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NAL$T
Presented by SCMHRD
June 2011 Send us your feedback to financeclub@scmhrd.edu
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In Focus: Is Indias Economy Overheating?

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Editorial
Hello everyone, Like always activity in the financial world is at its peak. In the backdrop of high political activity with the results of the state elections, 2G scam and almost perennial inflationary pressures estimated to be around 6% by the next year, the economy is going through a mixed phase. Recently, weve all witnessed extreme volatility in crude oil, metals, currencies, global stock markets, commodities markets wherein the much sought-after Silver dropped by 30%. Although Investor confidence has been declining in the equity markets, RBI continued to tighten its monetary policy by increasing interest rates. However certain measures like introduction of marginal standing facility, 3 month span for short selling in g-securities are sure to boost some activity in the money market. Apart from this the one of the valuable web assets, Skype, is now owned by Microsoft, giving it a head start over Google and Facebook, however whether it translates to good news for free VOIP users, as the company contemplates to charge a price for it, is yet to be discovered.
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Economy
F!NAL$T | June 2011
Inside this issue:

Cover Story: An Overheated Indian Economy Politics: The Economics of present day Politics Financial Jargon: The Bubbles Commodities: Rise of Silver Economy: Crude Oil Corporate View: India and Africa: Brothers in Arms by Mr. K.A.Ramana, PwC Tte-a-Tte: An Interview on Banking sector with Mr. Kamal Batra, IndusInd Bank Debate: Deregulation of Savings Bank Deposit Rates 4 6 8 12 14
An Overheated Indian Economy

It is that time of the year when the heat is on! Temperatures are rising much more than ever before and the weather gods are in no mood to offer any respite. And we arent the only recipients of these hot waves, this scorching heat has pervaded in our economy too. Amidst the global recovery and restructuring reforms, there have been alarms raised by various economists indicating that we are witnessing an Overheating Indian Economy. And this has been attested by the most influential multilateral organization - International Monetary Fund (IMF). An economy exhibits signs of overheating when the productive capacities are unable to keep pace with the increasing short term aggregate domestic demand. An overheating economy is preceded by an unsustainable high economic growth rate due to greater economic activity and higher disposable incomes. But lack of adequate supply to suffice this increasing aggregate demand leads to emergence of inflationary pressures and consequently higher interest rates which leads to reduction in investments and thus lowers economic growth indicating the most dreaded recessionary trends. The question arises if Indian economy is really overheated? And if it is, what is the way forward? However IMF in its latest World Economic reduced the growth projection for India for 8.2% from its earlier forecast of 8.4%. In expects economic growth to further soften from its earlier projection of 8%. Outlook 2011 to 2012, it to 7.8%
Excerpts:
IMF officials said, Growth in India is expected to moderate, but remain above trend, with GDP (gross domestic product) growth projected at 8.25% in 2011 and 7.75% in 2012. Also the Organisation for Economic Co-operation and Development said in its recent release that the composite leading indicator for India for February continued to point towards a slowdown in the economy. The aggregate demand is constantly increasing and the credit dynamics suggest that the bank credit has grown at a higher-than-expected level of 21.4 per cent (yearon-year) during 2010-11 (up to March 25) with credit demand becoming broad-based every month. Strong momentum is being seen in both the working-capital and term-loans led demand reflecting robust economic activity. Although credit demand has picked up in recent months, it will take some time for this to get translated into actual capacities that would help satisfy growing requirements of Indias ever-expanding middle and upper middle classes. Nonetheless, from a five-year perspective, per capita real credit growth has been very buoyant, with much flowing into real estate and large infrastructure projects. Commercial loans rose 23% from the previous year as of 11 March, more than the 20% rate prescribed by RBI. Though this economic growth is inevitable, one of the major hindrances to the same is Inflation. The inflation index was around 10.9% for the year 2010. This is well above the RBIs acceptable limit of 5-6%. Though efforts are being made to recede the growth of these inflationary trends, the prices of essential commodities have been increasing sharply leaving the common man to bear the brunt. The deregulation of petrol prices have provided a license to the oil firms as they have increased the prices more frequently in the last year
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Our June issue reports facts surrounding the recent biggest news about elections in West Bengal and what would the Trinamool Congress-Congress alliance mean for India and what could be the economic implications of this result. Another interesting read pertains to the current stage of our economy which has prompted various economists and the IMF to downgrade their growth estimates. Various doubts prevail about the Demand-Supply dynamics in the economy and if events like constantly increasing interest rates to tame the inflation, etc are leading our economy to an
overheated state.
Despite these concerns, over the years India has emerged as a strategic investment destination by various multinationals for conducting their business activities. This has ensured that a spate of 2-way mergers and acquisitions by Indian companies abroad in countries like South Africa, Bharti-Zain being a notable one. There have been a series of synergistic partnerships among the two countries. Our issue presents to you a close insight on the partnership of the two countries which is penned by an industry expert Mr. K.A. Ramana from Pricewaterhouse Coopers. Our issue also throws some light on the common mans woes- the ever increasing crude oil prices and the way in which it is impacting our economy. The rise and recurrence of Bubbles is captured in our article on The Bubbles which very interestingly traces all the Bubbles that the world has witnessed in a chronological order. Our debate section presents views on whether or not the saving deposits rate be deregulated, presenting both sides of the coin. And lastly, with our summer interns in various companies networking with the top honchos of the industry, we have an interview from Mr. Kamal Batra from Indusind Bank. Hope all these new relationships built go a long way in our professional lives. We hope you enjoy reading this issue and we sincerely await your suggestions and feedback on the same.
Backed by strong economic fundamentals Indian economy has experienced a high economic growth of 8.6% in the last financial year. The Financial Minister Pranab Mukherjee vouched for an optimistic number of 9.1% for the current financial year in his 2011-12 Union budget speech.
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Economy
totaling to a staggering 20%. At the last count Indias inflation rate (WPI) rose sharply to 8.98 per cent in March, 2011 way above the RBIs projection of eight per cent. The Industrial production growth has slipped markedly to a mere 3.6% as per February 2011 from a high of 15.1 per cent posted during February 2010. With demand staying at elevated levels, the manufacturing sector has been able to pass on these cost pressures to final consumers. For instance, manufactured product price inflation has steadily risen from 4.90 per cent in November, 2010 to 6.21 per cent in March 2011. With the current supply chain infrastructure, the supply side will continue to look weak in the near future. Hence the only way out to contain the ever increasing aggregate demand and the consistent spurt in prices is the monetary policy review by the RBI. This has led the RBI to resort to the use the only possible tool under its control i.e. to increase the interest rates and it has done so eight times in the last financial year by 200bp. It recently raised the rates again by 50bp as against the expected 25bp thus serving a big blow to the investments and credit in the country. But rising interest rates may not act as a major deterrent to credit expansion, since credit growth in the past has been strong when interest rates were rising. Today, the real drivers of credit are domestic demand and an upsurge in global trade volumes.
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Another interesting contributor to this situation can be the wage inflation, it is condition where in higher wages or increased wages chase little goods available in the market and causing increase in the prices of the goods and in turn putting pressure on wages to hike. Under the National Rural Employment Guaranty Scheme (NREGS), which government announced in 200 rural households are guaranteed for 100 days work in a year with the minimum 100 rupees wage per day. This has been the biggest contributor to the rural income and expendable amount in rural hand considering more than half of the Indian population is in rural areas. This has lead to more spending from rural India, contributing to the increase in the overall demand by their urban counterparts. RBIs move to constantly increase the interest rates would definitely curtail the domestic demand to an extent but it will have greater repercussions on the investments by the industry. This reduction in investments would again impact the supply side for the non-agricultural products and thus lead to the inflationary trends. Hence monetary policy is not the only tool to deal with overheating. Close coordination among monetary, fiscal, trade and investment policies is vital to address the medium-term growth challenges infrastructure, agriculture, sustaining the FDI/FII flows and put India on the path to sustainable development with low inflation like its most popular counterpart- China.
Politics
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The Economics of Present Day Politics

It was Mothers Day, 2001, when the J. Jayalalithaa-led AIADMK was elected to power in Tamil Nadu. Earlier, Amma (meaning mother) was disqualified from contesting the election, having been convicted in a corruption case. The massive victory was attributed to a consequent wave of sympathy towards her. Ten years later, a similar victory, as unprecedented! 147 wins out of the 160 seats contested, she left her rival DMK, and its ageing leader, gasping! Another matriarch, Didi, to her followers in West Bengal and beyond, single- handedly demolished the Communist citadel in the routinely-Left-voting Kolkatagrad, as many non-Leftists would derisively call it. Such was the thirty five year old Communist stranglehold over the Bangla voter that not just ten or five, but even two years ago, any person predicting such a change would have been laughed at. But Mamata Banerjee, with all her grit and determination, never gave up! erstwhile Cabinet colleagues, who had rebelled against him. Kerala, though, was a mixed bag the incumbent CM lost his government, but was the only victor in the election! In the absence of any unidirectional wave to suggest why the voters chose to vote as they did, one has to appreciate the underlying currents and the economic factors in these states. Perhaps the voters rejected those like the DMK in Tamil Nadu, who did the right things the wrong way. Its government performed well on socialist welfare schemes, whose commitment to the underprivileged had to be matched by effective wealth redistribution. Its ministers at the Centre brought funds for schemes, new investments, and many job opportunities. The booming Textiles and IT sectors were also encouraged and did well. The Congress-DMK combine won 26 of 39 seats in the 2009 Lok Sabha elections. Yet something happened in the last 2 years? The enormous 2G scam came to light and its links spread to former Telecommunications Minister A. Raja and the CMs daughter, Kanimozhi. Even, the Congress was defeated in Sriperumbudur where Rajiv Gandhi was assassinated and held by it or an ally for the four elections since his assassination by the AIADMK this time. At the leadership level, it was alleged that the Chief Minister and his family were the unintended, yet, largest beneficiaries of most of the welfare schemes. It was too late for Chief Minister Karunanidhi to do anything to reinforce that DMK stood for Dravida Munnetra Kazagham, and not Delhi Money for Karunanidhi. In West Bengal, after the sweeping land reforms and improved agricultural productivity, successive Left governments could do little to address the economic malaise that had set in. Investments were not coming in and the state was paying 96% of its revenue on salaries. In addition, nearly two generations of Bengalis had grown up in schools where the medium of instruction was not English, an essential in todays fast globalising competitive environment. Stressing on the mother
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Sumit Dawra SCMHRD MBA 2010-12 In contrast, there was a verdict for continuity in Assam, where voters chose to reaffirm their faith in Tarun Gogoi ten years after they first elected him. He provided them with unbroken peace, economic growth and development; despite whispers of corruption, after nearly two decades of killings, bombings and intra-state strife. Even in Puducherry, people chose to put their faith in the three-month old party of a simple unassuming cycle-travelling CM, who governed their state for seven years, but quit his parent party due to inner squabbles. Not just this, they punished his
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tongue and the regional culture was right, but not at the cost of stifling aspirations of the people. The economic upliftment that was to be the second generation reform in West Bengal, which Buddhadev Bhattacharjee tried to decisively to address in his first term as CM. He brought investments in IT, and to prevent any trouble for the IT sector, declared IT to be an essential service. There was a new buzz in the industrial circles with his promise to rein in the militant trade unionism. The youth lapped it up, giving him thumbs up in the state elections in 2006, giving his government a 4/5ths majority. But Nandigram, Singur and his brazen attitude (They will be paid back in the same coin, he said for the people of Nandigram). Ultimately he faced defeat in his own seat, at the hands of one of his own trusted former officers. In Kerala, the voters have rewarded some good or even transformative work. 32 of the state PSUs have posted profits amounting to nearly Rs. 240 crores in 2009-10, compared to approximately Rs. 60 crores by 24 out of 37 PSUs in 2006-07. The combined turnover had increased by nearly 50% during the same period. Amazing work, one would conclude! That such growth has been aided by debt, not capital expansion this under a Leftist government is ideologically transformative. So why did the Left not be re-elected? Maybe because it did not learn from the mistakes of the BJP. It is important to look back to December 2008, when the Vasundhara Raje-led BJP lost the elections to the Rajasthan Legislative Assembly. The then national leadership of the BJP, including L. K. Advani had publicly called it a hit-wicket --- the party could not support its leader as well as it should have. Similarly, five years of bitter rivalry between the state unit and the government, after which VS was demoted from the Politburo of the party. Further, VS had also been denied a ticket till the very last minute and the price was paid by the LDF in Kerala. It was a lesson to the AGP and the BJP in Assam, who
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performed very well in an alliance against the Congress during the Lok Sabha election, but chose to contest separately now. The people overwhelmingly voted for the tried and tested Tarun Gogoi, who promised more economic fruits of peace and greater prosperity. It was a handicap of the Opposition who could not find a credible face to promise delivery of better governance. Similarly, even in Puducherry, the voters decided to back a CM who delivered well on the economic front consistently even if this meant punishment for the party he led in power for so long. What do these trends portray for the national scene? Are we headed into the era where economics will determine politics? After all, from Uma Bharati, Vasundhara Raje and Sheila Dikshit in 2003, to Nitish Kumar in 2010, we have seen strong regional satraps get elected and re-elected on the back of welfare economics aided by higher revenue realizations on account of VAT. Are these polls a reinforcement that good economics in our country has to be not just welfare, but welfare through proper means? Perhaps, they are. People have resoundingly approved good governance, and are encouraging politicians to think innovatively and reinvent economic policies for greater, larger and faster common good. They are rewarding politicians who are able to deliver a workable ecosystem, in which people can enjoy the fruits of an enabling economic environment, along with other essentials like rule of law, public order and regulation. A larger message is that reforms have to continue. The people need to be given an opportunity to overcome their deprivation. But in several of these cases, though it is good economics that is bringing about positive results for the performers, the importance of identity has not totally disappeared. It was growth-plus-Gujarati pride for Narendra Modi; it was governance-plussympathy that swept B. S. Yeddyurappa to power. For a continent-sized diverse country like ours, politicians should ensure that the stress is always on good economics, while the identity and emotion part of this equation does not get out of hand. Jatin H. Gajwani SCMHRD MBA 2010-12
Financial Jargon
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The Bubbles
But all the bubbles have a way of bursting or being deflated in the end. Barry Gibb The areas of consensus shift unbelievably fast. The bubbles of certainty are constantly exploding Rem Koolhaas Stock Market bubbles dont grow out of thin air. They Stock have a solid basis in reality, but reality as distorted by a misconception. George Soros The word bubble is said to have a Scandinavian origin candinavian which is not far from the origin of asset price bubbles which we are about to discuss here. Arguably, the first asset price bubble was recorded in Netherlands more popularly known as The Tulip Mania.
Source: The tulipmania: Fact or artifact? Earl A. Thompson
months the prices came crashing down leaving many people in ruins.
The Tulip Mania

Tulips were introduced in Europe in early 16th century. The flower introduced by the Ottoman Empire gained popularity in the present day Netherlands (then known as United Provinces). As the flower gained popularity the Source: Verzameling Van Een demand multiplied and so did Meenigte Tulipaanen - P. Cos the prices. They were classified as single single-coloured and multicoloured. The flower became a status symbol for the families of the country. Semper Augustus bulb was the most admired and desired variety. As the demand increased the prices of d the Semper Augustus spiked. According to some estimates the price of this variety at its peak in 1637 was almost equal to a cost of fine house in central Amsterdam. The cause of this spectacular spike cannot be attributed to the demand alone. French traders emand entered the markets seeing an opportunity to make extraordinary profits. They began to speculate in the futures market which is said to be one of the main reasons of the spike. It soon became clear that the traders who were driving the prices upwards were ing actually not going to buy the bulbs. Hence in February the collapse of the prices started. Within a span of few s
What started with Tulip mania, the rise and fall of asset prices, also known as asset price or economic bubbles, has now been repeated many times. Sometimes leaving insurmountable losses and sometimes bringing entire nation to its knees.
The Varieties
Economic bubbles come in many varieties and forms. The most notable economic bubbles in various markets are listed below.
Stock market bubbles

The stock market bubbles are fast and they result in tremendous loss of wealth in quick time due to the liquid nature of the stocks. Some of the most Prominent Stock market bubbles are listed below. Mississippi Company: John Law, credited with invention of stock markets, was a Scottish Businessman who persuaded the distressed French Government to let him open a bank which would issue bank notes and in turn n reviving trade and commerce. Louisiana was French colony in America. In early 18th century, John Law bought the then derelict Mississippi Company. The company obtained monopoly on trade with North America and West Indies for 25 years. To raise money nd to fund companys activities John Law issued shares in 1719. The shares could be purchased by bank notes or government bonds. The growth of company spurred more and more excitement about the prospects of the company. The share price rose sharply. Law issued any. more bank notes for enable people to buy shares. The
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Symbiosis Centre for Management and Human Resource Development mbiosis
Financial Jargon
price at the end of the year increased by the factor of 20. At the beginning of 1720 the shareholders started booking profits by selling shares for gold. The initial euphoria died down and heavy profit booking ensued. The shares reach tenth of their peak value, less than half of its issue price. The fatal flaw of printing money without any collateral had done the company and John Law in.
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Financial Jargon
Real Estate bubbles
The real estate bubble is also called property bubble or housing price bubble. It was historically believed that the only way for real estate prices is up. But many recent incidents do not support the hypothesis. As compared to the stock market bubbles the real estate bubbles are slow in nature. The prices increase rapidly over a short span of time and when the bubble bursts the prices decline gradually over a long period of time. Even this cycle cannot be generalized for all the cases. As real estate is less liquid than other assets the ss collapse occurs much slower than a stock market collapse. The real estate bubbles sometimes occur at a local level (e.g. Japan) and sometimes affect the entire globe (e.g. US subprime crisis). The most notable housing price bubbles are listed below: The Japanese housing price bubble of 1990: is still affecting Japanese economy. During the hay days of Japan in 1980s, great amount of trade surpluses were generated. The yen appreciated. Appreciation of Yen combined with financiall deregulation, resulted in euphoria about the economic prospects. The liquidity increased and banks started giving risky loans. This resulted in sharp appreciation of housing prices and stocks. The aggressive policy adopted by Japans central bank set its real estate prices and stock markets into a downward spiral. The slump in the Japanese economy is believed to be one of the longest in the worlds tryst with economic collapses.
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due to the subprime nature of le lending. Soon the investment banks who dealt in complex derivatives started to feel the heat. Lehmann Brothers, which had highest exposure to such derivative instruments, went insolvent. Many other banks felt the heat too. The default on home loans trigge triggered a collapse of the entire banking system. As the liquidity dried up, it became difficult for businesses to find working capital loans and hence sustain their businesses. The world was on a brink of economic collapse.
The Great Depression: The American stock bubble which burst during 1920s. It was the era of technological innovations.
Source: From John Law to John Maynard Keynes by Steve H. Hanke
Source: Standard & Poor and Fiserv
South Sea bubble: South Sea was a British company which had obtained monopoly of trade in South Sea in return for assuming a portion of national debt that was accumulated on account of war with Spain. The idea was to trade with the rich Spanish colonies after the war was won. The war ended in 1713 but not for long. In 1718 the war broke out again between Spain and England. This time South Sea proposed to assume entire National debt and with persuasion of influential people the proposal was accepted. New shares were issued and the share prices started their northward journey. Due to trading prospects with the New World many companies were set up. Some were just on paper to leech investors money. This dented confidence in the market. To restore confidence in the markets The Bubble Act was passed which mandated all the companies to have a royal charter. It is here that the first time a bubble was associated with economics. This did the trick though and the share price of the company increased five times in just four months. But soon gravity caught up and reality started to sink in. The shares started losing their value and soon the company became worthless.
Other Asset price bubbles ther

Bubbles are also formed in the in other asset classes including commodities. As a matter of fact the first ever recorded bubble is was in a commodity i.e. The Tulip Mania. The advent of futures contracts has had a major role in formation of bubbles in the commodities. The futures were basically invented to protect the stake holders from wild price swings in the underlying commodity. Hence they were used for hedging. Futures contracts are said to be helpful in determining the real price of the underlying assets due to high volume nature of its trading. But the result is often undesired when the game of trading turns into wild speculation. This phenomenon is also called as irra irrational exuberance or speculative mania. The term Irrational Exuberance was first coined by Alan Greenspan, the former chairman of US Federal Reserve, to describe the housing price bubble in Japan. Some of the most spectacular bubbles in the history of commodities are listed below: mmodities The Uranium bubble of 2007: The prices Uranium started appreciating in 2003 on back of increasing demand. This rise in prices resulted in increased mining activity. In 2006 there was a flood in the Cigar Lake
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Source: Helmsman Economics Ltd. 2010 The Dot-com bubble: The emergence of internet and technology companies. The bubble burst in 2001.
Source: fireworksproject.com
As much has been written about The Great depression and The dot-com bubble, going in detail here would be unnecessary. Apart from these bubbles there have been several bubbles in the stock markets. Most of these bubbles are country specific and affect the particular countries though that may not be the case every time.
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Source: marketoracle.co.uk
Source: www.businessinsider.com
The US subprime crisis of 2007: In the US, the general myth about housing prices prevailed that they had only one way to go and that was up. The low interest regime made home loans very attractive. The banks started disbursing sub-prime loans. The default rate increased prime
Financial Jargon
Mine, which is said to be largest undeveloped Uranium deposit. This caused concerns for short term supply of uranium and the prices appreciated by a factor of 18. But in mid 2007, the fears of uranium supply were allayed, causing uranium prices to fall and leaving many companies out of business.
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debated. Some of them are as follows: Easy Money: Easy credit was one of the major causes of the US Subprime crisis. Easy availability of money lures people to buy beyond their capacity which would result in default and in turn a crash. Irrational Exuberance: Excessive speculative fervor. Greater fool theory: Tendency to buy overpriced assets in order to sell it at even higher price to another speculator. Herd mentality, Mispricing of assets, excessive inflation of demand and projecting past in future without considering situational parameters are also causes of formation of bubbles.
Commodities
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Rise of Silver
The white metal soared meteorically to surpass the mark of Rs 70,000 in April 2011, the highest, one had seen in the last 30 years. In the past one year silver has risen by 171% with a few fluctuations here and there. It increased by 50% since the beginning of current year. Globally the demand for silver stood at 178 million ounces in 2010, nearly six times the demand in 2004. Silver holdings in iShares Silver Trust (SLV), the biggest listed Exchange traded fund backed by physical silver, increased to 11053 tonnes. In last week of April and first of week of May the ETF had an inflow of $500 million, almost 3.2% of its net assets, depicting the interest of retail investors in the metal. This new trend that Silver has shown since 2010 has caught the analysts attention, and it remains to be seen whether this metal will remain poor mans gold anymore or not. Demand for silver jewellery grew by 5% in 2010 over 2009; demand for investment grew by 26% which includes the demand for coins. In fact in 2010 silver had outperformed the returns generated by gold by three times. Post the 2008 global financial crisis, there has been a rise in investments in commodities. The world saw weakening of dollar as US went on bailing its own economy by offering nearly zero interest rates and with Fed purchasing bonds. The money got channeled into the commodities market which has been outperforming the equities or currencies markets since then. Bracket this with the downgrading of US debt-rating outlook to negative by Standard and Poor, crises in middle east countries and the consequent rise of crude oil prices, the nuclear disaster in Japan which has caused China to increase its focus on renewable energy and build more solar panels in the mid and long term, the European sovereign crises and the inflationary pressures in developed and emerging markets. In fact one can attach almost any geo-political reason to this volatility in silver prices and it would still seem plausible.
Source: gold-speculator.com
The Oil Price bubble of 2008 : The slowing down of western Economies on the back of US subprime crisis and the ever increasing thirst of China and India for oil, led to commodities becoming the in thing. Due to this the price of Oil sky rocketed from around $92 per barrel in January 2008 to a high of $147 in July. The collapse of the banking industry cut short this Bull Run abruptly. The liquidity crunch sent the oil prices into a downward spiral. The price at the bottom quoted below $40 in December same year.
The Next Bubble

Some people make astonishing heaps of cash by speculating during these times but at the cost of many who go insolvent. Whenever an asset appreciates too fast, there is something to look out for. Nothing man made can defy gravity forever. It always pays off to be careful. The economic bubbles are like Mandelbrotian Gray Swans, a term used in the book The Black Swan by Nicholas Nassim Taleb. It means that economic bubbles are black swans that we can account for. For example, just as we know that earthquakes are bound to happen, economic bubbles are there to be formed and burst. But we cannot predict its properties and give precise description. Even as I am writing this article there are speculations going on in the financial markets of the world. The bubbles may be forming or are about to burst. The stage is set. The time is ripe. Chinese real estate or the spectacular rise in the prices of palladium or oil or something out of the blue, only time will tell. Manan Patel MDI Gurgaon PGPM 2010-12
For the reasons mentioned above and also the ongoing domestic marriage demand, silver prices had reached the highest on April 25 for the first time in 30 years. No sooner had it reached the peak, the silver price slipped by 25% in the next two weeks owing to $6 per ounce drop in contracts traded on COMEX after its parent CME raised margins. This sudden spike and sudden plummet of the silver prices is confounding the investors and pundits alike, who are not able to attach any definite pattern to it. This sudden fall in silver prices is thought to be caused by the non-participation by the European market due to shortened week, and killing of Laden, which caused the investors to predict that US would be expending lesser on defence and its real economic growth. The real economic growth in US is seeing the investors to shift to strengthening the US dollar; these were the investors who had seen commodities as an alternative option to weakening dollar post the 2008 financial crisis. The essential question is, whether there is really a scarcity of Silver or have the uses for the metal suddenly been discovered? It is not the ultimate reserve currency like gold nor does it hold the same place as gold in global economy. While the silver prices are spiraling, analysts are trying to attach any possible explanation to this, rising crude oil price, emerging markets, strengthening of dollar etc. Yet there is no credible answer to this, because silver unlike gold is not any standard. One can purchase it in physical form and end up paying a transaction cost of 15% on it, but it is not an asset that is handed down to generations. A sect of investors feel this is just a bubble that occurs with every metal, but the question is would copper or aluminum make to the headlines if it had gone through the same cycle considering the fact that their industrial uses are also very high? It is really the retail investors interest in this that puzzles the experts. Agreed, silver finds its uses in the industry, photography, food and jewellery. Under commercial demand, silver finds its uses in electronics, auto, brazing alloys, solar panels, photography and investment products (physical and non physical). The silver supply comes from mining, net government sales, old scrap sales and hedging, if any. With mining costs continuing to be high, and as prices
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Source: businessinsider.com
The Cause
The statement history repeats itself cannot be truer as is in the case of economic bubbles. There have been so many instances where greed has taken over prudence. However, human nature does not change. Every time an asset price starts appreciating it is said this time it is different. But the fact remains that It is always the same. There may be many causes for the formation of bubbles and the real reasons are still
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Commodities
rise, net producer hedging and old scrap sale would become the major sources of supply. In 2010 old scrap supply increased by about 15%. Globally there is no shortage of silver, hence the rising silver prices contradicts the macroeconomic principle that longer-term price equilibrium is a result of demand and supply. There is going to be a surplus of silver of around 5000 tonnes per annum for the next five years at the least. So the rise of silver prices is more because of sentimental and speculative behaviour of investors and aggressive pocketing by seasonal traders.
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and a statement from European Commercial Bank ECB that inflation would be watched closely. Killing of Osama, and ECBs inaction on raising key interest rates again saw a spike served as an excuse to book profits. This is the bad part of it. The ugly side of it is that silver has proved to be volatile even in the past. What makes the situation foggier is that few people actually have knowledge of commodities market and fewer still have knowledge about silver. When silver prices fall suddenly it is hard to say if it is due to demand shock or sudden liquidation of other commodities to book margin calls in silver. Analysts have requested investors to be wary of this metal as there might be more correction and in the past, silver has shown hard hitting price reversals. The price of silver in the short term is extremely volatile due to unsustainable speculative demand or unwinding of speculative long positions in times of sharp US dollar appreciation. In the longer term if and when some of the global uncertainties may disappear and inflation surges, leading to lower investment demand, the price of silver may nose dive. The gold-silver ratio stands at 32, a 26-year low, Vis a Vis the long-term average of about 55, hinting at a switch from silver to gold on cheaper relative valuations. The next stop for silver is anyones guess, because it is a volatile and thinly traded market, also much speculation depends on the strength of US dollar. With US dollar strengthening again due to real economic growth, investors who had considered silver as an alternative may now shift back. It is quite possible that the peak of silver has been hit. Recently, extreme volatility has been seen in the commodities market as prices fell ranging from 2-17% across categories, with silver prices which was thought to b the next gold, dropped 30% and some other commodities followed suit. As an old adage goes What goes up must come down, sooner or later. Samira Vemparala SCMHRD MBA 2010-12
Economy
F!NAL$T | June 2011
Crude Oil: A Burden on Indias Economy

The price of Crude Oil in global market is highly sensitive to global, political and economic developments. Global oil prices have almost doubled in the past one year due to the political unrest in the Middle East while signs of economic recovery have raised the prospects of oil demand in 2011. The recent dip in crude oil price by over 10% owing, mainly, to Chinas lower than expected growth and decrease in demand for oil is a slight relief. Though the crude oil price is forecasted to drop to 75$/bbl by end of the year 2011, there are also many theories which oppose this. external balance of payment obligations. This eventually forced government to liberalize the economy.
Present Scenario
Although post liberalisation India hasnt faced any such crisis, it still, however, is heavily dependent on import of crude oil. India Ranks 4th in the world in Oil Consumption and imports three quarters of its annual oil and gas requirements. Eighty per cent of crude oil requirements are met by imports. India's oil imports for the FY 201011 were at $101.7 billion, whereas the same for the year FY 2009-10 were $79.55 billion. The nation's domestic oil production was about 34 million tonnes in the year 2009-10 where as the import tonnage for the same period was159.2 million with the net oil imports making up around 30 per cent of the import bill .This predominance of oil in Indian import basket is more than that of any other ASEAN countries, all of which have a positive current account and hence can ably absorb the oil price spike better. Demand over the next 10 years will increase by 40 per cent at the least, whereas the increase in supply from the maturing (domestic) oilfields is expected to be around 12 per cent. So the gap will deepen further, resulting in increased imports and dependence on crude oil. By 2031, TERI indicates a dependency of 78% on coal (over a billion tonnes), 93% on oil (~ 700 million tonnes) and 67% on gas (~ 93 BCM) on imports. IMF report says that among the oil importing countries, the largest impact on GDP growth and the balance of payments is expected to be felt in India, Korea, Pakistan, Philippines, Thailand, and Turkey. The report further indicates that a USD 5 per barrel increase in oil price would lead to a 1.3% increase in inflation and a drop of 1% in GDP growth. According to Goldman Sachs Asia Economic Catalyst with every $ 10 increase in oil prices, the current account deficit (CAD) would rise by 0.4 percentage points and would reduce India's economic growth by
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Good, Bad and Ugly

The good side of this volatility is the gain which short term investors are making. You see this is also beneficial for mutual fund investors who clamour for silver ETF and those who are already investing in commodity futures. Even rich farmers who are bullish on silver prices are converting their earnings from good yields into bars and coins of silver that can be easily encashed later. With the rise in price of silver there is a sudden increase in the number of schemes like offering wholesale prices and also allowing customers to lend LBMA (London Bullion Market Association) accredited bars and earn interest on them and ETFs. The soaring prices of both gold and silver are filling the coffers of state governments. It is emerging as a significant source of income thanks to the value added tax. Gujarat witnessed a 37% increase in tax collection (Rs 25000 crore) in 2010-2011 while Maharashtra witnessed 25% increase. With expectation remaining bullish, the commercial sellers in few places are also ready to bear a small percent of VAT on the gold and silver purchases rather than passing it on to the customers. The recent plunge in the silver prices wiped the buy side margin by nearly 8%. Investors who were long on silver were greatly impacted. In fact retail investors who had entered in the last leg looking at the price rally were greatly affected. Volatility continued as investors eased their long positions after the interest rate hike continued by emerging economies like China and India
Crude oil as a commodity and an investment is of uber importance to global as well as Indian economy, but the extent of its influence on the latter is alarming. A country which is fourth largest on Purchasing Power Parity terms and which aims to grow at 9% cannot depend much on crude oil for its growth.
A Brief History
History has shown us that impending oil prices have always had a deeper impact on developing vis-a-vis the developed countries. Oil crisis in 1973 and 1979 resulted in inflation in India and a consequent depletion to its foreign reserves. Later, in mid-eighties, India started having balance of payments problems, Indias oil import bill swelled, exports slumped, credit dried up while investors pulled out their money. Large fiscal deficits, over time, had a spillover effect on the trade deficit culminating in an external payments crisis. Indias foreign exchange reserves that were $1.2 billion in January 1991, depleted to half by June, and were barely enough for 3 weeks of essential imports. India was only weeks away from defaulting on its
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Economy
0.2 percentage points growth.
F!NAL$T | June 2011
Corporate View
F!NAL$T | June 2011
India and Africa: Brothers in Arms

Global interest and investment in Africa has been increasing rapidly over the past few years - from being branded the dark continent, Africa has moved on to becoming one of the most preferred investment decisions in emerging markets. The continent has witnessed an approximate y-o-y growth of 17% in FDI inflows for the past few years, which has been primarily driven by large and untapped mineral resource base and oil & natural gas reserves. If we look at the % change in GDP from a year ago among various economies, one would observe the momentum which is being shown by the African countries. Over the next few years, sectors including infrastructure, agriculture, mining, oil & gas, telecommunications, financial services and energy are expected to attract significant foreign capital and further drive GDP growth in the region. Traditionally the Indian outbound story has been driven by the acquisition of niche technology or key customers making it imperative to concentrate on the US and European market, post the global meltdown in 2008 the Indian companies have shifted their attention to the African continent where the domestic demand is expected to increase significantly in the years to come. The African opportunity is sizable, which has also worked towards attracting foreign players - for example, South Africa has a population of approximately 44 million, of which the adult population is over 29 million (sex ratio is almost 50:50) Increasing awareness and rising hygiene standards among the population has driven consumer demand for cosmetics and toiletry products, which has in turn created a robust local industry. Market for hair care and relevant healthcare products in South Africa is estimated to be in the region of INR 6 billion and growing at more than 20% annually. The market for personal care and cosmetics roughly estimated has a volume of INR 40 billion. Noteworthy deals in this sector include Godrejs recent acquisition of Tura Cosmetics, Nigeria which is a follow up to their earlier acquisition of Kinky hair products, South Africa in 2008. In 2009, Wipro embarked on the ambitious acquisition of Yardleys businesses across the world, including some countries in Africa. Given the rising disposable income of people in the continent, the demand for more discretionary goods is likely to increase going forward, which in turn will drive further M&A in this sector. If we look at the deal flow from India to Africa from 2007 till date, the total Indian deal value is more that $12 billion, spread over more than 20 transactions. It is to be noted that the Bharti-Zains telecom deal alone accounted for $10 billion.
Impact on Indias Economy

Skewed Balance of Payments
If the burden of increase in the oil prices is entirely passed on to consumer, headline WPI inflation would by 0.9 per cent due to direct impact and another 0.9 per cent due to indirect impact. The Indian government bears a major of the crude oil spike burden through subsidies and this has taken a hit on the governments finances affecting the macroeconomic outlook in India. Indian basket of crude currently costs about $120/b. At that price level, implied losses to the public sector oil companies (more precisely forced subsidies to consumers) are Rs 5 per liter on petrol, Rs. 17 per liter on diesel, Rs. 29 per liter on kerosene and Rs. 500 on cylinder of residential LPG. Total petroleum subsidy bill amounts to $8.6 billion for this fiscal year. India, as a result, will experience deterioration in its balance of payments, putting downward pressure on exchange rates. Ultimately, imports would become more expensive and exports less valuable, leading to a drop in real national income.
Future Prospects
Oil production has stagnated at around 33 MT in the past few years and is not expected to increase significantly. So government is looking at increasing efficiency and utilization and exploring new possibilities of natural gas reserves. India plans to increase its nuclear power output to 64GW by 2030 by constructing 18 additional nuclear reactors. Indias wind power is 5th in the world and is in planning to reach 20GW by 2012.India's theoretical solar potential is about 5000 T kWh per year, far more than its current total consumption. Currently solar power is prohibitive due to high initial costs of deployment. However India plans to add about 20GW of solar power capacity by 2022. Though these renewable sources are a good to meet energy requirements they are not an actual alternative to oil and petroleum products which is used mainly in transport which is 83% dependent on liquid fuels. India has also taken an active step toward bio-fuel and is planning to meet to 20% of diesel demand through bio-fuel. Government is encouraging national oil companies to acquire oil and gas fields abroad. ONGC has extended its foreign operations to Africa and other Asian countries with its first international hydrocarbon revenue from Vietnam. Results of the Governments Energy policies and their implementation assume a major role in realization of Indias dream as economic super power, the high dependence on import of crude oil, otherwise which, will drag down the growth rate and economic development. Siddharth Mullapudi IMT Ghaziabad MBA 2010-12
Soaring Inflation
Higher oil prices generates a cost push inflation, leading to increased input costs, reduced non-oil demand and lower investment in net oil importing countries. Also, tax revenues tend to fall and the budget deficit increases, due to rigidities in government expenditure, which drives interest rates upwards. India's food inflation stood at 9.18% as of April 2011 and is expected to shoot to double digit which will impact the demand eventually leading to decrease in
Given the increasing global interest in Africa, more and more Indian companies are looking at expanding their presence in Africa, in order to ensure that they do not lose strategic advantage to their foreign counterparts. Indian trade with Africa is estimated at USD 39 billion annually. Even though there are significant differences between the development and maturity levels of the African and Indian economies as a whole, underlying cultural and consumption similarities have helped drive Indian companies growth in the region. There is also a strong Indian Diaspora in the region, concentrated in South Africa, Nigeria, Kenya, etc. which has traditionally been entrepreneurial in nature and contributed extensively to the growth of their respective economies.
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Corporate View
The value of Indo-Africa deals has shot up in the last two years with Indian companies inking deals in excess of $850 million in 2009, and YTD 2010 accounting for $10.75 billion * excludes the $10.7 billion Bharti - Zain deal from early 2010 The natural resources sector including oil & gas and coal mining have traditionally led investments into Africa, with Kenya and Mozambique being the largest recipients of Indian Capital. Even though total deal value in South Africa has been sub $100 million, many Indian companies have used the country as a gateway for the rest of the African continent. For example, a major automotive company entered the African continent by establishing a base in South Africa to begin with and is now mapping the Nigerian market to set up an assembly plant there and penetrate the relatively unexploited West African region.
F!NAL$T | June 2011

Certain Indian corporates including Karuturi Global and Jayshree Tea have also established a foothold in the African Food & Agriculture market via the acquisitions of floriculture and tea plantations respectively Although the general business & cultural environment in India and Africa can be quite similar, there are certain regulatory nuances that need to be factored in while making any investments in the region. A key example of this would be the concept of Black Economic Empowerment (BEE) which is widely prevalent in South Africa. Under this scheme which aims to empower the relatively poorer black sections of South Africa, companies are rated on a points based system based on whether there are any black investors, employees in the company, does it do any business with black suppliers etc. Although this policy is not a law, it is an implicit government directive and hence any Indian company looking to do business in South Africa must keep these issues in mind. Failure to do so would preclude the Indian company from winning government tenders, etc. Traditionally Indian companies have preferred investing in East and South Africa on account of the instability in the political environment in West and North Africa. Companies doing business in the continent have to mindful of the fluid political situation, civil tensions and internal security issues as part of their investment preparations. India needs to be mindful of the increasing Chinese influence in Africa, as part of their long term strategic goals to ensure natural resource security and establish a strong foothold in the region. Chinese companies are playing a key role in building infrastructure in the form of roads, railways, sanitation facilities, etc. across much of Africa, in return for mining and exploration rights in these countries. Indian companies need to counteract this strategy by building better relationships within the political & business circles of the various important countries in the region and ramp up their operations rapidly to take advantage of the demand boom in what is increasingly becoming the Fair Continent. Mr. K.A.Ramana Financial Advisory Services, PwC Pricewaterhouse Coopers
Tte-a-Tte
F!NAL$T | June 2011
Corporate Interview: Banking

In this section we bring to you the first hand information from the industry. This month we present you our interview he with Mr.Kamal Batra. Mr.Batra is currently the Country Head Business Banking at IndusInd Bank. IIM Bangalore alumni, . Head-Business Mr.Batra has also worked with ANZ Grindlays Bank, ABN Amro, Standard Chartered and Indiabulls prior to working with IndusInd Bank. Excerpts: A few weeks ago RBI raised its policy rates by 50 bps with an intention to contain inflationary pressures. Do you think RBI may have to sacrifice growth to tame inflation? RBI Governor D. Subbarao is very clear that it is alright to let growth be a little less but it is very important to contain inflation. According to him, inflation is a tax on ng the common man. As measured by him, growth may come down by 50 bps to around 8% or a little less but it is very important to contain inflation. Typically we work in a market environment and hence tend to raise the base rate immediately. So within one day of RBI announcing the interest rate increase, the base rates of ICICI, HDFC and IndusInd are revised immediately. Now they are two issues, a lot of our assets may not be linked directly to the base rate because those are fixed rate loans. So, lets say our whole book of what we do in retail finance all of it is fixed rate. Like if a car loan is taken, a lender cannot change the rate mid-way. So, one problem is that one way. cannot revise the rates. The second issue is that RBI ates. may increase the rate and if a bank has a lot of illiquidity, it may not be able to pass on the rate to the customer. This is because of the liquidity available in the system and hence some other bank may be able to lend at a lower rate. Thus there are competitive pressures which force you not to revise the rates immediately. That is why one shall notice that the back end stocks are not doing well because in an increasing interest rate scenario, typically NIMs will fall d down and because the rates on liabilities gets revised immediately but the rates to the customers may not happen or may happen with a lag. RBI has recently initiated a discussion on deregulation of interest rates on savings deposits. Do you think this initiative would help banks and borrowers? ative I think there is a divergent view on this issue. A bank basically transfers funds from savers to users. Investors put their funds in Savings and FDs and banks channelize these funds to the industry. RBI has to deal with the common man, rising inflation an overall stability. By and necessity everyone has to put their money in a Savings bank account. There is a bit of stickiness because one would not open a Savings Bank account every day. So, therefore, the one side is that regulation is necessary to ensure that the customer gets a particular minimum t rate all the time and is not unduly stressed out to move his deposits every time. The other side is that everything is deregulated and hence the savings rate
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Apart from the telecom and natural resources sectors which have attracted most Indian investment in terms of deal value, another sector which has seen interest from Indian companies has been the rapidly evolving FMCG sector in Africa, as has been illustrated earlier.
There are other ways to contain inflation also but government will have its own issues with that. One can argue about Governments management of NREGA and PDS or increase the diesel prices but Government may have its own limitations for it. Hence, the Central Bank will have to do what they believe is right. The Central Bank has raised interest 9 times in the last ised year by approximately 250 bps. How do banks manage it? When does it decide that customers will have to bear the complete burden? Currently we have base rates in place and as per RBI regulations we are supposed to inform th them of our mechanism of arriving at the base rates. So, most of the banks have raised their base rates and a lot of our book is related to the base rates and hence we are able to raise the prices wherever possible.
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Tte-a-Tte
should also be deregulated. A fair competition demands somebody who is willing to offer higher return on mebody payments and the money would move there. Would deregulation not put pressure on the Banks NIM? Banks are only one component of the economy. Every bank is dealing with hundreds and millions of savers. So banks deal with ALM issues all the time and this is just s another ALM problem. Infact, some industry experts say that the savings rate may actually fall down over the long term, if they were to be deregulated. Eventually, the broader argument is that in a capit capitalist economy that if everything is deregulated, interest rates should also be deregulated. How it will plan out is still to be seen. Despite the rise in borrowing costs, why do Indian firms rely more on bank funds to finance their business rather than tapping the capital market pping directly? Our debt markets apart from the banks are not really developed. The equity market is reasonably developed but it is a more costly form of funding. The main issue is on the debt markets per se. I dont think our markets are very deep in debts apart from banks. It is a matter e of time and as markets become more developed and they deepen so companies shall move away to capital markets. Today only a handful of companies which have a very high rating can raise debt from outside the bank. Fund availability is also an issue because only Insurance companies apart from the banks have money to lend. Hence markets have not developed enough. Its not about individual companies and their choice because their choice is limited to the banks. So if I have an s. instrument which is not very well rated, I will have to hold it on my book because there is no market where it can be sold. Bankers are more powerful to the lenders and more so because are markets are not well developed. How much component of a banks earning are from nt fee based services? Chances are that if you have a higher fee based income as a percentage of total income, you are using lesser equity. Various banks will be at various levels. Every
F!NAL$T | June 2011

bank is struggling to improve it. Broadl the industry Broadly NIMs are 2.5-4%. Typically a lot of banks would be able 4%. to generate 1-3% of the total assets as fee income. A lot 3% of banks would hence have a 50 50-50% earnings from Fee and NII. There is a lot of transactional banking and hence a lot of inflows passing through or advisory or ws flows incase of exports (flow services or foreign exchange) comprising of the components of fee based services. Hence there could be same income from fees and Net Income which also means that you get a higher lso Return on Equity. Should banks be allowed to refinance or issue securities against mortgages? Are the Indian markets/investors ready for it? Seemingly US was ready for it, but it all backfired. So being ready is not the point. The point is the benefit of hindsight i.e. how well the markets are regulated. Hence I think, that we should be able to package, securitise and sell down risk.
Tte-a-Tte
mechanism which ensures that a fair rating is given to an instrument, I think we should be doing it and there is no argument against doing it. Has our economy reached a period of Stagflation? I dont agree with this. Our Central bank in comparison to the others believes that there is a permissible level of inflation for a good economy to grow. It is a growing economy and is reaping the fruits of a younger generation. So we are, miles away from stagflation. Is there any initiative that the bank has taken to boost the rural savings? Every bank faces this problem and hence there are a rising number of NBFCs and MFIs. We are tying up with Banking Correspondents (BCs) who will be operating in the rural markets and get customers for whom the bank will open accounts. The BCs will do the KYC appraisal for all the potential customers based on which the bank will open a no frills account for them. RBI has also put a guideline for banks that need to have branches in Tier 5 and Tier 6 cities. But this shall happen over a period of time. It is a part of our social responsibility and a part of RBI mandated penetration issues. Also there is a potential to earn margins there.
F!NAL$T | June 2011

What are the initiatives that the bank has taken for the Small and Medium businesses? We are banking a lot of small and medium companies. Our operations are not limited to 10-20 cities but are extended to 80 cities. We are also developing products where we can leverage not just on their balance sheet but also on their linkages with the larger companies. It also includes making transactions simpler for them through Indusnet or Indus Online or by providing packaged products. Where do you see the banking sector in the near future since floating loan rates would hamper the credit availed in the wake of high interest rates? World over people are used to high interest rates. When the interest rates rise the investments would fall. So once we each our equilibrium on inflation and global conditions stabilize so people will get used to other means. We have grown faster from 2003-04 onwards for 4-5 years and then we slowed down. So maybe instead of 25% growth we may have 18-19% growth which is a significant number. But there are a lot of industries that need funds. If the interest rates are high along with inflation the real interest rates are not very high.
Alan Greenspan was always of the opinion that markets will correct themselves and that is why he bought the world to where it currently is. So there is no argument against selling down securities and repackaging them. It should be done because it spreads t risk and raises the more funds. Infact it is a part of the deepening of debt markets per se. We may not be ready for it in the sense that we may not have the right skill set of how to measure the risk and how to price them correctly. Initially the regulation has to be tighter and eventually it n can be loosened out over a period of time. It finally comes to the common saver who would go by the ratings at best. CRISIL, ICRA or FITCH would rate an instrument and the investors would just follow the ratings. As long as there is a reasonable controlled ng
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Debate
F!NAL$T | June 2011
Debate
Saving rates should be deregulated (Contd.)
More Innovation: Recent deregulation in Honk Kong has led to significant innovation in the financial instruments being offered by banks like a combined checking and saving account and tiered interest rate structure contributing to significant savings. Such innovation could help depositors by offering them a product they would like to select. It could also encourage depositors to use ATM & Internet banking facilities over going to branches due to lower operational charges for using such facilities. Market Driven rates: Empirical evidence has suggested that widening the differential between saving bank deposit rates and market rates due to regulation could lead to a reduction in savings back deposits as a part of the total deposits. This trend has been seen increasingly in period of 2005-10 where aggregate deposits for individuals has gone up significantly but has not increased at the same rate for savings deposits. This could be attributed to the fact that deposits were held more for transaction then saving purposes... Since rural and semiurban areas hold savings account more for savings than transaction purposes any increase in rates could benefit them. Smoother Monetary Policy transmission : Deregulation will help in smoother transmission of monetary policy as the cost of overall deposits of banks will now will able to move in tandem with the policy rates and will help narrow the spread between the market rates and deposit rates. No unhealthy competition: Unhealthy competition will not be there as statistical evidence suggests that ,although, rates on term deposits that accounted for 60% of PSB deposits had been deregulated in 1997, there was only a small shift in accounts from PSB to private banks who offered better rates. Thus savings deposit which only account for 22% will not significantly impact PSB. This move will only enhance competition and give depositors the best deal.
F!NAL$T | June 2011

Rates should not be deregulated (Contd.)
Higher Transaction costs and reduced flexibility: Although rates offered might be attractive, transaction costs which are in range of INR20-225 (urban) and INR20-100 (rural) per quarter (PSB) and between INR750-1000 per quarter for private sector banks can rise sharply, as a source of cheap funding for bank reduces and they pass on the burden to the end users. Flexibility of withdrawal will be reduced as limitations and restrictions on number of withdrawals per month could be increased thus asking depositors to reduce their transactions since transaction costs would substantial increase. The increase in transaction costs, minimum balance requirements and flexibility on withdrawals could erode the advantage of getting a higher return on deposits. Unhealthy competition: CASA deposits are source of low cost funding for banks and if rates are deregulated, the banks who have the highest CASA deposits will be hit the most as other banks offering higher deposit rates would attract more of these deposits. This could lead to banks passing the burden on to its borrowers thus leading them to borrow at a higher rate, and if not done it can affect the net interest margins and banks profitability. Asset-Liability Mismatch: Deregulation could also cause asset liability mismatches as banks use the saving deposits as core deposits usually to fund long term loans and any deregulation of interest rates could cause banks with a high dependence on savings to be impacted as these accounts might move to other banks due to competition.
Deregulation of Savings Bank Deposit Rates

Banks have complete freedom in fixing deposit rates except the savings bank account deposit rates that have been pegged at 3.5% since 1st March 2003 and only have recently this month been revised to 4%. It remains the only deposit rate that is left to be deregulated as all other deposit rates have already been deregulated. The RBI has also published a discussion paper in 2010 on deregulation and has asked general public to send their feedback and comments on this move by May 20, 2011. Before we move ahead, lets elaborate on the savings deposit accounts. A savings deposit is a hybrid account that combines the benefits of both current account and term deposit account as it serves the dual role of easy withdrawals/collection of cheques and payment facilities along with providing an opportunity to earn interest on parked deposits. Savings deposits are popular instruments which constitute about 13% of the household savings and about 22% of the total commercial deposit of scheduled commercial banks. Deregulation in the interest rates on deposit of these accounts is widely expected to increase competitiveness as rates will be more market driven and has been implemented before in other Asian countries with some success. However there are concerns regarding how this will be implemented, whether it will actually meet its objective of garnering higher public savings and not lead to unhealthy competition between PSB and private banks. The debate below will present both sides of the coin.
Saving rates should be deregulated

Encourage Savings: The move could increase savings and could benefit the economy especially considering the inflationary scenario which the country is facing currently. The rates will be dependent more on demand-supply patterns and be more market driven thus enhancing competitiveness as banks that provide the best deposit rates could attract more depositors and give the depositors a chance to earn higher returns.
Rates should not be deregulated

Minimum balance requirements could hinder savings : The minimum balance is between INR 250(rural) and INR 1000(urban) for PSB and slightly higher for private banks giving an opportunity to low income earners like labourers who come from rural areas in city to deposit funds which can be withdrawn by their rural folk. Since more than 60% of India still stays in villages, any increase in minimum balance requirements due to higher deposit rates being offered by banks can severely affect their livelihood.
Abhishek Maheshwari MBA 2010-12 SCMHRD
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Finance Club
The Finance Club at SCMHRD was formed in 2005 with the aim of bringing Finance as a specialisation to the forefront of the offerings of the Centre. It aims to provide students with advanced skills in applied finance required in todays competitive financial environment. It acts as an interface between the student community in the college and the financial world. The club provides an excellent avenue for the students of the college to explore finance with specific emphasis on the latest trends developing in the financial universe. Its objective is to enable prolific interactions among the student community, coupled with valuable inputs from the faculty, the academia and representatives from the industry. Some of the notable events that were held in the past are:
TEAM Abhishek Maheshwari Anshul Sood Charul Mahajan Samira Vemparala Sumit Dawra
Risk Management Seminar (2009)

One of the Major events of the Finance Club, the risk Management Seminar brought together corporate stalwarts with diverse experience in the field of financial risk management who put forward different perspectives on the issue and bring to light he different tools to mitigate risks.
Banking Conclave
Another annual event that features eminent personalities from the banking industry sharing their insights on the latest trends in Banking.
First Academic Summit on Valuation and Financial Modeling 2010

In 2010, The Finance Club raised the bar by holding the First Academic Summit on Valuation and Financial Modeling. The summit which was two day event held a paper presentation competition and heard the best of the people from industry and academics alike speak on the theme. The event was graced by Dr. Prasanna Chandra who gave his valuable insights on Ten Commandments of valuation.
Publications:
Pre and Post Budget Analysis:
An annual effort by the students at the Centre that involves publication of the Annual Budget both before and after the formal Budget speech.
Finalyst
A monthly magazine published by the Finance Club, contains concise and in-depth analysis of emerging trends in the area of finance. Articles are written by students and eminent corporate personnel. It has a circulation of more than 2500 copies covering corporate, alumni and India's top 30 B-schools.
Knowledge Series
The Finance Club comes out with a monthly Knowledge Series which equips layman to understand basic financial terms. It is an initiative to increase financial awareness and make various financial aspects in a simple, lucid and understandable manner.
Contact us: financeclub@scmhrd.edu Web: finance.scmhrd.edu

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June 2011 Send us your feedback to financeclub@scmhrd.edu

In Focus: Is Indias Economy Overheating?

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Inside this issue:

An Overheated Indian Economy

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The Economics of Present Day Politics

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The Tulip Mania

Stock market bubbles

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Source: From John Law to John Maynard Keynes by Steve H. Hanke

Source: Standard & Poor and Fiserv

Other Asset price bubbles ther

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The Next Bubble

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Crude Oil: A Burden on Indias Economy

Good, Bad and Ugly

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India and Africa: Brothers in Arms

Impact on Indias Economy

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