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Editorial

Season’s Greetings!

In this edition, we have Mr. Motilal Oswal – Chairman and Managing Director – Motilal

Oswal Financial Services Ltd. (MOSFL), articulating his thoughts on Indian Economy,

stressing upon the replacement of consumption-driven growth by investment-led

growth. We thank Mr. Oswal for his contribution to the newsletter.

For this month, APAS column has focused on Wealth Management.

The economic indicators showed mixed performance. Manufacturing PMI was down

from 52.6 in August to 52.1 in September. India’s core sector output rose 5% in

September as compared to 3.2% in August. The index of industrial production (IIP) fell

by 0.7% in August, compared to a decline of 2.5% in July. PMI services and composite

PMI were at 52.0 and 52.4 each, from 54.7 and 54.6 respectively in the previous month.

India’s retail inflation eased sharply to 4.31% in September from 5.05% in August. WPI

(wholesale price index) softened to 3.57% in September compared with 3.74% in

August

The Reserve Bank of India (RBI) issued Operating Guidelines for Small Finance Banks

and Payments Banks. Also, RBI issued Operational Guidelines on Sovereign Gold Bonds

2016-17, Series III.

Insurance Regulatory and Development Authority of India (IRDAI) issued a circular

specifying the guidelines on Standardization in Health Insurance. IRDAI Chose to

strengthen its efforts on a comprehensive Cyber Security Framework.

Cabinet approved establishment of National Academic Depository (NAD). Also, cabinet

approved MoU between Export-Import Bank of India (Exim Bank) on General

Cooperation with the New Development Bank (NDB), along with other Development

Financial Institutions of BRICS nations.

SEBI issued a circular revising the limits for investments by FPIs in government

securities. Investment by a Foreign Venture Capital Investor (FVCI) registered under

SEBI (FVCI) Regulations, 2000 was liberalized.

We hope that this newsletter is insightful and welcome your inputs and thoughts and

encourage you to share them with us.

Ashvin Parekh

Table of Contents

Guest Column

Mr. Motilal Oswal –

Chairman and Managing Director –

Motilal Oswal Financial Services Ltd. (MOSFL)

APAS Team

Wealth Management

Economy

IIP update – August

Inflation update – September

PMI update – September

Core Sector update – September

Banking Sector

Operating Guidelines for Small Finance

Banks

Operating Guidelines for Payments

Banks

Operational Guidelines on Sovereign

Gold Bonds 2016-17 Series III

Insurance

Standardization on Health Insurance

Cyber Security Framework

Infrastructure

Cabinet approved establishment of

National Academic Depository

Cabinet approved MoU between

Export-Import Bank of India (Exim

Bank) on General Cooperation with the

New Development Bank (NDB), along

with other Development Financial

Institutions of BRICS nations

Capital Markets

Investment by a Foreign Venture

Capital Investor (FVCI) registered under

SEBI (FVCI) Regulations, 2000

Investments by FPIs in Government

Securities

Capital Market Snapshot

Economic Data Snapshot

Ashvin Parekh – Managing Partner, APAS

All through the recent global economic turbulence,

the Indian economy has been a beacon of stability.

While the world economic growth has eased over

2012-2015, India’s GDP growth has improved. India

remains one of the fastest growing economies in the

world.

Consumption is the key driver of economic growth

India. At a time when most developed economies are

struggling to maintain their consumption growth,

consumption in India has grown at 7.4% YoY (on an

average) over the last four quarters, up from 6.6% YoY

growth in the preceding four quarters. The near-

normal monsoon this year following two years of

insufficient rain and the impending implementation

of the Pay Commission recommendations would only

fuel near-term consumption. Most experts expect

India’s consumption story to remain intact for many

years to come. Not surprisingly, consumption-related

stocks are valued at a multiple of 35-40x, more than

double the market multiple of 16-17x.

Yet, for India to remain a beacon of stability,

investment-led growth must replace consumption-

driven growth. Though rising consumption, per se, is

not a concern, the fact that households are

withdrawing their savings to finance consumption is

worrying. Indian households have been consuming an

increasing share of their income for the past five

years. A comparison of Indian consumption with

other Asian economies also reveals some

discomforting facts. Consumption growth has picked

up pace in almost all Asian economies over the last

couple of years. This may make one believe that

India’s economic growth is in line with other

economies; however, the devil is in the details.

Mr. Motilal Oswal – Chairman and Managing Director, Motilal Oswal Financial Services Ltd. (MOSFL)

Higher consumption in India is being financed by

savings – household income growth has lagged in the

past few years. Accordingly, gross domestic savings

have fallen from ~35% of GDP in 2011 to ~30% in

2016. When we look at other Asian economies, we

find that while consumption growth has picked up in

almost all these economies, the savings rate has also

been higher in most of these economies. The only

other economy with a meaningful fall in savings rate

is Singapore. Nevertheless, Singapore is reeling under

deflation for the past two years as against ~5%

inflation in India.

For the first time in the history of independent India,

household consumption growth has outpaced the

growth in personal disposable income for five

consecutive years. The recent level of consumption-

income differential is the highest in four decades,

reflecting strong consumption but lagging income

growth. Household savings have fallen by more than

a quarter to ~18% of GDP, the lowest in two decades.

With lower savings, investments in India have

suffered the most, falling by almost one-fifth in the

past five years. Unless savings pick up, investments

are unlikely to revive, and thus, the divergence

between consumption and investments would widen

further. This would inevitably be inflationary.

The current consumption-led growth model could

help India reach 8% real GDP growth in two years, but

would increasingly become destabilizing. India must

replace consumption with investments as the key

driver of growth. Such transformation implies that

India could take a little longer (probably after 2020) to

graduate to the next level of economic growth (9-

10%). Yet, once investments take over as the key

growth driver, India could grow at 10% on a

sustainable basis.

Today, the Indian economy is in an enviable position.

Economic resilience has helped India to rise from the

world’s 12th largest economy in 2008 to 7th this year,

increasing its dominance in the world economy. At a

time when most major economies in the world are

witnessing declining working population, threatening

to push them into stagnation, India’s demographic

structure puts it in a privileged position. In the past

four years, India’s vulnerability matrix has improved

markedly and reward matrix has also recovered. Its

risk-reward metrics make India an attractive

investment destination. Importantly, the Indian

economy has improved without increasing its

leverage. The debt intensity of India’s GDP growth is

one of the lowest among major emerging economies.

Foreign investors have begun differentiating India

from other leading emerging markets. With the

government delivering on the policy front, India will

now form a stable part of global portfolios. It will

continue to attract overseas fund flows even if the

transformation towards investment-led growth

delays its graduation to 9-10% sustainable economic

growth.

Wealth management is a holistic and a multi-

disciplinary approach to financial planning. It

effectively combines financial and investment advice,

banking services, retirement planning and legal

advisory. This specialized service began with creation

of Massachusetts Investors trust, an open-end mutual

fund. Since then, wealth management industry has

been through lot of ups and downs.

Global financial crisis of 2008-09 has affected the

global investors; including the wealth managers. It

shook the investor confidence, due to which the

global banks witnessed a decline in their wealth

management divisional revenue. Wealth managers

outlined revenue growth as one of their strategic

priorities with an intention to improve revenue

streams by improving investor experience amidst

volatile markets.

Post the global financial crisis, regulators and

governments across the world focused on tighter

oversight of wealth management industry, capital

preservation, risk management and corporate

governance. New regulations were created promptly

in the best interest of the investors. Wealth managers

will continue to face the challenge to cope up with the

dynamic regulatory environment in their home

jurisdictions and in international markets.

In the wealth management space, Indian banks have

been expanding their operations aggressively. India

has the key ingredients of a high-growth wealth

management market. GST tax reforms have attracted

foreign investors. GST will also have a beneficial

impact on India’s economic diplomacy, including

foreign trade, which would in turn boost exports.

Currently, India is growing at highest GDP growth

rates in the world at around 7.6%, most of which is

supported by rebound in agriculture, civil service pay

reforms, better exports, hence enhancing private

investments. High GDP growth has been supported by

favorable monetary policy, to tame high inflation.

Central bank has been successful in maintaining 5-6%

inflation rate; raising the real rate of returns for fixed

income asset classes.

India’s wealthy comprises of relatively young masses.

As per a report by Kotak wealth management,

combined wealth of 146,000 ultra HNHs is estimated

to be around Rs.135 trillion. The number of ultra

HNHs is estimated to grow to around 294,000

amassing a wealth of around Rs.319 trillion by 2021.

Apart from the inherited wealth, India’s HNIs also

comprise of entrepreneurs, professionals and

businessmen who have amassed wealth recently, due

to the factors like up tide in the Indian markets, start-

ups, investor-friendly government initiatives

encouraging entrepreneurship, etc. This has created a

relatively young generation of HNIs, whose take on

wealth management is a bit different from the already

present HNIs. This clearly presents an opportunity to

develop innovative products, with interactive

technology base and mobile-enabling investing

applications for better serviceability.

Most organized players have so far focused mainly on

the urban segment, leaving untapped about one-fifth

of India’s high net worth individuals (HNWIs)

population. Region wise concentration of HNWIs in

India. While metros continued to hold 55%, emerging

cities and small towns stood at a significant 4%. There

has been symbolic rise in the number of HNWIs as

well as their quantum of wealth. 2016 saw a 7%

increase in the number of ultra HNWIs.

Looking at the investment avenues over the years,

real estate and gold have been time-tested avenues

for Indians to invest their wealth in. With the changing

economy, a more aware investor class has started

adopting to riskier ventures like equities and alternate

investment vehicles. Increasing globalization has

greatly impacted the rates of returns in Indian equity

markets; especially post-2008 crisis. India’s HNWI

wealth suffered a setback in 2011 and experienced

slight to negligible growth in the next two years due

to the carryover effect of the financial crisis. The sharp

slowdown in the nominal GDP growth was a common

trend in Asia for 2015, on account of depreciation of

local currencies against the US dollar.

Wealth managers in India hold portfolios owned by

primarily entrepreneurs, inheritors and professionals.

The wealth ploughed back by these individuals in to

investments generally depends upon their risk

appetite, preference for avenues of investments and

motive of investments. As per a Kotak Wealth

Management Report Top of the Pyramids 2016, ultra

HNIs spend almost 45% of their income in

expenditures, leaving the rest 55% for investment.

Investments in e-commerce ventures, art collection,

renewable energy ventures, etc. have proved to be

top investment avenues for the ultra HNI investors as

alternate investments. The return in these

investments is difficult to ascertain when compared

to traditional modes of investment. Meanwhile,

overseas investment by Indians have also increased in

recent times to capture opportunities not available to

the investors in India.

Profit margins in wealth management firms have

improved in India by 7 basis points to 22 basis points

in 2013 which can be mainly accounted to reduction

in expenses through improved operational

efficiencies and increased RM productivity.

On an overall global level, equity markets have picked

up momentum after 2013, and have reached all-time

highs post the crisis drop. This suggests a bullish view

on demand picking up and resulting corporate profits

in the coming years. Fixed income spreads have

moved marginally up from their all-time lows,

implying investor perception of reduced systemic risk

and little less concern for inflation.

However, traditional benchmarks of risk and investor

sentiment such as treasury spreads, LIBOR or equity

indices have tremendously lost the credibility. Despite

market indices showing upstream growth and

demand from markets picking up, the global systemic

risk has weighed down the investment managers;

who tend to provide only a very cautious view on

investing.

The preferred investment destinations for investment

managers have changed over the years. Real estate

investment as a portion of portfolio, on an average,

has declined from 37% to 25% in FY11-FY15. Whereas,

investments in equity have increased from 34% to

45% in the same duration. Other parts in the portfolio

are debt instruments with an average share of 20%

and rest is alternate investments. The decline in real

estate as a part of the portfolio ascribes to the

increase in risk-taking abilities of investment

managers.

Global banking operations have digitized

exceptionally well, which also includes wealth

management front. Digital innovations have led to

new age wealth management players gain an edge

over traditional players. On the front-end, better

technology interface between wealth manager and

customer have eased things for both. While on the

back-end, enhanced statistical outputs have

encouraged better decision-making abilities for

wealth managers with the help of data processing

units which ensure faster consolidation of data,

manage risks for highly diversified portfolios and

increased reaction speed despite market

complexities.

With the rise in HNWIs in the country, potential for

wealth management entities to tap in the Indian

markets is huge and rising. Improved regulations, high

returns and stable growth of the economy has

incubated favorable environment for the growth of

wealth management in the country. For wealth

management firms to look forward in India, they must

focus on building trust amidst the investors by way of

their proven track records outside the country. By

focusing on their customer interface management,

transparency and compliance, wealth management

firms can pave long pathways in India.

-APAS

IIP (Index of Industrial Production) – August

Industrial production contracted for a second straight

month in August 2016. However, a good monsoon and

early onset of the festive season have raised hope of

revival in demand for consumer durables, on the back

of rising farm income.

The Index of Industrial Production (IIP) fell by 0.7% in

August, compared to a decline of 2.4% in July, as per

the data from Central Statistics Office.

The IIP contracted by 0.3% in April-August, first five

months of this financial year, versus growth of 4.1% in

the corresponding period last year. Mining and

manufacturing dragged down overall IIP for the month.

The mining sector contracted by 5.6%, from 0.9%

growth the previous month. The manufacturing sector,

75% of the index, saw the intensity of decline get

lower, to 0.3% from 3.4% in July. Dismal when

compared with the 6.6% growth in August last year.

Only six of the 22 sub-sectors, however, showed a

decline in growth, with production of electrical

machinery falling the steepest at 49.4%. Radio,

television and communication apparatus grew the

fastest at 15.2%.

Electricity barely expanded at 0.1% in August,

although it has shown growth of 5.7% in the first five

months of this financial year.

The most volatile segment, capital goods, in the

series saw production fall for tenth month in a row,

by 22.3% in August, against 29.49% fall in July. These

had grown 21.3% growth in August last year. Cables,

gems and jewellery, minerals, sugar, machinery and

rice were the top negative contributors. Hot-rolled

coils, stainless steel, telephone instruments, fruit

pulp and air conditioners were the top positive

contributors. Consumer goods output grew by 1.1%,

compared to 1.5% in July. Consumer durables,

mainly white goods such as refrigerators and other

appliances, grew by 2.3%, against 5.8% the previous

month and 17% in August last year. Car sales,

however, have showed promising growth, with 9.5%

rise in August and 15.4% in September.

-0.8

1.22.1

-2.4 -0.7

Apr-16 May-16 Jun-16 Jul-16 Aug

IIP (%YoY)

Quarterly evaluation of IIP

1.13

0.43

3.233.53

4.73

1.80

0.20

0.83

Q2 14-15 Q3 14-15 Q4 14-15 Q1 15-16 Q2 15-16 Q3 15-16 Q4 15-16 Q1 16-17

IIP

%

Quarter

IIP Trend Mining activity recovered during 2014-15 from a

three-year slump, buoyed by a sharp increase in

the production of coal. Weakness in consumer

spending, sluggish investment activity and poor

external demand operated as drags on

manufacturing activity during 2014-15.

During April - June 2015, however, the growth in

IIP decelerated mainly because of a sluggish

performance in capital goods, electricity and

food products.

IIP has experienced a downfall from 3.83% in Q1

to 0.43% in Q3 (2014-15) respectively. Further

IIP rose to the highest level of 4.73% in Q2 (2015-

16). However, it fell to a low of 0.2% in Q4 (2015-

16) and slightly rose to 0.83% in Q1 (2016-17).

Consumer Price Index - September

India’s retail inflation eased sharply to 4.31% in

September, the slowest in more than a year, from

5.05% from August, mainly because a sharp fall in

food prices. Food inflation slowed to 3.88% in

September from 5.91% in August as prices of

vegetables and pulses fell.

Core inflation inched up further to 4.8%.

Vegetable inflation contracted 7.21% in September as

against a rise of 1.02% in August. Housing inflation

also inched lower in September, falling to 5.18% from

5.3% in August.

Inflation in the fuel and light segment, however, rose

to 3.07% from 2.5% in August. Retail inflation in urban

areas was 3.64% in September as against 4.22% in the

previous month, while rural retail inflation was 4.96%

as against 5.87% in August.

Quarterly evaluation of CPI

5.09

3.95

5.34 5.265.64

5.14

Q1 15-16 Q2 15-16 Q3 15-16 Q4 15-16 Q1 16-17 Q2 16-17

CP

I %

Quarter

CPI Trend For Q1 of 2015-16, CPI inflation remained at

5.09%. Thereafter it fell to 3.95% for Q2. Post that

CPI inflation rose back to 5.34% in Q3. It

continued to be relatively high and “sticky”,

despite the sharp fall in commodity prices

globally, especially crude oil.

Even after a sharp rise in food inflation, CPI has

fallen from 5.34% in the Q3 of 2015-16 to 5.26%

in Q4 of 2015-16 due to ease in rural and urban

inflation respectively.

Food inflation dominated the rise and fall in CPI

for the Q1 and Q2 of 2016-17. CPI rose to 5.64%

during Q1 of 2016-17 mainly due to a steep rise

in food prices, thereafter CPI fell to 5.14%, once

again, fall in food prices being the main cause.

0

2

4

6

8

May-16 Jun-16 Jul-16 Aug-16 Sep-16

CPI

WPI (Wholesale Price Index) – September

Cooling food prices helped wholesale inflation decline

in September after it touched a two-year high in

August, strengthening the case for more rate cuts

after retail inflation also showed a sharp decline.

India's wholesale prices as measured by WPI

(wholesale price index) softened to 3.57% in

September compared with 3.74% in August. The

lower inflation rate is attributed to a 10.9% decline in

wholesale vegetables prices which till a month ago

were the major cause of rising food inflation.

Fuel price index rose to 5.58% from 1.62% in August

as diesel prices were up 19% against 12.15%.

Inflation in manufactured products also increased

marginally to 2.48% from 2.42%. It was mainly wood

and wood products that saw higher inflation at 3.40%

in September against 1.86% in the previous month.

Also, core inflation (inflation minus fuel and food

items) rose to 0.65% in September from 0.56% in the

previous month.

Pulses, which were also pushing up WPI inflation, saw

the rate of price rise falling to 23.99% in September

from 34.55% in August. Amid an all-round fall in food

inflation, fruits and milk were outliers. Inflation in

fruits saw an uptick to 14.1% against 13.91%, while

that in milk touched 3.71% from 3.4%.

Quarterly evaluation of WPI

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

May-16 Jun-16 Jul-16 Aug-16 Sep-16

WPI

The WPI inflation breached the psychological

level of 0% in November, 2014 and January,

2015. The decline was majorly caused by

lower food and fuel prices.

However, in 2015-16, WPI has been in

negative zone for all three quarters ending

December 2015. It continued to remain in the

negative territory for Q4 of 2015-16 also.

However, the graph has been moving

towards the positive region. The main cause

for this was a steep fall in fuel and power.

For Q1 of 2016-17 WPI inflation went up to

0.92% due to pricier food items. Further to

which, there was a steep rise in food price

once again, for the first two months of Q2

(2016-17) and the food prices cooled down in

the third month of same quarter. However,

on an overall basis WPI inflation showed a

rise which went up till 3.64%.

-2.47

-4.51

-2.18

-0.88

0.92

3.64

Q1 15-16 Q2 15-16 Q3 15-16 Q4 15-16 Q1 16-17 Q2 16-17WP

I %

Quarter

WPI Trend

PMI update

Service PMI – September

The health of the Indian private sector economy

improved in September, but to a lesser extent than in

August. Output and new business increased at softer

rates in service sector. Meanwhile, prices charged

were raised in line with higher cost burdens.

Reflecting softer expansions in activity at both service

providers and manufacturers, the seasonally adjusted

Nikkei India Composite PMI Output Index fell from

August’s 42-month high of 54.6 to 52.4 in September.

The headline seasonally adjusted Nikkei India Services

Business Activity Index registered 52.0 in September.

Down from August’s 43-month high of 54.7, the latest

reading pointed to a slower rate of expansion that

was moderate overall.

The level of new business placed with Indian services

firms increased moderately in September, following a

solid rise in August. The upturn in order books at

manufacturers also lost some momentum.

Outstanding business at Indian service providers rose

for the fourth month running in September and at the

quickest rate since July 2014. Goods producers saw a

softer increase in work-in-hand, but one that

remained solid.

Broadly stagnant staffing levels at services firms and

manufacturers contributed to higher backlogs.

Quarterly evaluation of Service PMI

The trend in employment showed little-

change through much of 2015-16. Except for

last July where hiring among service providers

was mild, a broadly stagnant labour market

was seen for the past two years. Input costs

across the private sector meanwhile rose at

the quickest rate in three months and charge

inflation likewise accelerated.

The average of Service PMI was seen rising

from third quarter ended December 2015 to

fourth quarter ended March 2016 (52.13 to

53.33). The main reason being sharper

increase in new business spurring activity

growth in service sectors.

Q2 saw no change in the level of Indian private

sector employment.

Source: www.tradingeconomics.com

Manufacturing PMI - September

India’s manufacturing upturn was sustained in

September, as a further increase in order books

underpinned growth of output and purchasing

activity. Rates of expansion eased in all cases. Both

input costs and output charges increased at quicker

rates.

Manufacturing PMI was down from 52.6 in August to

52.1 in September. This indicated that growth lost

some momentum.

One factor contributing to the slowdown in the sector

was a softer increase in new business inflows.

Whereas improved client demand supported the

upswing in order books, growth was reportedly

hampered by strong competition for new work.

Foreign new orders for Indian-manufactured goods

expanded markedly in September, and at the quickest

rate in 14 months. Greater workplace activity led

companies to scale up their buying levels and hire

additional workers in September.

Manufacturing output in India continued to increase

in September, marking a nine-month sequence of

growth. However, the rate of expansion eased since

August and was relatively modest.

Quarterly evaluation of Manufacturing PMI

Manufacturing PMI in India averaged 51.93

from 2012 until 2016, reaching an all-time

high of 55 in June of 2012 and a record low of

48.50 in August of 2013. Because of rising

purchasing activity, preproduction

inventories expanded.

The rate of accumulation was slight overall

and in line with those seen throughout the

current four-month sequence of growth.

Manufacturing PMI kept fluctuating for the

first two quarters of 2015-16. Further it

slowed down in the third quarter ended

December 2015. The average being 50.03 for

that quarter. However, the average for the

fourth quarter ended March 2016 rose to

51.53. The reason for this rise was expansion

of output at an accelerated rate. New orders

were also welcomed. There was an improved

demand from both domestic and external

clients.

Until the beginning of the Q2 (2016-17), the

rate of accumulation was only marginal. The

manufacturing PMI data showed that the

positive momentum has been carried over

into Q2 of 2016-17, with the rise in expansion

rates and buying levels.

Source: www.tradingeconomics.com

Core Sector Growth – September

Core sector output rose 5% in September, a three-

month high. The growth in the Index of Eight Core

Industries in September was much stronger than the

3.2% growth seen in August. The combined index of

eight core industries stands at 176.1 in September,

2016. Its cumulative growth during April to

September, 2016-17 is 4.6 %.

The eight core industries comprise nearly 38 % of the

weight of items included in the Index of Industrial

Production (IIP). -Coal production declined by 5.8 %

in September, 2016 year-on-year (YoY). Crude oil

production declined by 4.1 % in September, 2016

(YoY). The natural gas production declined by 5.5 % in

September, 2016 (YoY). Petroleum refinery

production increased by 9.3 % in September, 2016

(YoY). Fertilizer production increased by 2.0 % in

September, 2016 (YoY). Steel production increased by

16.3 % in September, 2016 (YoY). Cement production

increased by 5.5 % in September, 2016 (YoY).

Electricity generation increased by 2.2 % in

September, 2016 (YoY).

Monthly evaluation of Core Sector

(Quarter represents a three-month period of a financial year April – March)

3.2 3.2

-1.3

0.9

2.9

5.76.4

8.5

2.8

5.2

3.0 3.2

5.0

Co

re s

ect

or

dat

a %

Month

Core sector Trend - Monthwise

There has been a continuous slide in core sector

growth from 6.7% in November 2014 to 2.4% in

December, 1.8% in January, 1.4% in February and to a

negative 0.1% in March. It continued to remain in a

negative zone in April. However, it continued to

expand for six months, before it contracted in Nov

2015 to a negative 1.3% mainly driven by a decline in

steel production.

From December 2015, core sector output has grown

from 0.9% to 6.4% in March 2016. This growth was due

to increase in output of electricity, cement, fertilizers

and refinery products. Also, coal output was seen to

increase in December 2015 and January 2016 which

led to an overall growth.

From February 2016, core sector output increased up

till April 2016, taking it to the high of 8.5%. However,

the output fell to 2.8% in May 2016. Starting from May

2016 till August 2016, core sector has been

experiencing fluctuating trends stabilizing at 3.2% in

August 2016. The rise in September 2016 core sector

output was mainly due to a sustained growth in

the steel sector and an increase in refinery production.

Operating guidelines for Small Finance Banks

Licensing Guidelines under which in-principle

approvals were issued to the applicants for setting up

small finance banks were issued on 27th November,

2014.

The Reserve Bank of India issued Operating

Guidelines on Small Finance Banks on 6th October,

2016.

The need for separate Operating Guidelines for small

finance banks was examined, considering the

differentiated nature of business and financial

inclusion focus of these banks. Accordingly, the

Operating Guidelines for small finance banks have

been given. The prudential frameworks for market

risk and operational risk are being examined and the

instructions in this regard will be issued separately.

These Operating Guidelines are supplementary to the

Licensing Guidelines.

Operating guidelines specified that the prudential

regulatory framework for the small finance banks

(SFBs) will largely be drawn from the Basel standards.

The capital adequacy framework and the leverage

ratio have been specified. SFBs have been allowed

exemption from the existing regulatory ceiling on

inter-bank borrowings till the existing loans mature

or up to three years, whichever is earlier.

Restrictions have been put on loans and advances.

SFBs will be permitted to participate in securitization

market only as originators and providers of

associated credit enhancements and liquidity

supports.

Other credit risk transfer transactions as below will

be allowed for SFBs. SFBs will not be permitted to

undertake any para-banking activity except that

allowed as per the Licensing Guidelines and the

related FAQs issued and will be permitted to use

Interest Rate Futures (IRF) for proprietary hedging.

The risks and risk management techniques for SFBs

will be on par with the scheduled commercial banks.

Provisions with regards to corporate governance as

applicable to scheduled commercial banks will also

be applicable to Small Finance Banks. Banking

operations and KYC requirements have been

specified. Implementation of Ind AS would be

applicable to SFBs once they become scheduled

banks. Some more regulations have been specified in

the guidelines.

Operating guidelines for Payments Banks

Licensing Guidelines under which in-principle

approvals were issued to the applicants for setting

up payments banks were issued on 27th November,

2014.

The Reserve Bank of India issued Operating

Guidelines on Payments Banks on 6th October, 2016.

The need for separate Operating Guidelines for

payments banks was examined, considering the

differentiated nature of business and financial

inclusion focus of these banks. Accordingly, the

Operating Guidelines for payments banks have been

given. The prudential frameworks for market risk and

operational risk are being examined and the

instructions in this regard will be issued separately.

These Operating Guidelines are supplementary to the

Licensing Guidelines.

Operating guidelines specified that the prudential

regulatory framework for the payments banks (PBs)

will largely be drawn from the Basel standards. The

capital adequacy framework and the leverage ratio

have been specified. PBs have been allowed

exemption from the existing regulatory ceiling on

inter-bank borrowings till the existing loans mature

or up to three years, whichever is earlier.

Restrictions have been put on loans and advances.

PBs will be permitted to participate in securitization

market only as originators and providers of

associated credit enhancements and liquidity

supports.

Other credit risk transfer transactions as below will

be allowed for PBs. PBs will not be permitted to

undertake any para-banking activity except that

allowed as per the Licensing Guidelines and the

related FAQs issued and will be permitted to use

Interest Rate Futures (IRF) for proprietary hedging.

The risks and risk management techniques for PBs

will be on par with the scheduled commercial banks.

Provisions with regards to corporate governance as

applicable to scheduled commercial banks will also

be applicable to Payments Banks. Banking operations

and KYC requirements have been specified.

Implementation of Ind AS would be applicable to PBs

once they become scheduled banks. Some more

regulations have been specified in the guidelines.

Sovereign Gold Bonds 2016-17 Series III – Operational Guidelines

The Reserve Bank of India issued Operational

Guidelines on Sovereign Gold Bonds 2016-17, Series

III.

It specified the date for filing the application and

rules for joint holding and nomination. Know-Your-

Customer (KYC) norms shall be the same as that for

purchase of physical form of gold. Also, the

applicants will be paid interest at prevailing savings

bank rate from the date of realization of payment to

the settlement date. As the bonds are government

securities, lien marking, etc. will be as per the extant

legal provisions of Government Securities Act, 2006

and rules framed there under.

Receiving Offices may engage NBFCs, NSC agents, LIC

agents and others to collect application forms on

their behalf. Banks may enter into arrangements or

tie-ups with such entities.

Sovereign Gold Bonds will be available for

subscription at the branches of scheduled

commercial banks and designated post offices

through RBI’s e- Kuber system. The e-Kuber system

can be accessed either through Infinet or Internet.

The Bonds shall be eligible for trading on a date

notified by the Reserve Bank of India. (It may be

noted that only bonds held in demat form with

depositories can be traded in stock exchanges).

Standardization in Health Insurance

A circular was issued by IRDAI on 29th July, 2016

specifying guidelines on Standardization in Health

Insurance. It specified the norms for registration of

Network Providers in the Hospital Registry. The

circular stated that the registration had to be done

within 90 days from the notification of the said

guidelines.

IRDAI examined the matter and issued a clarification

dated 29th October, 2016, that given the number of

existing Hospitals in the Provider Network, the time

limit for compliance is now extended up to

31/12/2016. This is issued in terms of Regulation (31)

(e) read with Regulation (39) of IRDAI (Health

Insurance) Regulations 2016.

Cyber Security Framework

With the technological innovations, cyber security

has gained a lot of importance in financial sector.

Following which, IRDAI has determined to strengthen

its efforts on a comprehensive Cyber Security

Framework for Insurance sector in India.

IRDAI would also draw an appropriate mechanism to

mitigate the risks on the cyber front. The regulator

has invited submissions regarding the present status

and the plan of action that would meet the challenges

related to cyber security in the future.

The areas these submissions should mainly focus on

would include securing of data, applications,

operating systems, network layers in case of cyber

security attacks such as denial of service, phishing,

hacking, man-in-middle, malware acts, sniffing and

spoofing, etc.

Cabinet approved establishment of National Academic Depository

The Union Cabinet under the Chairmanship of Prime

Minister Shri Narendra Modi has accorded its

approval for establishment and operationalization of

a National Academic Depository (NAD). This would

aim at bringing another dimension and enhancement

of the vision of Digital India.

The NAD would be established and operationalized

within the next three months and would be rolled out

throughout the country in 2017-18.

The NAD would be operationalized by NSDL Database

Management Limited (NDML) and CDSL Ventures,

Limited (CVL).

Academic institutions would be responsible for the

authenticity of data and the depositories will ensure

the integrity of the data in the NAD. The NAD will

register educational institutions/boards/eligibility

assessment bodies, students and other users. It will

provide digital or a printed copy of the academic

award with security features to the students or other

authorized users. NAD will verify academic awards

online on the same day of request initiated by any

authorized user.

Requests for access to academic awards, for example,

from potential employers, and academic institutions

would be only based on consent of the student. NAD

shall maintain the authenticity, integrity and

confidentiality of its database. It will also train and

facilitate academic institutions/boards/ eligibility

assessment bodies to efficiently lodge academic

awards in the database.

Cabinet approved MoU between Export-Import Bank of India (Exim Bank) on General Cooperation

with the New Development Bank (NDB), along with other Development Financial Institutions of BRICS

nations

The Union Cabinet under the Chairmanship of Prime

Minister Shri Narendra Modi has given its approval

for signing of a Memorandum of Understanding

(MoU) on General Cooperation with New

Development Bank (NDB) through the BRICS

Interbank Cooperation Mechanism by Government

at the level of Secretary, Department of Economic

Affairs/ Export Import Bank of India.

The proposal will enhance trade and economic

relations among the BRICS countries. There is no

financial implication involved with signing of the

MoU.

The MoU is a non-binding umbrella agreement aimed

at establishing a co-operation framework in

accordance with the national laws and regulations,

besides skills transfer and knowledge sharing

amongst the signatories. Further, establishment of

the NDB reflects the close relations among the BRICS

countries and provides a powerful instrument for

increasing their economic co-operation and help

India play an enhanced international role.

Background:

Five banks from the BRIC nations had established the

BRICS Interbank Co-operation Mechanism to

enhance trade and economic relations amongst the

BRIC countries, and enterprises. The BRICS Interbank

Co-operation Mechanism now proposes to sign a

Memorandum of Understanding (MOU) on General

Co-operation with the New Development Bank.

.

Investment by a Foreign Venture Capital Investor (FVCI) registered under SEBI (FVCI) Regulations,

2000

Investment in India by Foreign Venture Capital

Investors (FVCI), registered with SEBI, is governed by

the provisions of Principal Regulations (those

amended from time to time).

In order to further liberalize and rationalize the

investment regime for FVCIs and to give a fillip to

foreign investment in the startups, the extant

regulatory provisions have been reviewed, in

consultation with the Government of India and

accordingly amendments have been carried out in

Schedule 6 of Foreign Exchange Management

(Transfer or Issue of security by a person resident

outside India) Regulations, 2000, through Foreign

Exchange Management (Transfer or Issue of Security

by a Person Resident outside India) (Third

Amendment) Regulations, 2016.

As per the Amendment Notification referred to

above, any FVCI which has obtained registration

under the Securities and Exchange Board of India

(FVCI) Regulations, 2000, will not require any

approval from Reserve Bank of India and can invest in

some of the sectors mentioned in the notification

dated 20th October, 2016.

The notification also stated that the equity or equity

linked instrument or debt instrument can be issued

by an Indian ‘startup’ irrespective of the sector in

which the startup is engaged. It is clarified that

downstream investments by a Venture Capital Fund

(VCF) or a Cat-I AIF, which has received investment

from FVCI, shall have to comply with the provisions

for downstream investment as laid down in the

principal regulations.

There will be no restriction on transfer of any

security/instrument held by the FVCI to any person

resident in or outside India. An entity receiving

investment directly from a registered Foreign

Venture Capital Investor (FVCI) will be required to

report the investment, mutatis mutandis, in form

FCGPR. The necessary changes in the E-biz portal is

being made and separate instructions will be issued

in due course. Till such time, reporting requirements,

as hitherto, shall continue.

Authorized dealers’ category I – banks would bring

the contents of the above notification to the notice

of their constituents.

.

Investments by FPIs in Government Securities

RBI in its Fourth Bi-monthly Policy Statement for the

year 2015-16, dated September 29, 2015 had

announced a Medium-Term Framework (MTF) for

Foreign Portfolio Investors (FPI) limits in Government

securities in consultation with the Government of

India.

Following this, Securities and Exchange Board of India

(SEBI), had issued circulars regarding the allocation

and monitoring of FPI debt investment limits in

Government Securities. Accordingly, it has been

decided to enhance the limit for investment by FPIs

in Government Securities, for the next half year as

well. A Circular was issued on October 3rd, 2016

revising the limits. The Revised limits are mentioned

in the circular.

All other existing terms and conditions, including the

security-wise limits, investment of coupons being

permitted outside the limits and investments being

restricted to securities with a minimum residual

maturity of three years, shall continue to apply.

Sources: National Stock Exchange

Sources: Bombay Stock Exchange

The Indian rupee on 3rd November, 2016 was trading little

changed against the US dollar in the opening trade. Asian

currencies were trading mixed.

The Federal Reserve kept interest rates unchanged on 2nd

November, 2016 in its last policy decision before the US

election, but signalled it could hike in December as the

economy gathers momentum and inflation picks up.

Foreign investors have pulled out more than Rs. 10,000

crore from the Indian capital market this month, after

pumping in Rs. 20,232 crore in September. Foreign

institutional investors (FIIs) have sold $764.30 million in

debt and bought $6.75 billion in equity till date this year.

Sources: APAS Business Research Team

Sources: APAS Business Research Team

Sources: APAS Business Research Team

8769

8710 8573

8659

8615

8626

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-16

13

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15

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-16

17

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19

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-16

21

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-16

23

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-16

25

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-16

27

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29

-Oct

-16

CNX Nifty (Oct-2016)

28335

2806127674

2813028179

27916

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13

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15

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17

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19

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21

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-16

23

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25

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-16

27

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29

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BSE Sensex (Oct-2016)

14.99

14.86 14.54 14.4515.49

0.00

5.00

10.00

15.00

20.00

25.00

Indian VIX (Oct-2016)

66.55

66.61

66.57 66.83 66.79 66.8566.88

66.20

66.30

66.40

66.50

66.60

66.70

66.80

66.90

67.00

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13

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15

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17

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19

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-16

21

-Oct

-16

23

-Oct

-16

25

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-16

27

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-16

29

-Oct

-16

31

-Oct

-16

$/₹ (Oct-2016)

6.9

6.84 6.82

6.82

6.85

6.856.82

6.89

6.89

6.74

6.76

6.78

6.80

6.82

6.84

6.86

6.88

6.90

6.92

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23

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25

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27

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GIND10Y (Oct-2016)

* The Economist poll or Economist Intelligence Unit estimate/forecast; ^ 5-year yield

Countries GDP CPI Current Account Balance

Budget Balance Interest Rates

Latest 2016* 2017* Latest 2016* % of GDP, 2016* % of GDP, 2016* (10YGov), Latest

Brazil -3.8 Q2 -3.2 1.2 8.5 Sept 8.3 -1.1 -6.4 11.1

Russia -0.6 Q2 -0.7 1.4 6.4 Sept 7.3 3.1 -3.7 8.37

India 7.1 Q2 7.6 7.7 4.3 Sept 5.2 -1.0 -3.8 6.82

China 6.7 Q3 6.6 6.3 1.9 Sept 2.0 2.6 -3.8 2.47^

S Africa 0.6 Q2 0.4 1.3 6.1 Sept 6.4 -4.1 -3.4 8.78

USA 1.3 Q2 1.5 2.1 1.5 Sept 1.3 -2.6 -3.2 1.75

Canada 0.9 Q2 1.3 1.9 1.1 Aug 1.6 -3.3 -2.6 1.19

Mexico 2.5 Q2 2.1 2.4 3.0 Sept 2.9 -2.9 -3.0 6.05

Euro Area 1.6 Q2 1.5 1.3 0.4 Sept 0.2 3.2 -1.9 0.04

Germany 1.7 Q2 1.7 1.3 0.7 Sept 0.4 8.4 0.9 0.04

Britain 2.1 Q2 1.8 0.7 1.0 Sept 0.7 -5.6 -3.9 1.15

Australia 3.3 Q2 2.8 2.8 1.0 Q2 1.2 -4.2 -2.1 2.26

Indonesia 5.2 Q2 5.0 5.3 3.1 Sept 3.6 -2.2 -2.6 7.08

Malaysia 4.0 Q2 4.3 4.4 1.5 Aug 1.9 1.0 -3.4 3.63

Singapore 2.0 Q2 1.0 2.2 -0.3 Aug -0.7 19.4 0.7 1.87

S Korea 3.2 Q2 2.6 2.6 1.2 Sept 0.9 7.2 -1.3 1.61

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Kindly email us your application on info@ap-as.com.

Disclaimer – This informative newsletter has been sent only for reader’s reference. Contents have

been prepared on basis of publicly available information which has not been independently verified

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representation or warranty with respect to the sufficiency, accuracy, completeness or

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