August 31, 2014

Volume 10

India records 2.5 year high GDP growth in

first quarter

Exchange Traded Fund

India’s persistent inflation hurting growth prospects

New Term, New Challenges

While Juniors beginning their Second Term with new zeal and

enthusiasm and Seniors preparing for their End Term Exams, we bring

to you yet another illuminating edition of FinXpress.

This week, the In Focus section talks about the India’s GDP which

grew at a two and a half year high rate of 5.7% for the first quarter. The

Opinion provides how India’s persistent inflation is hurting its growth

prospects.

The term of the week describes "Exchange Traded Fund", a security

that tracks an index, a commodity or a basket of assets like an index

fund, but trades like a stock on an exchange. Do have a look at the

Market and News section to bring yourself up to speed with market

volatility and the reasons behind it. Towards the end “Fun corner” to

juggle with some in trend questions and financial parody.

Club FinNiche welcomes any comments, suggestions or criticism

regarding the magazine. Please do write to us and share your ideas.

Happy Reading!

Regards

The Editorial Team

Club FinNiche

From The Editorial FinXpress Volume 10

August 31, 2014

FinXpress

Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.

FinNiche

AUGUST 2014 Page 1

CONTENTS

From The Editorial

In Focus: India Records 2.5

Year High GDP Growth in

First Quarter

Opinion: India’s Persistent

Inflation Hurting Growth

Prospects

Term of the Week: Exchange

Traded Fund

Market This Week

News

Fun Corner

IN FOCUS

Finally bringing some respite and the much

needed cheer, the Indian economy gave a

glimpse of hope that it is back on track by

recording 5.7 percent GDP growth; a record

high in the past 2.5 years.

Indian economy recorded a 4.6 percent

growth in the fourth quarter and 4.4

percent growth in the first quarter of the

last financial year. The GDP growth

recorded for the last two fiscals was below 5

percent except in the second quarter of the

last fiscal when it recorded a growth of 5.2

percent.

One of the main reasons behind the low

GDP for the last two fiscals was the

faltering growth in the manufacturing

sector. Manufacturing sector saw a decline

of 0.7 percent in the financial year 2013-14.

In the new fiscal year 2014-15

manufacturing sector recorded a 5 percent

growth in May and 3-4 percent growth in

June i.e. positive growth in for three

straight months.

The growth is not contained only to

manufacturing sector but a substantial

growth in other sectors is also visible. The

services sector recorded a growth of 6.8

percent as compared to 6.4 percent quarter

on quarter basis (QoQ).

The industrial sector recorded a growth of

4.2 percent compared to a 0.2 percent

decline QoQ. The mining sector,

construction sector, electricity gas and

water supply, trade, hotels, trade, hotels,

transport and communication all recorded

a positive growth. The highest growth rate

was recorded by financial services sector at

10.4 percent. There was a dip recorded only

in agricultural sector to 3.8 percent as

compared to 6.3 percent QoQ.

FinNiche

India records 2.5 year high GDP growth in

first quarter

AUGUST 2014

—— By Abhinay Gandotra

Page 2

IN FOCUS

Narendra Modi led government can be

attributed to the turnaround seen in the

economy. Relaxing FDI cap in railways and

defense, higher allocations in infrastructure

sector, cutting red tape etc. are some of the

decisions that have helped in reviving back

the growth.

There is not only an increase in GDP for the

first quarter but at the same time inflation

level is also contained around 10 percent

level. Citigroup has predicted that inflation

will further decline to 8 percent in financial

year 2015 and 6.5 percent in financial year

2016. The current account deficit has also

reduced from a staggering 4 percent of GDP

in financial year 2013 to 1.7 percent in

financial year 2014. As per the predictions

made by the Citigroup the deficit is likely to

be contained within 2 percent levels for the

coming financial years 2015 and 2016 also.

Narendra Modi’s promise to make doing

business in India easier with stable tax

policies, speedy clearances especially in

case of forest and environment allocations

has given investors confidence to invest in

Asia’s third largest economy in hope of a

better future after years of declining growth

and increasing inflation. This hope has led

to increase in foreign capital inflows in the

country making Indian market shares the

best performers in Asia this year. Though

still there is a long way to go and Mr.

Narendra Modi has not yet announced any

big reforms that will bring back the

economy to double digit growth. The three

month old administration has set the pace

for the revival of Indian economy. The

challenges ahead are formidable but the

government change has inspired

confidence.

Economists often predict that India needs

at least eight to nine percent of robust

economic growth for creating jobs catering

to the humongous population and the first

quarter results are a step forward.

So going by the notion set by the

government “Achche Din Aane Wale Hain”

presumably it can be said “Achche Din Aa

Gaye Hain” but at the same time the

government should have no feeling of

complacency as there is a long road ahead.

FinNiche

AUGUST 2014 Page 3

Page 4

Opinion

Expected policy reforms and robust

investors sentiment poised India for

accelerated GDP growth ,but inflation

remains high from a global standpoint

weighing down a promising economic

recovery. Even though India's potential for

growth looks better now inflation constrains

its sovereign rating as it keeps domestic

capital costs high, erodes domestic

purchasing power as well as savings and

lowers international competitiveness.

India has been rated as Baa3 with a stable

outlook by Moody’s analytics. Indian

economy expanded 4.6% in the first

quarter of 2014,accelerated 5.1% in the

second quarter of 2014.India's potential

growth is around 6%, but it could move

towards 7% if some modest economic

reforms are enacted. The factor which is to

be worried the most in India’s inflation is

food prices, which can't be controlled with

increase in interest rates. Food inflation in

India is much higher than the global

average. India's consumer price inflation

increased to 7.96% in July, from 7.31% in

June. As food comprises a significant

portion of the average consumer basket it is

a key contributor to India's overall inflation.

India's large, young population and rising

wages among low earners who spend most

of their incomes on food have raised the

demand for food. However, there was no

equal supply response due to poor

irrigation and rural infrastructure, sub-

optimal fertilizer use, and conversion of

agricultural land to alternative uses. Food

supply constraints have been worsened due

to inefficiencies in the government directed

food distribution system.

Inflation trends will depend on policies to

address agricultural supply issues. Indian

authorities recognized that the current

recovery will be difficult to sustain if

inflation persists. Several measures have

been announced by them to curtail food

price pressures which include a

stabilization fund to lower market prices,

greater food price monitoring by state

governments and harsher penalties for

hoarders.

FinNiche

India’s persistent inflation hurting growth prospects

AUGUST 2014

------ By J.Sindhuja

Page 5

Opinion

Though these policies alleviate the food-

price spikes stemming from lower food

output due to this year's relatively weak

monsoon but they do not address the long

term widening of the gap between food

demand and supply. Bridging of this gap

will depend on the implementation of

government plans to re-orient fertilizer

subsidies to encourage best usage,

increase spending on rural infrastructure

and restructure the Food Corporation of

India, which is solely responsible for

executing the government's storage

operations and food grain procurement.

However, the authorities are yet to set out

concrete plans vis-à-vis certain other major

constraints on supply. It is hard to see the

significance of private investment in cold

storage facilities, if current restrictions on

foreign direct investment in the retail sector

remain in place. There is no clarity on

whether officials will substitute the

previous practice of ad hoc trade bans on

food items with a medium-term trade policy

that would enhance predictability in food

supply.

Risk of inflation spreading is high as growth

accelerates. The central government's

efforts to implement effective supply-side

policies may be complicated by the intricate

nature of current agricultural market

practices and the fact that agriculture is a

state-level subject in India's federal system.

But if the gap between food demand and

supply does not narrow, food costs will

keep mounting. In absence of a significant

increase in output of food, the risk that

inflation could limit India's growth

prospects remains salient.

Robust growth in agriculture is key to

India’s economic growth prospects. A

growth rate of 4.8% for agriculture was

projected by prime minister’s economic

advisory council compared to 1.9% last

year. Agricultural growth is expected to

support industry and services, and increase

employment opportunities in rural India.

Pressure on government employment

schemes might also be reduced.

Approximately half of India's workforce is

engaged in agriculture, as it remains the

backbone of the Indian economy. Food

Security Act and the ongoing National Rural

Employment Guarantee Scheme views

greater significance of agriculture’s

performance. The majority of low income,

poor and vulnerable people in the country

are supported by agriculture. An average

Indian spends almost half of his/her total

expenditure on food. Low agriculture

growth pulls down overall growth because

of its indirect connection to industry and

services. There is a low pressure on public

spending and employment schemes due to

rise in agricultural activities. Logically it

should lead to lower inflation for a common

man in urban areas. In rural areas,

demand for employment in both farm and

non-farm activities will be increased.

FinNiche

AUGUST 2014

Page 6

FINANCIAL KNOWLEDGE

Exchange Traded Fund has a similarity

with mutual fund as it tracks an array of

assets, an index or a commodity but it

differs on the point that it trades like a

stock on an exchange. So, in a simple term

we can say ETF—a basket of stocks.

Types of ETF:

In BSE following types of ETFs are traded:

1.Equity ETFs: It is a gamut of stocks that

reflects the composition of an index. E.g.

S&P CNX NIFTY .

2.Gold ETFs: This tracks the price of Gold.

E.g. Birla Sun Life Gold ETF

3.Liquid ETFs: The objective of Liquid ETF

is to provide money market returns. E.g.

Goldman Sachs Liquid ETS.

Trading of ETF:

Like any other stock ETFs can also be

bought or sold through any trading

terminals. All clearing and settlement

activities are performed through stock

exchanges. Therefore in case of any

untoward situation the exchange provides

immunity to the investors. ETF units can

be utilized for paying margins to the stock

exchange.

ETF and other Financial Instruments:

Trading value of ETF entirely depends on

the underlying net asset value (NAV) of the

stocks that it represents. The NAV of ETF

changes in real-time whereas NAV alters on

daily basis in case of Mutual Funds.

Besides, throughout the day price change is

observed for ETFs whenever they are

bought or sold. Futures trade much larger

in size when compared to that of ETFs.

Pros and Cons of ETFs:

In recent times ETFs have become coveted

financial instrument for the following

reasons:

Diversification: ETFs can track wide

range of stocks including multiple

sectors, companies and market

segments.

Lower cost: Expense ratio is quite

lower compared to other managed

funds.

Stock-like: ETFs can be traded in

similar fashion like a stock trading.

Reinvestment of Dividend: Dividends

of open-ended ETFs are reinvested

immediately.

Capital-Gain tax: ETFs are more tax-

effective when compared to others.

Price fluctuation: Due to the

involvement of arbitrage price cannot

fluctuate much beyond its actual

value.

There are demerits also.

Dividend yield: Dividend yield may not

be as high as having high-yielding

stocks.

Actual cost: once compared to stocks

actual cost comes out to be higher

for ETFs.

Intraday pricing: For long-term

investors this intraday-pricing is a

deterrent.

Considering all these aspects we can

comment positive aspect of ETFs outweigh

few demerits of this comparatively new

financial instrument, first introduced in US

in the year 1993. ETFs facilitate investors

to gather wide exposure to different stock

markets with relative ease, on a real-time

basis and at a lower cost. Hence, we can

say ETF has created a new investment

opportunity for all sorts of investors.

FinNiche

ETF: Exchange Traded Fund

AUGUST 2014

Page 7

FINANCIAL KNOWLEDGE FinNiche

Market This Week

This week the Indian markets have shown a turn of events which triggered the entire

market volatility. With the reforms slowly coming into picture and the harsh fines

which were imposed on DLF and the automobile companies threw a gambler’s dice into

the market. The sentiments were not respected last week as scripts fluctuated for about

5-8 % and some even like DLF had shown a downfall.

Though the domestic markets were not stable still they stayed on the higher side and

sentiments of positivity moved with all rise as the spokesperson of Citi Bank showed

immense confidence to invest in the Equities of Indian listed companies. Long Term in-

vestments still stay an unturned stone as speculations persist about the expected turn

around in the Indian indices.

SENSEX Simple Moving Averages

BSE SENSEX

CNX Nifty

Thirty Days 26,626.69

Fifty Days 26,625.98

Hundred Days 26,614.99

Two Hundred Days 26,544.86

AUGUST 2014

Page 8

FINANCIAL KNOWLEDGE FinNiche

Bank Rate 9.00%

Repo Rate 8.00%

Reverse Repo Rate 7.00%

Cash Reserve Ratio 4%

Statutory Liquidity Ratio 22%

INR / 1 USD 60.48

INR / 1 Euro 79.86

INR / 100 Jap. YEN 58.27

INR / 1 Pound Sterling 100.35

Commodity Unit Rs / Unit % Change

Gold 10 grams 27,996 -0.28

Silver 1 Kg 42,255 -0.35

Crude Oil 1 bbl 5,831 1.22

Base Rate 10.00%-10.25%

Savings Deposit Rate 4.0%

Term Deposit Rate 8.00%-9.25%

Nifty Simple Moving Averages

Commodities

Lending / Deposit Rates

Thirty Days 7,952.77

Fifty Days 7,953.31

Hundred Days 7,950.42

Two Hundred Days 7,930.63

Key Policy Rates and Reserve Ratios

Exchange Rates

AUGUST 2014

FINANCIAL KNOWLEDGE

RBI eases procedure of ECB refinancing

The Reserve Bank of India has eased the

refinancing procedure of external

commercial borrowings where borrowers

can repay any existing debt by raising fresh

ECB at lower all-in-cost but subject to the

condition that the outstanding maturity of

the original loan is maintained.

"It has been decided to simplify the

procedure by delegating powers to the

banks to approve even those cases where

the average maturity period of the fresh

ECB is exceeding the residual maturity of

the existing ECB under the automatic route

but subject to some conditions," RBI said in

a notification on Wednesday.

ADB to provide up to $9 billion loan to

India over 3 years

Committing to support infrastructure

development in India, Asian Development

Bank today said it will provide up to 7-9

billion loan to the country over the next

three years. "ADB's operations for India will

maintain high level of lending, amounting

to a total of $7-9 billion over the next three

years," ADB president Takehiko Nakao said

Besides, the multilateral funding agency

will provide around $30 million for

technical assistance grants, especially for

building institutions and capacity at the

state as well as the local levels.

Signing of India-ASEAN FTA

Eager to expedite the implementation of the

free trade agreement with the South East

Asian countries, India will soon propose

circulation process for signing the pact in

services and investments with the ASEAN.

Under the circulation process, each

member will separately sign the agreement

and it will become effective only after the

last member signs the pact.

RBI eases norms for overseas investors

buying government bonds

The Reserve Bank of India has eased norms

for overseas investors buying government

bonds, allowing them to invest directly in

secondary market debt. "Consequently, the

eligible investors can acquire such

securities in any manner as per the

prevalent/approved market practice. "With

a view to provide flexibility in regard to the

manner in which government securities can

be acquired by eligible investors, it has now

been decided to remove any stipulation as

to the manner of acquisition from the said

regulations."

Startups in a fix over RBI’s extra

verification circular

Startups operating through foreign

payment gateways that allowed them to

sidestep the mandated two-factor

authentication are in a quandary after the

Reserve Bank of India recently insisted on

additional verification for all credit.

Besides the US-based taxi hailing app Uber,

this move by the central bank is expected to

FinNiche

NEWS

AUGUST 2014 Page 9

FINANCIAL KNOWLEDGE

affect companies that have subscription-

based business models and those that sell

software and applications on Google and

Apple stores, among others. In addition to

additional authentication, the central bank

also wanted transactions to be carried out

in Indian rupees and not dollar.

Petrol price cut by Rs 1.82 a litre, Diesel

hiked by 50 paise

Petrol price was on Saturday cut by Rs 1.82

a litre, the third reduction in rates this

month, but diesel rates were hiked by 50

paise per litre. The revised rates are

effective from midnight tonight, oil

companies announced on Saturday. With

international oil rates on the decline, petrol

price was cut by Rs 1.51 a litre, which after

including local sales tax or VAT translated

into a reduction of Rs 1.82 a litre in Delhi.

PM Narendra Modi's 100 days: Smart

cities set for take-off, state governments

asked to identify cities

Among PM Modi's pet plans, few would be

more significant to India than building 100

smart cities, as the country is in the middle

of a massive wave of urbanization. Modi

was smitten with the idea of a smart city

long ago, and he had set the ball rolling in

Gujarat with the Greenfield Gujarat

International Finance Tec-city (GIFT). This

venture is now proceeding rapidly, as it has

been allotted 11 million square feet for

construction. As he moved to the Centre,

Modi started work on implementing the

idea all across India. It is among his few

plans that are moving smoothly ahead.

India Inc. to spend Rs 2,000 crore on ads

during Onam-Diwali

“Achhe din” are almost upon us — this

festival season will see India Inc. spending

over Rs 2,000 crore on advertising,

marketing and promotions, which will be a

five-year record, and a sharp contrast to the

pessimism of past few years. ET spoke to

scores of companies, media planners and

advertising agencies, and they were

unanimous in predicting a record spike in

advertising spends.

Indian School of Business to launch Big

Leap Club for North India-based SMEs

The Indian School of Business (ISB)

announced the setting up of a 'Big Leap

Club' meant exclusively for SMEs spread in

and around Punjab, Haryana and Himachal

Pradesh to help them get access to the best

industry practices. The objective of the Big

Leap Club is to help small and medium

enterprises (SMEs) get access to the latest

and best practices across the world,

interact with ISB and international faculty,

network with leading industry experts and

leaders from large Indian corporates and

MNCs.

FinNiche

NEWS

AUGUST 2014 Page 10

FinNiche

FUN CORNER

FinQuiz

1. _________ is a measure of continued rise in the

worth of an asset.

2. _______is a set of conditions against which a product

or business is measured.

3. ________ is amount paid by the bond at maturity.

4. ________ is when a business funds growth is purely

from personal finances and revenues from the busi-

ness.

5. IFC is headquartered at __________.

Last Week’s Answers

1) Tarini Vaidya, KBC Bank of India and South Asia

2) Part of capital not repre-sented by assets

3) Ticker 4) Covenant 5) Economy

CARTOONS

FUN CORNER

Page 11

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AUGUST 2014

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August 2014