Professional Documents
Culture Documents
Agenda:
1. Monetary system
2. Banking system
3. Tax system 4. Share Market Fundamentals
Monetary System
o Reserve Bank of India (RBI) Central Bank of India o RBI functions include Control and regulation of money and credit Control of foreign exchange operations Banker to the government Bankers bank
Monetary System
o CRR (Cash Reserve Ratio) 3 to 15% o SLR (Statutory Liquidity Ratio) 25% o Bank Rate Rate at which banks borrow from RBI (currently at 6%) o Open market operations Involves sale and purchase of government securities by the
Monetary System
o REPO and Reverse REPO REPO transactions imply liquidity adjustment facility of the RBI whereby it injects and absorbs liquidity vis--vis the banking system to even out short term fluctuations in the money market. o Absorption of liquidity by the RBI is termed as reverse repo and injection as repo.
A slack season policy (AprilSeptember) A busy season policy (October March) o Impact of CRR cut on interest rates? When CRR is reduced, more cash is available with the banks
monetary policy
Fiscal policy is a broader tool with the government Monetary policy brings about a change in the economy by changing money supply and interest rate. Fiscal policy can be used to overcome recession and control inflation Fiscal policy decides the change in government revenue
Banking System
o Participants of the Indian financial systems
Commercial Banks
Co-operative Banks Financial Institutions (FI) Investment Institutions Specialised financial institutions State-level development banks Non-banking financial companies
(NBFC)
Market intermediaries stock brokers and moneylenders
Commercial Banks
o Main functions Acceptance of deposits
Giving loans
Overdrafts Discounting bills of exchange Investment of funds o RBI categorisation of commercial banks
Money market
o Market for borrowing and lending of short-term funds o Call money market inter-bank transactions on day-to-day
Tax system
o Different heads of income for tax structure in India Salary
House property
Profit in business or profession Capital gains Other sources
o Filing date is not extended and any late filing is charged with
interest o All large sized and medium sized taxpayers are subjected to investigative assessment
GST
o Goods and Services Tax (GST) o GST will include CENVAT, VAT, Service tax, Turnover tax, Octroi.
o Dematerialization Process of
conversion of physical share certificates to electronic form and crediting to the investors account with his Depository Participant (DP) o Securities Market Regulator Dept of Economic Affairs, Dept of Company Affairs, RBI and SEBI (Securities and Exchange Board of India)
Securities - Terms
o Face Value Nominal or stated amount assigned to a security by the issuer o For shares, it is the original cost of the stock
Issue of Shares
o Initial Public Offering (IPO) when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. o Rights Issue When a listed company proposes to issue fresh securities to its existing shareholders. o Market Capitalisation Market value of a quoted company; calculated by the product of the current share price and the number of shares in issue o ADR (American Depository Receipt) physical certificate of ownership of ADS (American Depository Share). ADS is a US dollar denominated form of equity ownership in a non-US company. o GDR (Global Depository Receipts) A global finance vehicle that allows an issuer to raise capital simultaneously in two or more markets through a global offering
Analysing a company
o Industry Analysis Effects of govt policy, future demand of products, etc o Corporate Analysis Information on current operations,
Mutual Fund
o A corporate body registered with SEBI that pools money from individuals/corporate investors and invests the same in a variety of financial instruments or securities. o Benefits of investing in Mutual Funds: Small investments wide spectrum with small investments Professional Fund Management Spreading risk Transparency
Choice
Regulations (SEBI protects the interests of the investors)
Monetary measures
o In mid-September 2008, the central bank started to ease liquidity but no cuts were made yet in policy rates. o Inflation measured in terms of the wholesale price index (WPI) peaked at 12.9 per cent in early August 2008 and remained high for some time. o From mid-September till end-October 2008, the economy was in the grip of a serious liquidity crisis and credit crunch. o The Reserve Bank of India (RBI) acted aggressively from mid-October to ease the situation by a series of rate cutting and liquidity injecting measures that went on till April 2009.
Fiscal stimulus
o The central government announced three successive fiscal stimulus packages: one in early December 2008, the second one in early 2009 and the last one in early March 2009. o These included an across-the-board central excise duty reduction by 4 percentage points; additional plan spending of Rs.200 billion; additional borrowing by state governments of Rs.300 billion for plan expenditure; assistance to certain export industries in the form of interest subsidy on export finance, refund of excise duties/central sales tax, and other export incentives; and a 2 percentage-point reduction in central excise duties and service tax. o The total fiscal burden for these packages amounted to 1.8 per cent of GDP.
Impact on Economy
o The growth in GDP dropped to 5.8 per cent (year-on-year) during the second half of 2008-09 from 7.8 per cent in the first half.
Indian Economy-GDP
Fiscal Stability
o Public finances had improved considerably o The fiscal deficit (centre and states combined) came down to 4.2 per cent of GDP in 2007-08 (well below the permitted 6 per cent), the primary deficit (fiscal deficit net of interest payments) turned into a surplus of 1.3 per cent of GDP and total public debt as a proportion of GDP also came down from the peak of 81.4 per cent in 2003-04 to 75.1 per cent in 2007-08.
Fiscal Stability
o The situation changed drastically in 2008-09 o The fiscal deficit shot up to 8.9 per cent of GDP (10.7 per cent including off-budget bonds against 5 per cent in 200708) and the primary surplus turned into a deficit of 3.5 per cent of GDP. o The public debt, however, declined marginally to 74.7 per
Fiscal Stability
o The policy implication is that
we should strive to reduce primary deficit or achieve a primary surplus, raise the growth rate and reduce the interest rate. o The growth is in nominal terms and there is surely an option of inflating our way out of debt. o However, this is not feasible given the political sensitivity
regarding inflation.
Inflation
o In India, the year-on-year change in the wholesale price index (WPI) is used as the measure of inflation. o The wholesale price index has long been discarded by countries for measuring inflation. o 157 out of 181 countries in the IMF statistics use consumer price index (CPI) for tracking inflation. o While WPI inflation is very low or negative from March 2009, CPI inflation was high and rising from April 2009. It touched about 12 per cent in July 2009.
Inflation
o Although year-on-year WPI inflation was negative till
August 2009, food items under both primary articles and manufactured products have shown rising and high inflation at double digit levels in recent months. o The negative inflation continues in the case of fuel and metal groups. o It appears that inflation is concentrated in food items and what we have is food inflation and not a general inflation. o For products like personal care and effects and other miscellaneous items, the rates of inflation have touched 12 per cent and 20 per cent respectively in June 2009.
Balance of payments
o Indias balance of payments underwent major shifts in 2008-09 that resulted from the transmission of the direct impact of the global crisis to India. o The current account deficit shot up to 2.6 per cent of GDP in 2008-09 from 1.5 per cent of GDP in 2007-08. o This is the highest level of current account deficit for India since 1990-91 o The impact on the capital account was more pronounced as the capital account surplus dropped from a record high of 9.2 per cent of GDP in 2007-08 to a meagre 0.8 per cent of GDP in 2008-09. o This is the lowest level of capital account surplus for India since 1981-82. o The year ended with a decline in reserves of US$ 20.1 billion (inclusive of valuation changes) against a record rise in reserves of US$ 92.2 billion for 2007-08.
A major concern
o A sharp dip in the growth rate of private consumption. o Four factors seem to have contributed to this slowdown. o It could be due to the wealth effect, resulting from a decline in the equity/property prices. o The uncertainty in the labour market and some decline in employment in Indias tradable sectors may have
improved.
o The return flow of capital from abroad is taking place strongly, particularly from foreign institutional investors. o This, in turn, has put upward pressure on the rupee, which is
appreciating rapidly.
o Some appreciation may not be problematic as the real effective exchange rate had depreciated steeply during 2008-09. o But as we go forward, the central bank will be hard-pressed to
Reasons
o Boom in the Housing Market
o Speculation o High-risk Mortgage Loans and Lending Practices o Securitisation Practices o Poor Regulation
Impact on India
o Information Technology
o Exchange Rate o Foreign Exchange Outflow o Investment o Real Estate o Stock Market o Exports o Banks
o Increase in Unemployment
for the Eleventh Five Year Plan period, which has now been frontloaded as a part of the policy response to the growth slowdown, provides the basis for offsetting some decline in corporate investment in manufacturing by increased investment in infrastructure by government and by the private sector through the public-private partnership model.
o The steep decline in commodity prices in the second half of 200809 along with the likely slack in global demand or at least the next 12 months would not only help in cutting down the import bill, but also have a favourable impact in effecting a reduction in below the line deficit to less than the level in 2008-09.
o These range from a low of 4.8 per cent (ICRIER, March 2009) to a
high of 6.5 to 7.5 per cent (ICRA, April 2009). The RBIs April 2009 projection stands at 6 per cent and that of PMs Economic Advisory Council at 7-7.5 per cent. o Among the international agencies, the March 2009 ADB forecast for 2009-10 is 6.5 per cent, IMF is 5.6 per cent and World Banks forecast for the calendar year 2009 is 4 per cent.
Thanks Helpme@careerlauncher.com