Team Disha Newsletter

Dec 2015

Important Events in World Finance

USA:
Fed’s Lift Off: Markets are eagerly awaiting the much-debated lift off in the Fed funds rate. The decision is
expected to be announced after the FOMC meeting on Dec’16th 2015. The move will mark an end to historic
near zero rates and put an end to the era of ultra-cheap credit.
 What are fed fund rates?
 Financial Times: Detail Guide to What Happens When Interest Rate Rise
 The Fed is about to attempt the greatest monetary experiment in history
 Impact of Fed Lift off on Global Economy
 The fallout of Fed rate hike
 Indian markets well prepared for Fed Rate Hike bouncer
 5 reasons why Fed rate hike could be positive for India

Europe
ECB Monetary Easing: The markets reacted negatively to less than expected rate cut of 10 bps by ECB. The
deposit rate now stands at -0.3% and the QE has been extended till at least Mar’17. This decision is also important
in the sense that, it is the first time two major central banks ECB and Fed are moving in opposite monetary
policy direction.
 Europe’s QE Quandary
 ECB pledges to extend easing until March 2017 ‘or beyond’
 Impact of less than expected Easing
 'The great monetary divergence', Divergent Paths for U.S., European Central Banks
 Euro jumps as ECB underwhelms markets

China
Yuan’s SDR inclusion: The IMF recently approved inclusion of Yuan in the list of its reserve currencies. The
move was highly expected after China’s ongoing efforts to reform the currency management policies, including,
making it more market driven. This led to an unexpected devaluation of Yuan in Aug’15.
 The Yuan joins the SDR
 China Vows to Keep Yuan at Reasonable Level after SDR Inclusion
 5 things to know about China's push for yuan inclusion in IMF elite currency basket
 SDR inclusion to help China lure trillion-dollar inflows

Yuan Devaluation: In August 15, the PBoC unexpectedly change the method of managing the Dollar/Yuan
peg. The PBoC claims that it was done as part of the reforms needed for Yuan’s inclusion in the elite SDR list
of IMF. However, some market experts argue that the move was engineered by PBoC to devalue Yuan in order
to support its continuously falling exports.
 5 Things to Know about China’s Currency Devaluation
 Here's why China devalued its currency
 Could China's Yuan Devaluation Spark a New Financial Crisis?
 How Has Devaluation of the Yuan Impacted Global Currencies?
 Five Indian sectors that will be impacted by China's yuan devaluation

China’s Macroeconomic Trilemma: The Chinese economy has been doing poorly for last few quarters.
Despite its decently high growth figures, the markets have already started contemplating a Chinese slowdown.
The PBoC in a bid to support the slowing economy has already cut interest rates six times in last one year.
 Team Disha Newsletter
Dec 2015

However what Chinese economy is witnessing is a well-documented economic phenomenon called the
“Impossible Trinity”. As per this condition, an economy can’t have the following three economic luxuries at
the same time, viz. Independent Monetary Policy, fixed exchange rate and a free movement of capital. In case
of China, following sequence of events lead to the Macroeconomic policy becoming redundant:
 PBoC reduces interest rate to support the economy
 The reduction in interest rates leads to depreciation of Yuan (Free movement of capital)
 The PBoC sells dollar and buys Yuan (To maintain its peg of ±2%)
 Buying Yuan sucks out the liquidity from markets
 Reducing interest rate and buying back Yuan nullify the impact of monetary policy
Some economists now believe that the Yuan is headed for more depreciation and eventually the PBoC will
have to let go of their 2% managed peg
 Woo Explains How China Was Behind One of This Week's Most Extraordinary Market Developments
 Bank of America's Woo Says Chinese Yuan May Drop 10 Percent
 Economists React: China Cuts Rates Again as Growth Loses Momentum
 China joins nervous global easing
 China Cuts Interest Rates as Policy Divergence with U.S. Widens
 This Is What China's Version of Quantitative Easing Looks Like

India
7.4% GVA Q2 FY16: India’s economy grew at 7.4% in Q2 of current fiscal year, comfortably outpacing China.
This was majorly supported by a 9.3% gross value added (GVA) by manufacturing, modest recovery in
consumption and frontloading of government spending. Investment growth picked up by 200 basis points
while private consumption growth moderated to 6.8% as rural demand remained muted. The economy is
expected to end the year with an overall 7.4% growth rate.
 India's GDP grows at 7.4% in Q2 of FY16; manufacturing grows at robust 9.3%
 The state of the Indian economy
 Exports fall for 10th straight month, down 24% in Sept

Seventh Pay Commission: The Seventh Pay Commission recently submitted its report. Among other things,
it is expected to increase the GoI outlay by c. 1 lakh crore. However, it is expected to have a multiplier effect
that in turn will be a boost for the economy. The GoI has also expressed confidence in meeting its fiscal deficit
targets of 3.9%, 3.5% and 3% for FY16, FY17 and FY18 respectively, even after this additional expenditure.
 7th Pay Commission decoded: All you need to know about salary increment; past pay commissions
 FM Arun Jaitley says 7th Pay Commission outgo not to affect fiscal deficit target
 7th Pay Commission recommendations not to upset fiscal roadmap: Raghuram Rajan

GST in Winter Session? The long awaited major tax overhaul in the form of Goods and Service Tax (GST) is
widely expected to be passed by the Parliament in the current winter session. The Bill has been passed by Lok
Sabha and now requires to be passed by Rajya Sabha by two-third majority. The GoI is targeting an
implementation by April 1, 2016. The Chief Economic Advisor committee formed to recommend the possible
GST rates has recently submitted its report. Key suggestions include: removing the proposed 1% tax on
interstate tax and GST rate range of 16.9%-18.9%.
 Wiki: What is GST?, What is GST?
 Industry wise impact of GST, EY: Guide on GST
 Will GST make things costlier or cheaper?
 CEA panel for removing tax on inter-state trade, CEA committee suggests GST rate of 17-18 per cent
 Impact of non-passage of GST Constitution Amendment Bill in Rajya Sabha