77 i chronicle


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Cover Story Raghuram Rajan-The Academician Regulator
Outlook Silver
Stats The Bad books of Public sector Banks
Emerging Country Venezuela
In Focus New Companies Bill- Kudos to the lawmakers

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77 i chronicle

  1. 1. Investeurs Chronicle August 2013, Volume: 77
  2. 2. Cover Story Raghuram Rajan has been appointed as the next Governor of the Reserve Bank of India (RBI) as the current governor’s (Duvuri Subbarao’s) term ends on September 4, 2013. Dr.Rajan, a former IMF economist, visiting professor to the World Bank and US Federal Reserve Board and one of the few economists who predicted the 2008 credit crisis will head the RBI. Rajan — ‘Raghu’ to his many friends and colleagues — is rated as one of the most influential economists of his generation. Rajan, 50, will be the second youngest governor after Manmohan Singh, who took charge when he was 10 days short of his 50th birthday. Bhopal-born Rajan has always been a high achiever: A gold medalist at both IIT Delhi and IIM Ahmedabad, he went on to complete his PhD from the Massachusetts Institute of Technology. He became the Economic Counselor and Director of Research (Chief Economist) of the International Monetary Fund in September 2003— the youngest ever to be appointed to this post. In 2003, he also won the first Fischer Black Prize, which is awarded to the most promising economist under the age of 40, by the American Finance Association. He is also a Professor of Finance at the Chicago University’s Booth School of Business. His most widely-read book, Saving Capitalism from the Capitalist, was co-authored with fellow Chicago GSB professor Luigi Zingales and published in 2004. In 2005, he predicted the financial crisis of 2008-09, but was brushed aside by economists such as former US treasury secretary and Harvard University president Lawrence Summers, who called him a “Luddite”. Rajan is viewed as a pragmatist on monetary policy likely to stick fairly closely to Subbarao’s line on managing inflation. The outgoing governor fought an uphill battle against price pressures for much of his term in an economy plagued by supply-side bottlenecks and legislative and bureaucratic paralysis. Raghuram Rajan-The Academician Regulator
  3. 3. Cover Story Despite the impressive credentials, there are several challenges he will face in trying to drive higher incomes and more stable prices for 1.2 billion Indians. What to expect from Rajan: The immediate priority for the new governor will be to draft the mid-quarter review of RBI’s monetary policy on September 18 - within a fortnight of taking charge. But the long-term challenges that Rajan has to address are: 1. North Block – Mint Road relationship: The relationship between the finance ministry and the Reserve Bank of India governor’s office has hit rock bottom. It will be a challenge for Rajan to improve the relationship at a time when the economic scenario is deteriorating. 2. Recovery of rupee: Perhaps the biggest challenge for the new governor will be to strengthen the rupee which has depreciated more than 12% in the current financial year, and the drivers of the weakness are not entirely in control of Indian policy makers. 3. Recouping FX reserves: The foreign exchange reserves is at a three- year low and could cover imports for about six and half months, lower than what is seen as providing stability to the currency. Replenishing the forex kitty will be a key task. 4. Keeping inflation under check: After fighting price rises for close to three years, outgoing governor D.Subbarao finally brought WPI inflation below 5 per cent – seen as the tolerance threshold of the central bank, though consumer price inflation is still high. 5. Reversal of liquidity tightening measures: If Subbarao decides to continue with the liquidity tightening measures till September 4, or perhaps introduces new measures, then Rajan has to face the challenge of withdrawing those measures. That's because the timing of such a step will be critical for exchange rate stability. 6. New bank licenses: Rajan takes charge at a time when the banking regulator is in the process of giving fresh licenses for banks after more than a decade and for the first time decided to allow industrial houses. Rajan faces the challenge of selecting the ‘fit and proper’ candidates from the 26-odd applicants. As the next governor of the Reserve Bank of India (RBI), Raghuram Rajan, will be stepping in the new role during tough economic conditions. Economic growth has decelerated sharply, the government deficit is about ten per cent of GDP, inflation has remained elevated at close to double-digits for over three years, and the current account deficit has widened sharply to unsustainable levels. As if this weren't enough, the country is also gearing up for two bouts of elections within the next nine months. Fiscal prudence could well be a casualty, further burdening the RBI and endangering the macroeconomic situation. There is a tricky balancing act that he will have to pull off.
  4. 4. Silver is often sought as a more affordable store of value than gold at times of wider market insecurity. Both the metals are also traditionally sought as hedges against inflation and currency debasement at times of loose central bank monetary policy. However, Silver continues to lack its own drivers at the moment and is therefore taking its cues from the gold market. This means that the white metal would also come under pressure as gold sentiment sours further. Given silver's tendency to overshoot gold moves, the downside risks are greater in the short term. Silver prices for this year have been slashed as the metal is expected to be dragged lower on gold's coattails as the U.S. Federal Reserve prepares to scale back its stimulus program. This year, silver is expected to average $24 an ounce and $25 an ounce in 2014. The Metal prices would get further affected due to turmoil in emerging markets and the prospects of lower growth in China. Further ahead, though, silver's price outlook looks brighter. Though silver is perhaps best known as an investment tool, it is not without other sources of demand. Unlike gold, silver is used widely in industry, and demand for the metal in electronics and solar panels, for instance, tends improve as economic growth picks up. The 'normalization' of the global economy and the return to healthy growth rates should increase the role of fundamentals in the silver market: robust industrial demand would offer more stability to silver prices on a yearly average basis. Stats Outlook-Silver Gloss Dirigisme It is an economic system where the state exerts a strong directive influence over investment. It designates a capitalist economy with a strong directive, as opposed to a merely regulatory, role for the state. A related concept is that of state capitalism.
  5. 5. Emerging Country- Venezuela Venezuela officially called the Bolivarian Republic of Venezuela is a country on the northern coast of South America bounded on the north by the Caribbean Sea and the Atlantic Ocean, on the east by Guyana, on the south by Brazil, and on the west by Colombia. Venezuela has a mixed economy dominated by the petroleum sector. Venezuela is the world´s tenth biggest exporter and the thirteenth largest producer of oil. Venezuela remains highly dependent on oil revenues, which account for roughly 95% of export earnings, about 45% of federal budget revenues, and around 12% of GDP. Other major exports are bauxite and aluminum, steel, petrochemicals, and agricultural produce. Venezuela’s principal trading partners are the United States, Colombia, Brazil and Mexico. Major import commodities in Venezuela are machinery and equipment, construction materials and other raw materials, to support its domestic industries and increase exports. Venezuela’s economy grew by 5.6 per cent in 2012, but is forecast to grow by only 0.1 per cent in 2013. High inflation, falling public expenditure due to volatile oil prices, a weak investment outlook and deteriorating infrastructure are contributing factors to this slowdown. Economic growth slowed sharply to 0.7 percent during the first quarter of this year, from 5.9 percent in the same period in 2012. GDP per capita rose from $4,132 in 1999, to an estimated $11,131 in 2012, according to the International Monetary Fund (IMF). Economic growth in the first quarter mostly reflects depressed domestic demand, which grew only 1.8% over the same quarter last year. Exports fell 7.5% while imports virtually halted to a 1.1% increase. Inflation hit a record monthly high of 6.1 percent in May, bringing the annualized rate to 35.2 percent. Foreign direct investment in Venezuela fell 15% in 2012; Venezuela received USD 3.21 billion versus 3.77 billion a year earlier. India and Venezuela have been maintaining cordial relations. India’s export to Venezuela is around US$300 million. The main items of India’s exports are pharmaceuticals, chemicals, Calcined Petroleum Coke (CPC), textiles and engineering products such as scooters, equipment and machinery. The Indian Pharma industry has already made a mark and some reputed companies are operating there. Venezuela’s total export to India is US$ 14105 million. The main items of India’s imports from Venezuela are crude oil, iron pellets and electrical cables. Vital Economic Statistics of Venezuela Economy Particulars Details GDP (nominal) $345.651 billion(2013 estimates) GDP growth rate 0.70% (2013 estimates) Currency Bolivar Fuerte (VEB) Credit Rating B (S&P) B+ (Fitch) B2 ( Moody’s) Fiscal Deficit 10.20% of GDP (2012) Current account Deficit 6.189 % (2012)
  6. 6. In FocusForex Economic New Companies Bill- Kudos to the lawmakers The Rajya Sabha on 8th August 2013 passed the Companies Bill, which seeks to improve transparency and accountability in the companies. The new Companies Bill, which replaces the decades-old Companies Act of 1956, requires President Pranab Mukherjee's assent to become law of the land. The Lok Sabha had passed the Bill in December last year. The five radical shifts in the new Bill: Corporate governance, corporate social responsibility (CSR), accounting provisions, relationship of the directors and the auditors with the company, and finally, the merger and amalgamation provisions have improved transparency and broad-based accountability while protecting the minority interests in a company. On a macro basis, the new Company law is slimmer with about 470-odd sections. But the subordinated legislation – Rules – will be the real test on whether the new corporate framework is heralding a shift from control to self-regulation or not. Nearly 75 per cent of the provisions in the new law are to be administered through the Rules. This is a clear pointer that Parliament and Indian law makers will have very little to do regarding Company law per se in the coming years with most changes possible through the executive. Another interesting facet is that the new law has defined “fraud” and extensively dealt with it. The earlier Companies Act did not define “fraud” or corporate misconduct. With increase in corporate frauds in the country, this may be the right approach. All in all, the Companies Law Bill passed by Parliament last week is a major attempt to streamline the functioning of companies. The new law is being enacted at a time India is in dire need of investments, both foreign and domestic, to sustain the economic growth rate, which alone can make a dent on poverty.However great the Companies Bill, 2013, may be, its success will depend on how well it is implemented. Often, it is not realised that the law is as good as the rules and regulations framed under it. Sensex Nifty 19,182 .26 18,598 .18 5685. 40 5507. 85 Gold (10 gm) Silver (1 Kg) 27865 30492 41780 50496 Crude Oil ($/barrel) Dollar/INR 108.70 110.40 60.82 61.82 Data from 5th August 2013 to 16th August 2013
  7. 7. About Investeurs Consulting Private Limited For a good business, finance is as crucial as vision, management and product. Intuitively then Business Finance plays a vital role in the business prosperity. We, at Investeurs Consulting Pvt. Ltd understand and appreciate the vitality of this discipline and the responsibility that comes with it. As Business Finance Consultants we realize that finance is an enabler that contributes significantly towards realizing your business goals. We bring to the table 18 years of vast and vivid exposure to different businesses, a profound understanding of business and financial dynamics and excellent relationship with banks/ financial institutions. Domestic Trade Finance: Negotiation of Inland Letter of Credit International Trade Finance: Buyers’ Credit and Suppliers’ Credit Capital Investment: Project Funding and Term Loan Working Capital Management Factoring Private Equity Rating Assistance TeamChronicle Akanksha Srivastava akanksha@investeurs.com Nidhi Gogia nidhi@investeurs.com Shagun Khivsara shagun@investeurs.com Harpreet Kaur harpreet@investeurs.com Disclaimer: InvesteursChronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided. Investeurs Consulting Pvt. Limited S-26, 27, 28, 3rdFloor,Veera Tower, Green Park Ext. New Delhi-110016, www.investeurs.com