with the money

they needed to live an American dream and

sustain as the superpower. “For a time it

seemed like a marriage made in heaven,” Fer-

guson writes. “The East Chimericans did the

saving. The West Chimericans did the spend-

ing.”

Mr Ferguson, a historian with a largely busi-

ness oriented interest and research, clearly ex-

plains rationale behind the book by summaris-

ing: “From ancient Mesopotamia to present-

day China…the ascent of money has been one

of the driving forces behind human progress: a

complex process of innovation, intermediation

and integration that has been as vital as the

advance of science or the spread of law in

mankind’s escape from the drudgery of subsis-

tence agriculture and the misery of the Malthu-

sian trap.”

Team Blue Chip

|BOOK REVIEW|


|IN - DEPTH|

stance from Germany’s exclusive obsession

with Fiscal Austerity. The other notable devel-

opments were that the promised aid of up to

€100 billion ($125 billion) for Spain to recapi-

talise its banks would no longer be senior to

other debt. It is mentionable here that when

Greek debt was restructured earlier this year,

bonds held by the ECB were not subjected to

losses. Spain was also given one year more to

meet the deficit target of 2.8%,

the new deadline being 2014.

Ireland could also expect the

burden of its bank bail-

outs to be eased.

But there are several cave-

ats. Firstly, the Eurozone

members did not

commit to a

b a n k -

i n g

union as such. Al-

though this could

be considered as

the first step to a

“Banking union”

which could end the

deathly cycle of weak governments and weak

central banks trying to stifle each other. Sec-

ondly, before banks can be recapitalised di-

rectly, the euro zone will have to create a strong

central supervisor, centred on the European

Central Bank (ECB). This will take time, with

several issues to settle – among them the ques-

tion of which banks should be supervised. Ger-

many has tried to limit scrutiny to big cross-

border banks. But this will tend to overlook the

smaller regional banks in Spain and Germany

Europe’s 19th crisis summit was held in the last

week of June in Brussels amidst great hope and

global attention. Like the previous 18, this too

was supposed to be a game changer. Did it live

up to its billing? Well partially yes, if you believe

the financial markets and pundits.

Yields on Italian and Spanish bonds fell sharply

as investors interpreted that Europe’s political

leaders had

committed

t h e m -

selves to

the creation of a banking union and to

allowing troubled countries

easier access to Euro-

zone rescue funds.

The heads of

Italy, Spain

and France

were hailed in

their respective

countries for scor-

ing a

v i c -

t o r y

over German Chancellor Angela Merkel, who

came under severe criticism at home for conced-

ing too much at the summit.

Looking at the fine print, the European leaders

have broadly agreed to create a Europe-wide

bank supervisor (involving the European Cen-

tral Bank) before the end of the year. Secondly

and more significantly, by accepting that bail-out

funds can go straight to banks, Mrs. Merkel has

made a big shift from her insistence that help

could go only to governments, with tough con-

ditions attached. This underlines a big change in

European Crisis

Still Anybody’s Guess

Aditya Bansal, Ankur Dikshit

Team Monetrix

36


37

international experts, and not the Spanish

government that would decide how much

Spain’s banks need. The rescue of Spain is

likely to have more impact on financial mar-

kets than the rest three as its economy is

nearly double the size as the rest three com-

bined.

Coming to Italy, the Italian budget deficit is

now pretty small as a percentage of gross

domestic product – much smaller than Brit-

ain’s, for example. But Italy’s total public

debt has recently hit a new record of €1.95tn

and is well above

120 per cent of

GDP. The country

needs to borrow

hundreds of bil-

lions in the mar-

kets this year, just

to roll over its

debt. However, the

IMF and Euro-

pean Union might

not be able to

cough up the

amount of money

Italy – the country

with third largest

debt stock in the

world, might need

for a bailout. The

borrowing costs

for Italy are creep-

ing up – we might just be approaching the

point where Italy has to look at some place

other than the bond markets because it be-

comes unfeasible.

In the light of these facts, the result of gen-

eral elections in Greece becomes more im-

portant. The newly formed government un-

der Mr. Antonis Samaras makes any confron-

tation with the EU more unlikely. It is very

important that Greece avoids any showdown

with the EU because the indirect effects of a

Greek exit could be enormous. Once inves-

tors see that countries can indeed leave the

where the worst problems lie.

The events of the recent past suggest that the

chances of break-up of the euro precipitated by

Greece are highly unlikely. The EU has enough

firepower to keep Greece in the single currency,

if it wants to. More alarmingly, if both Spain and

Italy are unable to fund themselves through the

markets, the EU may simply be unable to assem-

ble a bailout fund large enough to save them. At

that point, the break-up of the euro does not

look a distant reality.

In this light, the recent

failed attempt at bailout of

the Spanish Banks becomes

more significant. The

Europeans thought they

had exceeded market ex-

pectations by coming up

with €100bn. On the con-

trary, the yield on Spanish

bonds actually rose after

the bailout was announced.

Investors seem to have

concluded that if Spain

cannot borrow directly to

bail out its banks; it is peril-

ously close to losing access

to the markets completely.

The prospect that Spain

might need a full sovereign

bailout seems frightening.

It would need something in

the vicinity of €500 bn -

exhausting almost the entire

financial firewall that the EU has constructed to

contain the crisis.

However, because the new provisions in the Eu-

rozone’s €440bn rescue system were applicable

on Spain, it will avoid the kind of intrusive in-

spection of government books that came along

with Irish, Greek and Portuguese bailouts. But

the new loans, expected to be negotiated before

the end of the month, will not be condition-free.

EU’s top economic officials made clear that it

would be the European Commission and other

Source: The Economist

|IN - DEPTH|


June shows a steady decline in the month.

This follows four months after the private

sector shrugged off the region’s debt crisis

and expanded output in January for the first

time in five months. Purchasing managers’

indices for the 17-country bloc showed manu-

facturing and services activity rebounded un-

expectedly sharply in January, driven by ro-

bust output growth in Germany and a modest

expansion in France. January’s improvement

was because of companies running down or-

der backlogs. Exports were helped by a

weaker euro. Another boost to the confidence

might also have been the ECB’s crisis-fighting

measures, which saw it provide €489bn in

three-year loans to Eurozone banks in De-

cember.

As per the current figures,

companies are clearly

short on confidence

and anticipate the

worst, cutting back

on both staff num-

bers and stocks of

raw materials at the

fastest rates for two-and-a

-half years. The situation at the

employment front continues to find a

new low with each passing month. Across the

euro area as a whole, the count of the unem-

ployed topped 17.5m in May, nearly 2m more

than a year ago and more than 5m above the

level in early 2008.

Whatever direction the crisis takes from here,

one thing has become clear, the idea of a cur-

rency union without a fiscal union is essen-

tially flawed. Nations with weak currencies

and high productivity get an unfair advantage.

The current crisis is here to stay and it is only

with concerted apolitical action that the Euro-

pean Union can hope to see a solution in the

foreseeable future.

References

1. The Economist

2. Financial Times

euro, then they will inevitably re-price risk in

other eurozone countries – intensifying the

pressure on Italy and Spain.

It is unlikely that Greece will comply sufficiently

with even “lite” fiscal austerity conditionality, let

alone with structural reform conditionality, in-

cluding privatisation targets, which are unlikely

to be relaxed. Political opposition to both aus-

terity and reform is now stronger in Greece than

ever before. So is the apprehension over bail-

outs in the core. It has already led to one round

of elections that didn’t give any party the man-

date to form a government. The troika of the

European Commission, ECB and the IMF –

may forgive a Greek failure in the September

progress assessment, but is unlikely to tolerate

another failure to comply on all

fronts by the December

assessment.

It would not be the

wisest to assume that

the core Eurozone

would be willing to

take on significant ex-

posures to Spain and

Italy unless it can be estab-

lished unambiguously that a wil-

fully and persistently non-compliant programme

beneficiary will be denied further funding.

Therefore Greek exit would become even more

probable should Spain and Italy require a

broader troika programme and external help,

respectively, which appears likely. The greatest

fear of the core nations is not the collapse of the

euro area but the creation of an open-ended,

uncapped transfer union without a surrender of

national sovereignty to the supranational Euro-

pean level. The exit is likely to create extreme

unrest in Greece, and lead to social and political

instability. In recognition of this, the Greek gov-

ernment is likely to drop its demand to ease bail-

out terms after warnings that it would be re-

jected by international lenders.

The industrial activity front is also gloomy. The

new data on manufacturing activity released in

|IN - DEPTH|

38


39

|MARKET UPDATE|

Sense

x

Market Movement

Sector-wise Snapshot


Currency Rates

1 Dollar – Rs. 54.36

1 Euro – Rs. 68.54

1 Pound – Rs. 85.31

1 Yen – Rs. 0.68

Source: www.bseindia.com Currency rates, policy and reserve ratios as of 3rd July, 2012

Policy Rates and Reserve Ratios

Repo Rate – 8.00 %

Reverse Repo – 7.00%

CRR – 4.75%

SLR – 24%

Bank Rate – 9.00%

|MARKET UPDATE|

In the News

aim of increasing the safety in payments and set-

tlements system. It has invited public comments

on the 'Payments System Vision Document 2012

-15'.

The document proposes the vision of

"proactively encourage electronic payment sys-

tems for ushering in a less-cash society in India"

M3 Money Supply Grows 13.8% June 27, 2012; The Economic Times

According to the Reserve Bank of India, the M3

money supply in India increased 13.8% y-o-y and

stood at INR 76,216.5 billion as on 15th June

2012.

India Targeted M&A Value Decline 26% June 26, 2012; The Economic Times

According to Dealogic, a deals tracking company,

the cumulative value of merger and acquisition

deals targeted towards India this year so far has

registered a decline of 26% over the correspond-

ing period a year ago. The total value of the deals

till 22nd June 2012 was USD 25.5 billion.

The second quarter of 2012 has witnessed a sig-

nificant decline in the M&A activity with approx

USD 3.7 billion worth of transactions announced

during the period. In comparison, deals worth

USD 21.8 billion were announced in the first

quarter of 2012.

RBI Increases Limit on Inward Remit-

tances June 9, 2012; Business Standard

The Reserve Bank of India (RBI) has raised the

limit on the number of foreign remittances an

individual can receive from 12 to 30 per calendar

year. However, there have been no changes in

India's Current Account Gap Reaches 20-

year High June 30, 2012; The Economic Times

India's current account deficit (CAD) has in-

creased to the highest ever level to 4.5% of GDP

at USD 21.7 billion in January-March period of

2011-12. The rise has been on account of higher

imports of oil and gold. During Q1 CY12, India’s

forex reserves decreased by USD 5.7 billion de-

spite inflows of USD 13.8 billion.

A high CAD signals that a country is living be-

yond its means and is only able to fund its con-

sumption with excessive external borrowings. Un-

der the current circumstances in India, if left un-

checked, the rising CAD will lead to a decline in

rupee, and further increase the debt burden.

External Debt Increases 13% in FY12 June 29, 2012; The Economic Times

In FY2012, India’s external debt increased by 13%

to USD 345.8 billion from USD 305.9 billion at

end of March 2011. The rise was on account of

higher commercial borrowings and trade credit.

According to the RBI, almost all the components

of the external debt recorded a rise during the last

fiscal year. The dollar denominated debt was the

largest, accounting for 55% in the total external

debt as at end of FY2012. Loans under external

assistance rose by ~USD 3 billion during 2011-12

in comparison to a rise of USD 8.7 billion during

2010-11.

RBI Promotes Electronic Payments in In-

dia June 27, 2012; The Economic Times

The Reserve Bank of India (RBI) has proposed to

actively promote electronic transactions with the

40


http://www.bseindia.com

http://articles.economictimes.indiatimes.com/2012-06-30/news/32484196_1_current-account-q3-foreign-exchange-reserves

41

|MARKET UPDATE|

New Format for Reporting Financial Re-

sults April 16, 2012; The Hindu Business Line

The Securities and Exchange Board of India

(SEBI) released a new reporting format for dis-

closing financial results for companies other than

banks. According the SEBI guidelines, the com-

panies will have to adopt the new format for fil-

ing their income statement and balance sheet

starting FY12.

The format follows a February 2012 notification

from the Ministry of Corporate Affairs, India.

Under the new format, companies filing consoli-

dated results need to include details of profit and

loss of associates and minority interest. Addition-

ally, they have to include details of shared pleged

by the promoter/ promoter group.

SEBI Allows Stock Exchanges to List April 2, 2012; The Hindu Business Line


(SEBI) has decided to allow stock exchanges and

depositories to list. The move is in contrast to the

recommendations of the Bimal Jalan Committee

on listing of exchanges, which suggested that ex-

changes, depositories and clearing corporations

should not be allowed to list because of their

frontline regulatory role.

However, the SEBI has allowed the listing under

certain restrictions, including that the minimum

net worth for exchanges and depositories should

be INR 100 crore and that no single investor can

hold more than 5% in exchanges.

RBI Relaxes Rules for Foreign Currency

Accounts

April 2, 2012; The Hindu Business Line

The Reserve Bank of India (RBI) has liberalised

the regulations governing the Foreign Currency

Accounts (FCA) with the objective of providing

operational flexibility to Indian entities making

overseas direct investments.

Under the new regulations, Indian entities can

open, hold and maintain FCAs abroad to

smoothen the process of making overseas direct

investments, subject to certain eligibility condi-

tions.

the cap on the amount of each transaction. It has

been retained at USD 2,500 per person.

According to the industry experts, the measure

has been adopted to extend some support to the

falling rupee. It had been a long standing demand

of the money transfer agents to increase the num-

ber of remittances due to such requests flowing in

from the customers.

SEBI to Derecognise Exchanges with Less

than Rs 1,000 crore Turnover May 30, 2012; The Hindu Business Line


(SEBI) has announced that it will compulsorily

derecognise exchanges with less than Rs1,000

crore annual turnover and not applying for exit

within two years.

Stock exchanges with an annual turnover of less

than Rs 1,000 crore are eligible to voluntarily exit.

The derecognised exchanges would be required to

file for exit within two months, failing which, they

will have to compulsorily exit.

NRI Deposit Flows Triple in FY12

May 11, 2012; Business Standard

The non-resident Indians (NRIs) deposits inflows

into banks in India increase around three times in

the year 2011-12. THE NRIs sent around USD 11

billion in the last fiscal in comparison to USD 3.23

billion deposited in 2010-11. The increase in the

inflow was on account of higher interest rates and

a weakening rupee.

According to RBI executives, a large amount

moved into NRE deposits after banks raised rates

in the second half of FY12. RBI had raised the

ceiling on these deposits with the objective of at-

tracting foreign fund flows to check the rapid de-

clined in rupee value.

RBI Announces OMO to Ease Liquidity

May 8, 2012; Business Standard

The Reserve Bank of India (RBI) announced plans

to infuse up to INR 12,000 crore through Open

Market Operations (OMO), with the intent of eas-

ing liquidity pressure and creating an appetite for

fresh supply of government bonds.


- - - - - - - - - - - - - - - - - - - - - - -

From top left: Nihal Mahesh Jham, Raghav Pandey, Keyur Vinchhi, Uday Das Gupta,

Siddharth Janghu, Aditya Bansal, Rukun Tarachandani, Ankur Dikshit, Shaik Arif Ahmed,

Amit Garg, Anupriya Asthana, Soumya Hundet, Goutam Kumar, Aditya Mittal, Krishna Prem

Sharma, Sandeep Patil, Varun Sanghi, Mukul Aggarwal

The Club

- - - - - - - - - - - - - - - - - - - - - - -

Monetrix is the Finance and Economics club of Management Development

Institute (MDI), Gurgaon. As one of the most active clubs in the campus,

Monetrix continuously strives to contribute to the financial and economic

knowledge of the MDI community by holding events and conducting

knowledge sessions and other interactions.

The magazine, Blue Chip, is an effort in the same direction, of contributing

not just to the MDI community, but to the fraternity of MBA undergrads

throughout India.

Hope this issue of Blue Chip has served as an interesting read. Do watch out

for our next quarter issue to be released in October this year!

More information on Monetrix can be found at http://mdi.ac.in/students-life/academic-

clubs.html. For any other feedback or information, please mail in to us at

[email protected]

Note: You may have noticed that some of the articles in this magazine have been written by team

Blue Chip or team Monetrix. These articles have been kept in the issue only with the purpose of

making the magazine content wholesome and are not considered for the prize money.

Documents

BlueChip Apr-Jun 2012 Monetrix MDI