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Understanding Indian Financial Markets & Economy

Gain insights into the Indian economy, GDP growth, market workings, and economic parameters. Learn about inflation, interest rates, exchange rates, and fiscal deficits.

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Understanding Indian Financial Markets & Economy

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  1. Bombay Stock Exchange Brokers’ Forum

  2. OVERVIEW OF FINANCIAL MARKETS AND ECONOMY

  3. Coverage of Course • Indian Economy • World Economy • Stock Market working • Mutual Funds • Derivatives Market • Commodity Market • Currency Market • Monetary Policy and Debt Market • Fundamental Analysis

  4. Objective of Course • Objective of this course is to give you basic framework of important segment of Indian financial system

  5. Indian Economy • Indian Economy called as “Heaven of Stability” • Indian GDP growing at 7.5 % as compared to world average of 3.1 % • Currently the World Big four economies are in trouble • USA • Europe • China • Japan

  6. Features of Indian Economy • 3 unique features of Indian Economy • Demographic Dividend:- 70 % of the population less than 35 years of age. Average age of Indian is 25 years as compared to US 40 years, Japan 52 years and Europe 47 years. • Domestic Consumption:- around 80 % of the production in India is consumed by our own people and only 20 % exported. India not an export dependent economy • High saving rates:- Indian economy saving rate is 27 % of GDP while world average is 21 %

  7. Key Macro Economic Parameter • GDP • Inflation • Interest Rates • Exchange Rate • Current Account Deficit • Fiscal Deficit • Index of Industrial Production (IIP Index)

  8. GDP • GDP is Gross Domestic Product • It shows the progress made by one country • Data is released every 3 months by Govt. • Currently Indian GDP at 7.1% as compared to world average of 3.1% • GDP is the most important parameter seen by the Foreign investors for investing in Indian Economy • Last 10 years average of Indian GDP is 7% as compared to world average of 2.5 %

  9. GDP Composition • Indian GDP consists of 70 % services, 14 % agriculture and 15 % Industry • Agriculture though has least contribution, 62 % of people are dependent on agriculture for livelihood • This means that unless agriculture sector grow at 4 % per annum GDP will not touch 9 % • Industry 15 % is also stagnant from 1993 • Make In India campaign is aimed to increase the share of manufacturing in GDP from 15 % to 25 %

  10. GDP Composition • Make in India will create lakhs of manufacturing jobs on one hand • Other hand it will reduce the import bill and thus balance of payment will become strong.

  11. Inflation and Interest Rates • Inflation is higher price rise which results into lower purchasing value of rupee • Inflation is growing at 6 to 7 % per annum • Inflation is independent variable while interest rate is dependent variable • As inflation rises, RBI increases the Interest Rates

  12. Inflation and Interest Rates • RBI increases REPO rate to control inflation • As Repo rate rises, the rate on fixed deposit and loan rates also rise • As loan rate rises, the demand for loans falls and thus economy demand and consumption slows down • In December 2013, GDP had come down to 4.6 % as Repo rate was at 8 % • Loan rate had become 11 %

  13. Interest Rate • Interest rate has negative corelation with GDP of the country • As interest rate rises, the GDP of the country is sure to fall as demand and consumption slows down in the economy • Interest rate has negative relation with stock market.

  14. Exchange Rate • Rupee depreciation means weak economy and foreign currency outflow • Rupee appreciation means strong economy and foreign currency inflow • Rupee depreciation hurts as India imports 77 % of the total crude oil requirement • Oil pool deficit rises which makes the Balance of Payments weak

  15. Exchange Rate • Exchange Rate refers to the rupee value versus the dollar • In 2007 1 $ = 38 rupees • In 2011 1 $ = 43 rupees • In 2013 1$ = 68 rupees • In 2014 1 $ = 68.30 rupees • In 2015 1 $ = 68.86 rupees • In 2016 1 $ = 66 rupees

  16. Exchange Rate and oil • The oil prices have come down from $ 100 in 2014 to $ 42 in 2016 • In 2017 it went to $ 29 • Rupee has depreciated • It is because of lower oil prices that the current account deficit is under control • The current Account Deficit is only 1.2 % of GDP which is mainly due to lower oil prices

  17. Current Account Deficit • It is the difference between the exports and imports • When imports are more than exports it is called as Current Account Deficit • Right now the CAD is 2.4% of GDP. Earlier it was 1.9% • Mainly India imports Oil and Gold which are main components of the current account deficit

  18. Current Account Deficit • Lower current acccount deficit means stronger Balance of payment • Less pressure on import bill • “Make In India” programme to reduce the import bill since many things would be manufactured in India • More jobs would get created and thus the GDP of the economy would rise

  19. Fiscal Deficit • Fiscal Deficit refers to the gap between Government Income and Government Expenditure • Govt Income is the taxes paid by individuals and coroporates • Govt Expenditure is what govt spends on poverty, defense, social causes, infrastructure • Fiscal Deficit target is 3.5 % by Govt.

  20. Fiscal Deficit • Fiscal Responsibility and Budget Management (FRBM) bill was introduced in parliament • This makes Prime Minister answerable in parliament if the fiscal deficit rises • This makes government accountable for making expenses • Internationally 3 % Fiscal Deficit is considered as good management of public finances

  21. Fiscal Deficit • Fiscal Deficit considered very important by Foreign Institutional Investors (FII) • In Feb 2015 budget when Finance Minister assured that Fiscal Deficit would be at 3.5 % • In march 2015 FII bought Rs. 22000 crore worth of shares and April 2015 they bought shares worth Rs. 8000 crore shares

  22. Index of Industrial Production (IIP) • IIP data tracks the demand in manufacturing segment • Data is released every 2 months by Govt. • Rise in IIP index means that manufacturing demand is picking up in the economy • Last 6 reading are not giving any clear picture • -1.5 %, + 2 %, 0.1%, -0.8%, 1.2% and then now 2.1%

  23. Conclusion • Macro Economic Indicators are very important to track any economy in the world • FII and FDI money will come if the macro economic indicator are strong • Foreign capital will go away if the macro economic indicator are weak

  24. Structural Reforms for making india super power • 1. GST • 2. Aadhar Card • 3. Real Estate Regulation Act • 4. Banking Insolvency Act • These reforms will continue even if there is coliation govt in 2019 elections

  25. GST – Game Changer • Initially GST created huge hick ups for small and medium businesses • Currently after 1 year GST collections have touched Rs. 1 lakh crore • Quarterly returns to be filled for those firms below revenue of Rs. 5 crore which was earlier Rs 1.5 crore • This will benefit 93% of the total firms registered for GST payment • Compliance cost to get reduced • Ease of doing business to go up • Only 49 items are now under 28 % slab

  26. Aadhar Card • Direct Subsidy to the last man in the que • Saving of Rs. 15000 crore which was earlier getting leaked from the system • Authentication of Indian resident ship • Reduces fake documentation and links identity

  27. Real Estate Regulation Act (RERA) • Maximum amount of black and illegal money goes into real estate • RERA has ensured that fly by night builders are no longer able to survive • RERE ensures that if project is not registered then 10 % of the project value to be paid as penalty • Wrong advertisement leads to 3 years jail • Late delivery of home to attract 12 % interest to buyers • Amount collected for one project to be used only for that project • Buying power of the common man to rise

  28. Banking Insolvency Act • In history of india for the first time corporates are being taken to task for using PSU banks as “Piggy Banks” • 12 corporates taken to NCLT (National Company Law Tribunal) • Auction of corporate property being done • Public hard earned money cannot be taken for ride • Eg.Bhusan steel was liquidated and tata steel took over it

  29. Four Best Programmes of Govt • Make In India • Skill India • Digital India • Start up India • The above four has the capacity to make India “Super Economic Power” in next one decade • They have to be implemented properly

  30. Make In India • The main objective is to increase share of manufacturing in the economy from 15 % to 25 % • Main benefits • 1. Will create lakhs of jobs in the economy • 2. Reduce the import bill which will save our foreign exchange reserve • 3. Brand Make In India to be globally recognized • Ex:- Samsung has set up largest mobile manufacturing factory in India on 8 July 2018

  31. Skill India • Main objective is to make the youth employable that is they should be able to earn for themselves • The key benefits • 1. Skill based training to be given like driving, electrical work, tailoring, cooking etc • 2. Each person to be able to earn for himself by using the skill This will reduce the unemployment problem and thus each person will earn and contribute in GDP

  32. Digital India • Technology has changed the whole life and way business are done • Face book, whataspp, Flipkart are best examples how the new generation companies are getting higher valuations • Flipkart which has loss of Rs. 255 crore got $ 16 billion for 70 % stake sale to wallmart • Govt more use of technology will ensure that Governnce increases and corruption reduces • Income tax and all corporate filing now can be done online which reduces scope of corruption • Also one can reach anyone through information technology so scalability rising very fast

  33. Start Up India • The main objective is to create ENTERPRENEURS as we are unable to create 1.5 crore jobs every year • India has 10,000 start ups which is 3rd highest after US and UK • Enterpreneurship has multiplier effect as more jobs gets created • Ex:- 60 MBA students if go out for job seeking but if they start something of their own then each person will create 3 jobs • 1. Office boy • 2. Marketing person • 3. office admin • So now the same 60 MBA students will create 180 jobs (60*3 jobs each)

  34. Monetary Policy • Monetary Policy is handled by RBI • Four main instruments RBI has to control money supply and inflation • Repo Rate • Reverse Repo Rate • CRR • SLR

  35. Instruments of Monetary Policy • Repo Rate:- Rate at which RBI lends to commercial banks. It is at 6.25% • Reverse Repo rate:- Rate at which banks will keep surplus cash with RBI. It is at 6% • Cash Reserve Ratio:- Rate at which banks have to keep compulsory cash with RBI. It is at 4 % and banks don’t get interest on this. • Statutory Liquidity Ratio:- It is compulsory investment by banks into Govt securities and bonds. It is at 21.5%

  36. Effect of Monetary Policy • RBI when increases the Repo rate then banks have to pay more interest to RBI • Banks in turn charge more interest from customers • This makes loans more costly • Reduces demand and consumption in economy

  37. Real Life Example • From 2010 to 2013, RBI had increased Repo rate from 5.25% to 8% • Loans had become 11 % • Automobile sector saw 2 lac jobs getting destroyed • Real estate sector also saw huge slow down • Infra companies bleeding as leverage capital with high interest rates have killed them • In Dec 2013, GDP become 4.6% lowest in last 10 years

  38. Global Economy Scenario • World Economy going through very tough phase • IMF and World Bank have reduced global GDP growth rate from 3.8% in January 2016 to 3.1% in August 2016 • Four major drivers of world economy • USA • Europe • China • Japan

  39. World GDP contribution • Country % contribution in world GDP • USA 23 • Europe 20 • China 9.3 • Japan 8.7 • Total 61 • India 2.4

  40. Debt to GDP Ratio • Countries Debt to GDP Ratio • World average 69% • India 57% • USA 103% • Europe 92.3% • Greece 177% • Spain 120% • Italy 160% • Japan 229% • China 282%

  41. Analysis of Economies-China • China --- the Dragon • China Debt to GDP ratio is at 282 % • It means that China income is 100 and it has to repay 282 back to world investors • Banks NPA at 30 % • Huge Excess capacity • Many cities called as “Ghost Towns”

  42. Analysis of Economies-China • China is biggest producer and consumer of many commodities • China slowdown has caused commodities cycle to slow down world wide • China dumping its products in world markets at cheap cost • This causes damage to world economies • Indian CEAT companies makes tyre for Rs. 20,000 but China dumps same tyre for Rs. 12000 • Indian Companies makes fan for Rs. 1400 but China dumps for Rs. 400

  43. Analysis of Economies-China • China has devalued its currency • This led to “Currency War” and all the Asian Countries currencies also became weak • China has invested $1.1 trillion in US Economy which it uses for tactical pressure • China has shifted from “One Child Policy” to “Two child policy” • Shift from “Investment” led Economy to “Consumption” led model • GDP has lowered from 9% to 6.6% with downward revision to 6.2%

  44. Japan • Japan Debt to GDP ratio is at 229 % • Its GDP is -0.8 % • Officially they have declared that they are into Recession • Average age of person is 52 years • Negative interest rates (charges deducted for depositing money into bank )

  45. Japan • Japan Central Bank has announced QE of $265 billion • Money to be spend on consumption • Effort to revive economy

  46. Europe • Europe Debt to GDP ratio is 92 % • Europe unemployment is 25 % • Greece Debt to GDP ratio is 177% • Spain is 120 % • Italy is 160 % • No clear plan how to solve this huge pile of debt capital

  47. US Economy • US GDP growing at 2.2 % • Unemployment rate down at 5.1% which is at 40 years low • US could create more than 2 lac jobs per month in last more than 1 year • FED has increased its first interest rate in December 2015 by 0.25%

  48. Impact of US Fed Rate Hike • In Dec 2015 US Fed hiked its interest rates • The result was Indian stock market saw in January 2016 and Feb 2016 outflow of Rs. 14000 crores • Emerging markets fear that with US hiking its interest rates, there could be

  49. FII investment figures • Year FII (Rs. Crore) Index Sensex Return • 2007 +70,000 21206 45.50 • 2008 -52,000 7697 -52.86 • 2009 +83,000 18000 75.38 • 2010 +1,30,000 20,000 14.65 • 2011 - 2700 15500 -24.65 • 2012 +1,20,000 21000 25.12 • 2013 +1,10,000 22000 8.12 • 2014 +1,25,000 27400 31.21 • 2015 +18,000 26100 -5.10 • 2016 +40,000 28000 2.5

  50. Global Crisis • 2008 – Global Financial Crisis • Started from USA and took world economy into recession • 2001 WTC Attack • 2002 onwards US Fed reduced rates from 5 % to 1% • 2003 to 2007 Sub Prime Lending of $ 3.3 trillion • 2007 Huge asset housing bubble • 2008 Lehman Brothers busted • World Economy went into recession

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