INDIA: A way forward for growth

The global economy is going through a change, which is inevitable. Slowdown in Chinese markets, long waited US-Federal Reserve rate being unchanged, fluctuations in oil prices etc., are the major concerns of any economy globally. Advanced Economies are having growth which has come to a standstill. The emerging and developing economies have also witnessed a slowdown in its growth. Except South Africa and India, other nations which are part of BRICS are slumping towards negative growth. India’s economy is expected to grow at 7.6% percent during the current year, having potential to increase. 

Central Government hints at private investment and consumer sentiment would revive the economy. Its initiatives such as ‘Make in India’, ‘Skill India Mission’ and ‘Digital India’ are evident for this. These initiatives would stress on quality and sustainability of service sectors which is contributing towards 57% of GDP. However, IT, ITeS, e-commerce and other professional services are oriented towards the external market. One of such goals which bring onus both on RBI and Central Government is their focus on inclusive growth. RBI has taken policy initiatives towards this through selective credit control, priority sector lending norms, lending to weaker section of society and other policy of financial inclusion. RBI’s policies on expansion of branch to rural and semi-urban areas are also quite evident with regard to its initiatives. The two newly licensed full-service banks (IDFC and Bandhan Bank), eleven payment banks and ten small finance bank (8 are MFIs), would provide thrust on reach ability and accessibility of finance thereby contributing to a sustainable and inclusive growth.

With ease of deadlock on land acquisition bill and GST, would provide a great opportunity for investment and drive up growth.   

Why do interest rates have an inverse relationship with bond prices?

On prima facie the inverse relationship between interest rates and bond prices would not make sense and seem to be illogical. However, to understand the logic let us consider an illustration of zero-coupon bond[1].

A zero coupon bond is trading at Rs.925.00 and has a par value/maturity value with maturity in one year. Hence, the bond’s rate of return (yield) is approximately 8.11%. The person, who bought this bond by paying Rs.925.00, must be satisfied with 8.11% returns. But, this satisfaction would be compared with what else is happening in the bond market with regard to returns. If the current interest rates increases, when newly issued bond pays 10%, then the zero coupon bond becomes unattractive. Demand for zero coupon bonds won’t be present at all. Therefore, to attract demand for zero coupon bonds, the price of the bond should decrease enough to match the prevailing interest rates. In this illustration, the bond’s price should be brought down to Rs.909.09 which offers a yield of 10.01% equivalent to the prevailing interest rate in the bond market.

Now, let us change the situation where the interest rates decrease to 6% in the bond market. Zero coupon bonds looks more attractive with 8.11% returns. More people would buy the bond, which would push the price up until the bond’s yield is matched with current interest rate of 6%. In this illustration, the bond’s price would increase to Rs.943.39. As the price increases, the bond holders benefit from increase in price due to decrease in prevailing interest rates.

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[1] Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills, they are issued at a (deep) discount to the face value.

Why post of tax cost of debt is considered while calculating weighted average of cost of capital?

US Dollar ($) - Is it a Jinx for India? and Why is Indian Rupee (INR) Depreciating?

1. Increase in imports would often increase the demand for US Dollars. Hence, the dollar appreciates and the rupee depreciates. Therefore, supply should be created by our exporters as they bring in more US Dollars from their revenues. Otherwise, bow in front of the Foreign Institutional Investors.

2. The demand for oil has increased in the international market. Globally, the price of oil is quoted in US Dollars. And India imports over 75% of oil requirements for its local market alone.

3. Dollar is strengthening against the other currencies such as Euro, Yen etc. US economy has seen an improvement in the labour market. The Euro zone is back to deterioration therefore more money is bet on US Dollars rather than Euros.

4. The Indian markets have been volatile. The investors (FIIs) are in a dilemma whether to invest in India or not. However, a national magazine showed a data of over $7.5 billion pull off during June 2013.

5. As there is increase in imports and reduction in exports, the current account deficit has increased. On the other side, due to increase in subsidies the fiscal deficit is above the comfort zone (Back to root cause 1).

Rupee depreciation: How it affects Indian common man?

1. Good for exporters as they fetch dollars which in return will translate in rupees. However for an importer, they would be forced to pay more on (capital) importing products.

 

2. Fuel price would increase as Oil Marketing Companies feel the burden and would pass it on to consumers as petrol price is deregulated. This would increase the transportation cost (moving vegetables and fruits across villages and cities) and finally, INFLATION.

 

3. Students studying abroad will bear the brunt as expenses towards university/institute fee and living would move north.

 

4. Holiday abroad would be costlier as various charges would escalate.

 

5. As inflation increases, RBI has very less room to cut the policy rates. But if they do not cut, borrower's would have more trouble on loan (re)payments.

 

6. When imports become costlier, Current Account Deficit (CAD) (Mr. PCM's favorite 3 words) would widen and it is bad for a country's overall growth.

 

7. Foreign investors may postpone the investments.

 

Hope Rupee find its own way to appreciate against the Dollar.

My Pick 'n' Click

 

My Thoughts

"Experience the experiment to expertise." – ViC

"When Priority changes from Minority to Majority or vice versa, Parity should be maintained." – ViC

"Change does not happen when circumstances improve; change happens when you decide to improve your circumstances."  –ViC

"Past performance may help to survive at present, however not to live in future."  –ViC

"Illusion would lead to exaggeration." –ViC