Mistry Shyam Roll No.

23 Finance Assignment

What is current account deficit?

A countrys current account deficit consists of merchandise trade and invisible trades income and expenditure from export and import of goods and services. Deficit arises when total export is lesser than total import. Where India does stands? Indias current account deficit likely to increase 3% of the GDP. What are the reasons for high trade deficit? Reasons are many like portfolio investment inflows, long-term capital inflows, and overseas borrowings. What are risks posed by a widening current account deficit? Risks like: serious problem for economy, debt payment problems, pressure on local currency, and outflow of foreign capital.

GDP saga:
Year 1960 to 1972: emerging market economics is 75% of world GDP. 1973 to 1985: around 72% of world GDP 1986 to 2009: around 65% of world GDP 2008 to 2009: around 55% of world GDP

What are bonds?

Bonds are one of financial instruments through which an investor can lend money to an entity in return for a periodic interest payment and repayment of loan money after a certain years. What is the inflation risk in investing in regular bonds? The fixed rate of return demanded by investor is based on inflation expectation. There are chances that actual inflation rate is higher than investor expected inflation rate at this time investor will incur loss or he will earn negative return. The risk is particularly very high in case of long term tenure bonds that having maturities as long as 30 years. How do inflation indexed bonds reduce risk for investor?

This bond assures fixed real rate of return to the investor. Here some return is fixed. Investors return varies from year to year as inflation is fluctuating. As example is given that if you have invested Rs. 100 for 5% interest rate after a year, inflation rate is around 5% so after a year 5% return will be calculated on Rs. 105. How does issuer of such bond benefit? Here investor does not demand an uncertainty premium in this bond. So, there are chances that expected inflation rate is equal to actual inflation rate, when this situation arises issuer will save premium and benefited. How have Indian investor responded to inflation indexed bonds? Response was muted, as in 1997 capital index bonds were issued at that time only principal repayment was indexed on inflation not interest.

Chinese competition a big worry

As we all know China is biggest competitor of India. China provides cheaper labour than India. There was a competition between China and India for getting orders, in this race China bagged Abhijeet groups 11300 crore order for 600 MW supercritical coal burning unit. Relience Power also placed order of 37700 crore with Shanghai Electric for coal fire generator. BHEL was the company who lost both the order, loosing these order will not affect BHEL as it has many orders but if we see long term than China will be the biggest competitor.

Subsidising Fuel and what it means for the Economy

How are price set in India? Prices of the most of the goods in India are market determined except leaving some sensitive products like Fuel. Government gives subsidies in fuel so instead of increasing price, prices are decreased because if price of fuel getting increased, its directly affect to the other goods in the economy and prices of other goods also will increase. Is this ideal way? As economic theory says prices of the goods are market determined even though Govt. come into picture to protect the weaker section economy. How does the Govt. finance subsidies? Govt.s main revenue is tax, taxes on goods and services so from this revenue only subsidies are financed. What are problems with the current system? Main problem is as soon as Govt. provides subsidies on fuel, people start using that fuel more. E.g. Diesel Are there other ways of supporting those in needs?

There are solutions like people are provided direct cash transfer. But what could be the criteria for selection of people to whom Govt. pay cash.

Asset Classes: A default pointer

Banks classifies their assets in different qualitative categories. These categories reflect how good or bad the asset is. What could be the chances of default? This practise is known as Asset Classification. Asset Classification is very important for bank as it provides the information that which assets are strong and weak. According to information bank can start making corrective actions for those assets which can be defaulted. There are four broad categories of asset classification: Standard asset: Borrowers pay their interest on regular basis. Sub-standard asset: Borrowers fail to pay their interest on loan for 3 consecutive months. Asset remains in NPA for less than 12 months. Doubtful asset: Asset known as doubtful if it remains in NPA for 12 months. Loss assets: When banks see little possibility of recovering loan or asset, it becomes loss asset for bank. If loss asset is there in books of banks, 100% of the outstanding has to be provided for doubtful asset. If it remains in book for a year than provisional requirement is 20%, if it remains for 1 to 3 year than provisional requirement of 30%.

Primary Dealers:
Primary dealers are essentially market makers for govt. bonds and securities offering two way quotes. In 2009 RBI let them expand business apart from core primary dealership to Non-core activities like investment in equity, equity oriented MFs, underwritings of equity offerings. Two way price quotes are: Negotiated Dealing system Order Matching (NSD- OM) and Over the counter market or other recognised stock exchanges.

Mark to Market:
It is valuation method for various securities in the books of accounts in the business. In this method equity portfolio is linked to the market price. This method came in existence in the financial reforms 90s.