Business Environment - Contents

1. A firm is affected by the following environments:

a. Macroeconomic Environment (Monetary Supply, Fiscal Policy, Government Policies,
etc.)
b. Microeconomic Environment (Demand Supply, Industry Growth Rate, etc.)
c. Internal Organization Structure
2. Macroeconomic Environment and Policies
a. Monetary Policy: It is controlled by Central Bank like the Fed in the US and RBI in
India. The Money Supply in the system, i.e. M1 which is narrow money and more
liquid components of money, and M3 that includes term deposits and non-liquid
components and its impact on the interest rates, inflation, etc.
b. The following are the mechanisms that are used by the RBI:
i. Open Market Operations: Buying and Selling of Government Bonds
ii. LAF (Liquidity Adjustment Facility): Repo Rate, Reverse Repo Rate, and the
Interest Rates
iii. MSS: Issue of Govt. securities with RBI and Govt. intervention
iv. Reserve Ratio: SLR, CRR and its impact on Interest Rates (The Multiplier
Effect)
c. Fiscal Policy: The income and expenditure of Govt.
d. The following are some of the factors associated with the budget that have an
impact on the business of a firm:
i. Revenue Deficit: Revenue Receipts – Revenue Expenditure
ii. Primary Deficit: Total Receipts (excluding redeemable bonds) – Total
Expenditure excluding interest payments
iii. Fiscal Deficit: Interest Payments added to Interest payments of the Govt.
Implication of fiscal deficit on the interest rates (The Crowding Out Effect).
The FRBM Act, 2004 and changes in the fiscal deficit over a period of time
e. The Budget Analysis included analysis of Govt. expenditure on specific industries
such as:
i. Power
ii. Infrastructure
iii. Aviation, etc.
f. Bonds and Derivatives Market
 i. Bond Market: Coupon Rate (the fixed interest rate on a bond), the face
value of bond, YTM (the total interest earned by an individual by holding the
bond until maturity since he/she bought it from the market)
1. If a bond's coupon rate is less than its YTM, then the bond is selling
at a discount
2. If a bond's coupon rate is more than its YTM, then the bond is selling
at a premium
3. If a bond's coupon rate is equal to its YTM, then the bond is selling
at par
4. ZCB: The interest rates and bond prices are inversely proportional
(ZCYC)
ii. Derivatives Market: A broad class of financial instruments that derive their
value from other financial instruments (known as the underlying), events or
conditions
1. Forward Contract: A forward contract or simply a forward is a non-
standardized contract between two parties to buy or sell an asset at
a specified future time at a price agreed today
2. Option: An option is a contract between a buyer and a seller that
gives the buyer of the option the right, but not the obligation, to buy
or to sell a specified asset (underlying) on or before the options
expiration time, at an agreed price, the strike price
3. Swap: A swap is a derivative in which two counterparties exchange
certain benefits of one party's financial instrument for those of the
other party's financial instrument
4. OTC: Over-the-counter (OTC) or off-exchange trading is to trade
financial instruments such as stocks, bonds, commodities or
derivatives directly between two parties
g. International Factors: Doha Declaration
i. Setting up of WTO (1995) following the GATT Agreement
ii. International Agreements: AoA, TRIPS, TRIMS, Agreement on Textiles, etc.
iii. Doha Declaration: 2001, 2005
h. SSI Policy and Evolution of SSI
i. Definition: < 50 people which changed to investment limits
ii. Classification of SSI
 iii. Govt. Bodies that support SSIs
iv. Industrial Policies and its role in development of SSI
v. MSMED Act , 2006 and Service Sector inclusion, Inclusion of Medium
Enterprise
vi. Types of SSI and Incentives
vii. Microfinance and Problems/Sickness faced by SSIs
viii. Global Economic Crises and its effect on SSI and Recommendations
i. PSUs in India and privatization
j. Carbon Credit
i. Carbon Dioxide – A major pollutant
ii. The Kyoto Protocol
iii. The Signatories – Annex I and Annex II countries
iv. MACC (Marginal Abatement Cost Curve)
v. The Trading Exchanges (EU ETS, CCX, etc.)
k. CSR
l. Corporate Governance
i. OECD
ii. SEBI
iii. Ministry of Corporate Affairs
m. Consumer Protection in India
3. Basel Norms
a. Capital Adequacy
b. Tier I Capital
c. Tier II Capital
d. Basel II Norms
i. Market Risk
ii. Credit Risk
iii. Operational Risk: Measurement of Risk and Data Exhaustiveness
4. Balanced Scorecard System: Bridges the gap between macroeconomic parameters and firms
short-term and long-term goals
a. Translating the vision
b. Communicating and linking
c. Business Planning
d. Feedback and Learning