2017

Volume 2

THIS MONTH

In this issue, Ms. Shilpa Kumar, Managing Director and CEO of ICICI Securities Ltd has presented

her thoughts on Strong domestic undercurrents that are holding the Indian market buoyant. We

thank Ms. Shilpa Kumar for her contribution to the APAS Monthly publication.

This month, the APAS column focuses on the Indian Banking Sector and the ups and downs the

sector has experienced in 2017. This column even focused on the demonetization and its effects

on the Indian economy.

The economic indicators showed mixed performance. Manufacturing PMI was up from 49.6 to

50.4 in January. The core sector slowed to 3.4% in the month as compared with 5.7% in the year-

ago period. India's Index of Industrial Production (IIP) decreased by 0.4% in December. PMI

services and composite PMI rose from 46.8 and 47.6 in December to 48.7 and 49.4 in January.

Inflation fell to 3.17% in January from 3.41% in December. Wholesale inflation increased to

5.25% from 3.39% in the previous month.

Other significant industry developments include the release of the Sixth Bi-Monetary Policy

Statement 2016-2017 by the Reserve Bank of India (RBI). Also, RBI has issued a review of the

Pricing Credit guidelines. The Central Bank has published a clarification regarding Coupon

Discretion on Additional Tier 1 Capital.

The Insurance Regulatory Development Authority of India (IRDAI) circulated a release modifying

the parameters concerning Life Insurance Point of Sales Persons.

APAS

MONTHLY

The Ministry of Civil Aviation launched the Regional Connectivity Scheme (RCS) UDAN, a key

component of the National Civil Aviation Policy. The Ministry of Urban Development has

released a multi-pronged policy framework to help address urbanization challenges. This

framework encourages “Transit-Oriented Development” enabling people to reside within walking

or cycling distance from mass transit corridors.

We hope that this APAS Monthly is insightful. We welcome your inputs and thoughts, and

encourage you to share them with us.

Ashvin parekh

On the cover

GUEST COLUMN

Ms. Shilpa Kumar

Managing Director and CEO, ICICI Securities Ltd.

Strong domestic undercurrents to keep the Indian market buoyant

APAS COLUMN

➢ Indian Banking Sector Snapshot – The Ups and Downs

ECONOMY

➢ Index of Industrial Production – December

➢ Inflation update – January

➢ PMI update – January

➢ Core Sector update – January

BANKING

➢ RBI’s Sixth Bi-Monthly Monetary Policy Statement, 2017

➢ Guidelines on “Pricing Credit”: Review

➢ Basel III Capital Regulations – Additional Tier 1 Capital

INSURANCE

➢ Guidelines on Point of Sales Person – Life Insurance

INFRASTRUCTURE

➢ Regional Connectivity Scheme UDAN (Ude Desh Ka Aam

Nagrik)

➢ National Transit Oriented Development Policy (TOD)

CAPITAL MARKETS

➢ Circular on Mutual Funds by SEBI

CAPITAL MARKET SNAPSHOT

ECONOMIC DATA SNAPSHOT

Financial markets, globally, witnessed a volatile year in 2016 led by political and economic events. Brexit,

the US Presidential elections and a hawkish shift in the US Fed stance all triggered strong market reactions.

The year was equally eventful for India as it experienced a pickup in consumption with a good monsoon

(after two years of below normal situation) followed by growth concerns over demonetisation and

subsequent abatement coupled with transmission of rate cuts.

Worldwide, capital markets are buoyant and scaling new highs in 2017 largely backed by initial signs of

demand recovery in key developed economies amid reasonable inflation levels. On the other hand,

concerns remain on a possible protectionist stance by major economies and its repercussions on global

trade. In the near term however, global markets seem to be focused on a US rate hike and European

elections. Currently, it appears that there is a high probability of a US rate hike in the upcoming March 15

meeting and a return of the US reflation trade. In the medium-term, European elections in Netherlands,

France and Germany will determine risk sentiments, which are currently in a risk-on mode as pro-EU

parties seem to be gaining traction. In the longer term, the key for equity markets will be the economic

policies of the US and China as well as the actions of the large central banks in the world economy.

The Indian economy heads into 2017 with relatively strong macroeconomic fundamentals, lower

inflation/interest rate regime, possibility of major reforms such as GST and a favourable demography

supporting sustainable growth.

The beginning of 2017, has presented a strong undercurrent of growth recovery in India driven mainly by

the lower than anticipated impact of demonetisation as well as a prudent Union Budget, which focused

on growth in key areas, while maintaining fiscal discipline. Recent GDP data released by the CSO allayed

fears of an economic slowdown on account of demonetisation. Q3FY17 real GDP growth was pegged at

7.0% while for the whole year FY17E real GDP growth was pegged at 7.1%. A positive surprise was

witnessed in private and government final consumption estimates. Going ahead, the government’s

Strong domestic

undercurrents to keep

the Indian market

buoyant

Ms. Shilpa Kumar, Managing Director and CEO, ICICI Securities Ltd.

resolve to implement structural reforms in the form of GST could provide a significant impetus to the

Indian economy. Consequently, GDP growth in FY18E is expected at 7.6%.

One of the benefits of demonetisation, apart from giving digitisation a strong push, has been the

availability of liquidity to the banking system. This has enabled the transmission of rate cuts. The interest

rate trajectory witnessed a sea change in 2016 wherein while the RBI cut benchmark rates by 50 bps, the

transmission of rates was around 80 bps. Going ahead, while the RBI has indicated a neutral stance, we

believe there remains further scope for cuts in repo rates in the second half of 2017 if the inflation

trajectory remains benign.

The adverse effect of demonetisation on physical assets like real estate and gold has already encouraged

investors’ tilt towards financial assets like equity and bonds. Channelisation of financial savings has

resulted in strong domestic flows into equities, which allowed Indian equities to withstand the severe

outflow from FPIs during the demonetisation period. One should note that FPI flows into Indian equity

markets for CY2016 stood at a 5-year low of Rs. 188 bn. However, DIIs have ploughed in Rs 372 bn into

Indian equities during the year surpassing the net flows from FPIs.

Looking ahead, global risks are likely to prevail and will continue to be a significant trigger of volatility in

financial markets. In the medium to long term, risk sentiment could stay positive as commodity price

recovery stabilises, Eurozone sees status quo prevail and stimulative policies from the US and China

continue. This is likely to be favourable for DM and EM equities. However, a more inward looking US plan

with a fiscal stimulus and tax cut could propel growth in the US economy and also push the Dollar index

higher. For EMs, the risk of stronger inflation and growth in the developed world remains, which can keep

the EM carry unattractive after considering hedging costs.

To sum up, structural positive shifts in the economy coupled with increased focus on channelisation of

financial savings is likely to keep the Indian financial market buoyant, amidst bouts of global volatility. On

the earnings side, FY14-17E has been largely flat with Sensex EPS pegged at around Rs. 1400 primarily on

the back of a global meltdown in commodity prices and NPA recognition by banks. Going forward, given

the low base, stable commodity prices and revival of consumption led demand, we expect strong double

digit earnings recovery over FY18-19E. Barring significant global risk events, this should enable the market

to scale new highs.

- Shilpa Kumar

FY2017 has been a challenging year for Indian banks due to low credit growth, rising NPAs and capital

scarcity. Demonetization presented another obstacle for Indian bank as an influx of deposits coincided

with a dearth of lending opportunities given the weak economic environment.

Demonetization was expected to be largely positive for banks by providing an influx of cash through

known banking channels and by closing alternative conduits. The surge of cash deposits during this period

were in the form of CASA and thus lowered the cost of funds for the banks. RBI’s reverse repo operations

and resulting surge in money market liquidity was expected to result in falling yields, boosting HTM bond

portfolios of banks and would add to their profitability. Market conditions pre-demonetization

incentivized banks to hold bonds above the SLR limit. If bond yields were to fall, then banks would have

no reason to hold excess government bonds in their SLR portfolio thereby leading to further credit

disbursement. However, it was essential that the environment fostering this increased access to credit is

met with a concurrent increase in credit demand.

While it was envisaged that demonetization would encourage these positive banking conditions, it also

caused a sudden breakdown in India’s commercial ecosystem. Trade across all facets of the economy was

disrupted, and cash-centric sectors such as agriculture, fishing, and countless informal markets were

virtually shut down, with many businesses foundering. PMI data for both manufacturing and services

contracted. Growth of bank credit fell to a multi-decade low of 5.1% in December. Banks realized

increased short-term costs during the demonetization period as they had to recalibrate their ATMs and

had to account for charges relating currency transport across the country.

Although banks have benefitted from lower cost of funds (as evidenced by deposit rates trending lower),

the move to the new marginal cost of funds-based lending rate (MCLR) structure has forced banks to pass

on this benefit to new borrowers more rapidly. Effective January, most banks have slashed their MCLR by

a sharp 75-90 basis points, resulting in pressure on yields on advances and hence margins, which offset

the gains realized earlier by the lower cost of funds. Retail-oriented banks are likely to feel the impact of

margin pressure quicker than other banks as the transmission of rate cuts will happen faster there and

new advances will be at lower lending rates. Corporates will also experience a nominal reduction in rates.

Although demonetization has had a clear effect on banking performance, some of the anticipated positive

effects of the policy were not attained. Q3 FY 17 saw a deluge of deposits but there were fewer

Indian Banking

Sector Snapshot –

The Ups and

Downs

disbursements in retail credit and the anticipated corporate credit demand did not materialize. Deposit

growth was 13% YoY and 6% QoQ in Q3, while CASA growth was 34% YoY and 19% QoQ. Credit increased

2% YoY and was flat sequentially, due to reallocation of banking resources to cash management, cash

collection and disbursements at branches and continued sluggishness in corporate credit. The loan-to-

deposit ratio (LDR) crashed, impacting margins and net interest income (NII). Meanwhile 10-year G-Sec

yields saw a steep fall in the post-demonetization period from pre-period levels of 6.79% in November to

6.22% in December. However, with the post-demonetization period announcement that future rate cuts

were unlikely given core inflationary pressures, the yields picked up to 6.91% in March.

Overall in the second half of this fiscal year, gains from reduced cost of funds and strong treasury income,

are offset by the marked slowdown in credit growth, lending rate cuts, risk of higher delinquencies and

increase in costs.

One as-yet unrealized positive appears to be the schemes and a few Budget announcements made by the

Indian Government. The recent lending rate cut is likely to trigger growth in retail loans---home loan,

personal and auto loans, and credit cards. The only other trigger for retail loan growth besides

consumption will be government spending in FY18.

On another positive note, increased allocation to the MUDRA scheme will provide a big boost to the non-

corporate small business sector and is anticipated to give a push to MSME lending. The allocation has

increased approximately twice as much compared to last year, to a current figure of INR 2.44 trillion.

The Budget has been provisioned to include a sizeable allocation to NREGA, a push to rural infrastructure

and a 40% rise under Pradhan Mantri Fasal Bima Yojana (PMFBY) coverage. These inclusions will lead to a

strong improvement in rural activity and will result in better financing opportunities.

Infrastructure status was conferred on Affordable Housing development in the Budget. This change, along

with wider scope of affordable housing and interest subvention scheme, announced earlier by the Prime

Minister, is expected to provide huge boost to the housing sector and in turn, the banking sector. The

interest subvention scheme gives an interest rate discount to LIG, of 4% for home loans up to INR 9 lakhs

and 3% for home loans up to INR 12 lakhs.

Post-demonetization, there are fresh risks and challenges for banks: asset quality concerns, supply chain

disruption for large corporates, possible increase in delinquencies in the SME and the loans against

property due to an on-going cash crunch in the short-term and overall slowdown in the economy.

Encouragingly, there is also evidence of factors that may mitigate or offset some of these risks. The

coming six to twelve months could prove decisive for the banking sector. With RBI’s hardening stance on

interest rates, banks will need to find profitable lending avenues without the aid of lower rates.

Concurrently, banks will need to remain conscious of the impact a continued weak economic

environment on the credit quality of their book and their need to preserve capital. Overall, it will be a

tough balancing act for the banks and only the tough and efficient will survive. It’s time to wait and

watch the direction in which banking sector will move.

-APAS

IIP (Index of Industrial Production) – December

Industrial production decreased by 0.4% in December mainly due to a reduction in Manufacturing.

The factory output for the April-November period of the current financial year remained relatively flat at

0.4% compared to 3.8% increase in production at this time one year ago.

The manufacturing sector, which constitutes over 75% of the IIP index, increased by 5.5% in November

compared to contraction of (-)2.4% in October and (-)4.6% a year ago. Mining output also increased by 3.9%,

contributing to the growth in industrial production. The pace of electricity generation rose by 8.9% in

November 2016.

As per the use-based classification, the basic

goods output improved by 4.7% in November

2016 against a year ago, while the output of

intermediate goods moved up by 2.7%. The

growth in consumer goods output was 5.6%,

while that of capital goods was 15% in

November 2016. Within consumer goods, the

production of consumer durables rose by 9.8%,

while that of consumer non-durables increased

by 2.9% in November 2016.

Sixteen out of the twenty-two industry groups in the manufacturing sector have showed growth during the

month of November 2016 when compared to the corresponding month of the previous year. The 'Radio, TV

and Communication equipment & apparatus' industry group has demonstrated the highest growth margin

with 32.2%. The other two industry groups, 'Electrical machinery & apparatus n.e.c.’ and 'Motor vehicles,

trailers and semi-trailers’ have increased growth in their respective groups by 23.2%.

The 'Furniture; manufacturing n.e.c.' industry group has experienced the largest decline in growth by (-

)16.5%. The 'Office, accounting and computing machinery' and 'Tobacco products' groups showed declined

in growth of -5.2% and -3.2%, respectively.

ECONOMY

-0.7

0.7

-1.9

5.7

-0.4

Aug-16 Sep-16 Oct-16 Nov-16 Dec-16

IIP (%YoY)

Quarterly Evaluation

4.73

1.80

0.200.83

-0.80

1.13

Q2 15-16 Q3 15-16 Q4 15-16 Q1 16-17 Q2 16-17 Q3 16-17

IIP

%

Quarter

IIP Trend

During April - June 2015, the growth in IIP decelerated mainly due to sluggish performance in capital

goods, electricity and food products.

IIP has decreased from 3.83% in Q1 to 0.43% in Q3 (FY 2014-15). IIP reached a peak of 4.73% in Q2 (FY

2015-16), however, it fell to a low of 0.2% in Q4 (FY 2015-16). While the IIP recovered slightly from

the end of the year to reach 0.83% in Q1 (FY 2016-2017) it has declined-0.80% in Q2 (FY 2016-17).

Over the course of Q2, IIP was negative for the first two months and improved to hit 0.7% by the third

month. Overall growth in Q2 has been minimal due to poor performance by manufacturing and mining

sectors.

CPI (Consumer Price Index) – January

The Consumer Price Index (CPI)-based inflation fell to 3.17% in January — a record low in the new series —

from 3.41% in December. The main reason for muted demand was demonetization of high value currency.

In January, 2016, the CPI hit a record5.69%. The higher the number in the previous year, the lower the

inflation looks in the current year. Technically, it is called the base effect.

Per the CPI-based inflation number released, inflation in food items — which account for over 45% in CPI —

was down to 1.29%, from 1.98% in December. The inflation in discretionary items, such as paan, tobacco

and intoxicants, decreased to 6.36% from 6.39% in December. Vegetables continued to witness deflation.

Pulses, witnessed inflation falling to (-)6.62% in January from (-)1.57% in December. Housing inflation grew

by 5.02% in January as compared to 4.98% in December.

4.31 4.2

3.633.41

3.17

0

1

2

3

4

5

Sep-16 Oct-16 Nov-16 Dec-16 Jan-17

CPI

Quarterly Evaluation

For Q2 of FY 2015-16, CPI inflation decreased to 3.95%. Thereafter it increased to 5.34% for Q3 of FY

2015-16 but ended Q4 with a slight decrease to 5.26% despite a sharp rise in food inflation due to an

ease in rural and urban inflation. It continued to be relatively high and sticky till Q1 of 2016-17, rising

to 5.64%, despite the sharp fall in commodity prices globally, especially for crude oil and despite

continued steep increases in food prices.

In Q2 (FY 2016-2017) the CPI fell to 5.14%, spurred mainly by a drop-in food prices. It fell further in

Q3 (FY 2016-2017) to 3.75% as a result of demonetization and a decrease in prices of vegetables and

pulses.

3.95

5.34 5.265.64

5.14

3.75

Q2 15-16 Q3 15-16 Q4 15-16 Q1 16-17 Q2 16-17 Q3 16-17

CP

I %

Quarter

CPI Trend

WPI (Wholesale Price Index) – January

Wholesale inflation increased to 5.25% from 3.39% in December 2016. In January 2016, the print was

(-)1.07%.

To date, the buildup inflation rate for the financial year is 5.31% compared to (-)0.40% in the corresponding

period of the previous year.

The Wholesale Price Index-based inflation figure, which reflects the annual rate of price rise, stood at 3.15%

in November 2016.

WPI inflation for ‘Food articles’ declined by 1.1% from the previous month. This was facilitated by a

substantial price fall in vegetables, which stood at (-)32.32% and onions, (-)28.86%. Per the information

released by the Commerce Ministry, there have been increases across Minerals (25.44%), Fibers (15.18%)

and Wheat (9.49%) in January 2017. Manufactured products also showed an increase to 3.99% from 3.67%

the month prior. The corresponding figures for Sugar and Petrol were 22.83% and 15.66%, respectively.

Overall, the food inflation basket increased to (-)0.56% in January as against (-)0.70% in December. The WPI

inflation for November has been revised upwards at 3.38% against the provisional estimate of 3.15%.

3.573.39 3.15

3.39

5.25

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Sep-16 Oct-16 Nov-16 Dec-16 Jan-17

WPI

Quarterly Evaluation

-4.51

-2.18 -0.88

0.92

3.64 3.31

Q2 15-16 Q3 15-16 Q4 15-16 Q1 16-17 Q2 16-17 Q3 16-17WP

I %

Quarter

WPI Trend

The WPI inflation had reached 0% in November, 2014 and January, 2015.

However, in 2015-16, WPI has been in negative zone for all the quarters. The main cause for this was

a steep fall in fuel and power prices. However, the graph has been in the positive region for FY2017.

It increased to 0.92% in the first quarter of 2016-17 due to dearer food items.

Further, there was a steep rise in food price once again, for the first two months of Q2 (2016-17).

However, on an overall basis WPI inflation showed a rise which went up till 3.64%. It fell to 3.31% in

Q3 of 2016-17 due to fall in inflation in ‘Food articles’, mainly vegetables and onions.

Manufacturing PMI – January

Indian manufacturing output increased during January on the back of rising order books. Greater production

needs encouraged companies to purchase more inputs, but failed to generate jobs in the sector. On the

price front, input cost inflation climbed to its highest mark since August 2014, while output charges were

raised for the eleventh successive month.

The Nikkei India Manufacturing PMI was up from 49.6 to 50.4 in January. Rates of expansion were only

slight, but reversed the contractions experienced in December. Anecdotal evidence highlighted a return to

normal market conditions and a subsequent improvement in demand. In contrast to the upturn in total new

business, new export orders fell again. Having eased since the previous month, the rate of reduction was

marginal. Intermediate goods was the bright spot in January, with rates of expansion in both new work and

production outstripping those seen in the consumer goods sector. Meanwhile, investment goods dipped

into contraction. Holdings of finished goods decreased in January, amid evidence from survey participants

of orders being fulfilled directly from stocks. The rate of depletion was marked, and the quickest since last

May. Concurrently, pre-production inventories declined slightly, but at a pace that was the fastest in over

three years.

Manufacturers attempted to replenish their input stocks by purchasing greater quantities of raw materials

and semi-finished items in January. That said, the overall rate of growth was only slight and well below its

long-run average. As a whole, input cost inflation climbed to a 29-month peak across the manufacturing

economy. Where cost burdens rose, there were mentions of higher prices paid for metals, chemicals,

plastics, textiles and paper. As part of ongoing efforts to protect margins, Indian manufacturers raised their

own selling prices for the eleventh successive month in January. However, the rate of inflation remained

only marginal. Newly-released future output data, which have been collected since April 2012, showed a

pick-up. Promotional activities and better economic conditions are anticipated to underpin production

growth over the coming 12 months.

Quarterly Evaluation

Manufacturing PMI in India averaged 51.93 from 2012 until 2016, reaching an all-time high of 55 in June

of 2012 and a record low of 48.50 in August of 2013. Because of rising purchasing activity, preproduction

inventories expanded.

The rate of accumulation was slight overall and in line with those seen throughout the current four-month

sequence of growth.

Manufacturing PMI kept fluctuating for the first two quarters of 2015-16. Further it slowed down in the

third quarter ended December 2015. The average being 50.03 for that quarter. However, the average for

the fourth quarter ended March 2016 rose to 51.53. The reason for this rise was expansion of output at

an accelerated rate. New orders were also welcomed. There was an improved demand from both

domestic and external clients.

Until the beginning of the Q2 (2016-17), the rate of accumulation was only marginal. The manufacturing

PMI data showed that the positive momentum has been carried over into Q2 of 2016-17, with the rise in

expansion rates and buying levels. But after reaching a high in October, it fell in the next two consecutive

months falling to 49.6 in December.

Service PMI – January

The downturn in service sector activity across India softened during the opening month of 2017, with the

slowdown reflecting a weaker contraction in new business inflows. Input cost inflation slowed since

December. Average selling prices decreased again.

Rising from 46.8 at the end of 2016 to 48.7 in January, the seasonally adjusted headline Nikkei India Services

Business Activity Index pointed to the slowest fall in output in the current three-month sequence of

reduction.

The seasonally adjusted Nikkei India Composite PMI Output Index rose from December’s 38-month low of

47.6 to 49.4 in January, pointing to a marginal weaker contraction in private sector activity. The slowdown

was supported by a rebound in factory production. New orders at services firms dipped at a softer rate in

January.

January data highlighted an increasing degree of pressure on the capacity of private sector firms’ operations

as outstanding business rose to a greater extent than in December. Faster rates of backlog accumulation

were noted in both the manufacturing and service sectors.

Service sector employment increased slightly at the start of 2017. As has been the case since last

September, input costs facing service providers increased during January. However, having eased from

December, the rate of inflation was relatively muted in the context of historical data. Output prices, on the

other hand, were lowered for the fourth straight month. That said, the overall rate of discounting was

fractional. In the manufacturing industry, rates of inflation for input costs and selling prices were at 29- and

two-month highs, respectively.

Quarterly Evaluation

The average of Service PMI was seen rising from third quarter ended December 2015 to fourth quarter

ended March 2016 (52.13 to 53.33). The main reason being sharper increase in new business spurring

activity growth in service sectors.

In Q1 of 2016-17 the average of Service PMI was 51.7 due to softer expansion in business activities

such as new business, employment and increase in input costs. Contrast to this, average of Service

PMI in Q2 of 2016-17 rose to 52.9 on account of new business and lowering in output charge.

Q3 of 2016-17 started with good upswing with the increase in new businesses but saw contraction in

last two months due to cash shortage in the economy. The average of Service PMI for Q3 is 49.3.

Core Sector Data – January

Core sector growth slipped to a five-month low in January but remained comfortably in the positive zone.

Contraction in the output of refinery products, fertilizer and cement pulled down the index that tracks

growth in eight infrastructure sectors.

The core sector slowed to 3.4% in the month compared with 5.7% in the year-ago period. The eight

infrastructure sectors of coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and

electricity that make up the index have a 38% weight in the Index of Industrial Production (IIP).

Core sector growth in January was the lowest since August 2016, when the segments had recorded a growth

of 3.2%. It is also lower than that of 5.6% seen in December 2016. The output of refinery products, fertilizer

and cement contracted by 1.5%, 1.6% and 13.3%, respectively.

Coal and electricity output rose 4.8% each in January, against 7.9% and 11.6% expansion, respectively, in

January last year. Crude oil output grew 1.3% in January this year, against 4.7% contraction in the year-ago

month. Natural gas and steel output rose 11.9% and 11.4%, respectively.

From December 2015, core sector output has

grown from 0.9% to 8.5% in April 2016. This

growth was due to increase in output of

electricity, cement, fertilizers and refinery

products. Also, coal output was seen to

increase in December 2015 and January 2016

which led to an overall growth.

From February 2016, core sector output

increased up till April 2016, taking it to the

high of 8.5%. However, the output fell to

2.8% in May 2016. Starting from May 2016

till August 2016, core sector has been

experiencing fluctuating trends stabilizing at

3.2% in August 2016. The rise in October

2016 core sector output was mainly due to a

sustained growth in the steel sector and an

increase in refinery production. The core

sector growth slowed in the month of

November to 4.9% but increased in

December to 5.6%, mainly due to growth in

steel sector.

2.9

5.76.4

8.5

2.8

5.2

3.0 3.2

5.0

6.6

4.95.6

3.4

Co

re s

ect

or

dat

a %

Month

Core sector Trend - Monthwise

Sixth Bi-monthly Monetary Policy Statement, 2016-17

On the basis of an assessment of the current and evolving macroeconomic situation at its meeting on the

8th of February, 2016, the Monetary Policy Committee (MPC) released the Sixth Bi-monthly Monetary

Policy Statement, 2016-17 and kept the policy repo rate under the liquidity adjustment facility (LAF)

unchanged at 6.25 percent.

Consequently, the reverse repo rate under the LAF remained unchanged at 5.75 percent, and the marginal

standing facility (MSF) rate and the Bank Rate at 6.75 percent.

The decision of the MPC was consistent with a neutral stance of monetary policy in consonance with the

objective of achieving consumer price index (CPI) inflation at 5 percent by Q4 of 2016-17 and the medium-

term target of 4 percent within a band of +/- 2 percent, while supporting growth.

GVA growth for 2016-17 is projected at 6.9 percent with risks evenly balanced around it. The emphasis in

the Union Budget for 2017-18 on stepping up capital expenditure, and boosting the rural economy and

affordable housing should contribute to growth. Accordingly, GVA growth for 2017-18 is projected at 7.4

percent. Economic activity in cash-intensive sectors such as retail trade, hotels and restaurants, and

transportation, as well as in the unorganized sector, is also expected to be rapidly restored.

Demonetization-induced ease in bank funding conditions has led to a sharp improvement in transmission

of past policy rate reductions into marginal cost-based lending rates (MCLRs), and in turn, to lending rates

for healthy borrowers, which should spur a pick-up in both consumption and investment demand. RBI said

the current account deficit (CAD) is likely to remain muted and below 1 percent of GDP in 2016-17. Limits

on cash withdrawal would also be done away with, from 13th March, 2017 onwards. RBI will also raise the

withdrawal cap to Rs. 50,000 a week from Rs. 24,000 a week for savings accounts with effect from

February 20, 2017.

BANKING

Guidelines on “Pricing credit”: Review

The Reserve Bank of India had issued instructions on “Pricing of Credit” to Non-Banking Financial

Companies – MFIS under "Master Direction-Non-Banking Financial Company-Non-Systemically Important

Non-Deposit taking Company (Reserve Bank) Directions, 2016" and "Master Direction - Non-Banking

Financial Company-Systemically Important Non-Deposit taking Company and Deposit taking Company

(Reserve Bank) Directions, 2016".

As per these, it had to be ensured by the NBFC-MFIS that the average interest rate on loans during a

financial year did not exceed the average borrowing cost during that financial year plus the margin, within

the prescribed cap. As per the notification dated May 31st, 2013, the margin cap for all NBFCs irrespective

of their size was 12 percent till March 31, 2014. However, with effect from 1st April, 2014 margin caps as

defined by Malegam Committee may not exceed 10 per cent for large MFIs (loans portfolios exceeding

Rs.100 crore) and 12 percent for the others.

These master directions are being updated to reflect the changes below and RBI issued a notification in

that regard.

RBI published average base rate of the bank on a quarterly basis.

Basel III Capital Regulations - Additional Tier 1 Capital

Coupon Discretion on Additional Tier 1 Debt Capital Instruments

Criteria for Inclusion of Perpetual Debt Instruments (PDI) in Additional Tier 1 Capital’ of the Master Circular

dated January 14th, 2016, specified that Coupons be paid out of distributable items (i.e.) Current year

profits. In case of insufficiency of current year profits, the balance be paid out of revenue reserves (subject

to its availability) and/or credit balance in profit and loss account, if any.

Further to this, the Reserve Bank of India released a notification on the 2nd of February, 2017, stating that

Coupons be paid out of distributable items (i.e.) Current year profits. Due to insufficient current year

profits, coupons may be paid subject to the availability of Profits brought forward from previous years,

and/or

Reserves representing appropriation of net profits, including statutory reserves, and excluding share

premium, revaluation reserve, foreign currency translation reserve, investment reserve and reserves

created on amalgamation.

Also, there is no further requirement of prior approval of the Reserve Bank for appropriation of reserves

as above.

However, payment of coupons on PDIs from the reserves is subject to the issuing bank meeting minimum

regulatory requirements for CET1, Tier 1 and Total Capital ratios including the additional capital

requirements for Domestic Systemically Important Banks at all times and subject to the restrictions under

the capital buffer frameworks.

Guidelines on Point of Sales Person – Life Insurance - Modification

Guidelines on Point of Sales Person – Life Insurance were issued by the Insurance Regulatory Development

Authority of India (IRDAI) on 9th November, 2016. This was released to provide an easy access to life

insurance to people at large and to enhance insurance penetration and density.

These guidelines defined the scope and applicability, appointment of the point of sales person, products

that would be solicited and marketed by the point of sales person and compliance.

However, further on 7th February, 2017, IRDAI released a Modification to Guidelines on Point of Sales

Person – Life Insurance.

As per the modification, the authority decided to do away with the condition of training from and passing

of the NIELIT examination and prescribed terms for engaging a POS Person. It also amended the procedure

or qualification for being a POS Person.

Annexure in the circular, included the features of various POS products designed by the insurer, which

may be modified and developed per the evolving needs of the insurer and intermediaries.

INSURANCE

Regional Connectivity Scheme UDAN (Ude Desh Ka Aam Nagrik)

The Ministry of Civil Aviation had launched the Regional Connectivity Scheme (RCS) UDAN, a key

component of the National Civil Aviation Policy, on 21st October, 2016 to promote the balanced regional

growth and make flying affordable for masses. This scheme received an encouraging response when it

was released on the 18th of January, 2017.

Airports Authority of India (AAI), the implementing agency for the Regional Connectivity Scheme

(UDAN) received proposals from bidders covering more than 200 RCS routes. It has been decided that the

routes or networks would be awarded to the bidders who quoted the lowest requirement of Viability Gap

Funding (VGF) against such routes. To ensure that operations on ground would start with minimum time-

gap after the bidding is completed, parallel action has also been initiated by the Ministry of Civil Aviation

with AAI, State Governments, DGCA and Bureau of Civil Aviation Security.

The scheme envisages providing the connectivity to un-served and under-served regions of the country.

This would mean the revival of existing air-strips and airports and would be achieved through a financial

stimulus in the form of Central and State government concessions, as well as Viability Gap Funding to the

interested airlines to kick-off operations from such airports, keeping the passenger fares affordable.

This has been a significant step ahead in realizing our Honorable Prime Minister’s vision of ‘connecting

the un-connected and serving the un-served’. The scheme would boost tourism activities and employment

generation in hinterland and Tier-II and Tier-III cities.

National Transit Oriented Development Policy (TOD)

The Ministry of Urban Development has come out with a multi-pronged policy framework that would

promote living close to mass urban transit corridors and address the evolving urbanization challenges.

INFRASTRUCTURE

A National Transit Oriented Development Policy (TOD) has been formulated that would enable people to

live within walking or cycling distance from transit corridors like the Metros, Monorail and Bus Rapid

Transit (BRT) corridors.

This was discussed with the States and Union Territories at a National Workshop on Urban Development.

They agreed on big ticket reforms for speedy urban service delivery and resource mobilization. States and

Union territories endorsed five transformational urban reforms proposed by the Ministry of Urban

Development aimed at improving service delivery to citizens besides promoting resource mobilization

required for meeting the urban infrastructure demand. They also supported new policies and schemes

proposed by the Ministry viz., Transit Oriented Development Policy, Green Urban Mobility Scheme, Metro

Policy, Value Capture Financing Policy Framework, City Live Ability Index and Fecal Sludge and Septage

Management Policy. States have agreed to the three-year timeframe suggested by the Ministry for

implementation of the five transformational reforms.

Under TOD, city densification will be promoted along mass transit corridors. TOD promotes integration of

land use planning with transportation and infrastructure development to avoid long distance travel in

cities through compact development as against the present pattern of unplanned and haphazard urban

growth. Under the new Metro Policy, TOD is mandatory while under Green Urban Mobility Scheme, TOD

has been made an essential reform and is given priority for receiving central assistance.

TOD will be financed by channelizing a part of increases in property values resulting from investments in

transit corridors. Increased private sector participation will result in economic development and

employment generation. The policy also aims at inclusive development by ensuring mixed neighborhood

development in the form of a range of housing choices including affordable housing and ensuring spaces

for street vendors.

States and UTs will be required to incorporate TOD in the Master Plans and Development Plans of cities

besides identifying ‘Influence Zones’ from transit corridors for tapping revenue streams. TOD is being

taken up Ahmedabad, Delhi(Kakardooma), Naya Raipur, Nagpur and Navi Mumbai and the Ministry would

like this to be expanded to other cities as well.

Circular on Mutual Funds

Notification dated 15th February 2017 pertaining to Securities and Exchange Board of India (Mutual Funds)

(Amendment) Regulation, 2017 was related to investments by Mutual Funds in hybrid securities such as

units of REITs/InvITs.

The investment restrictions mentioned at Clause 13 in the Seventh Schedule of SEBI (Mutual Funds)

Regulations, 1996 shall be applicable to all fresh investments by all schemes, including an existing scheme.

Any existing scheme intending to invest in units of REITs/InvITs shall abide by the provisions of Regulation

18 (15A) of SEBI (Mutual Funds) Regulations, 1996. For investment in units of REITs/InvITs by an existing

Mutual Fund scheme, unitholders of the scheme shall be given a time period of at least 15 days for the

purpose of exercising the exit option.

The circular has been issued in exercise of the powers conferred under Section 11 (1) of the Securities and

Exchange Board of India Act 1992, read with the provision of Regulation 77 of SEBI (Mutual Funds)

Regulation, 1996 to protect the interests of investors in securities and to promote the development of,

and to regulate the securities market.

CAPITAL MARKETS

CAPITAL MARKETS SNAPSHOT

Source: National Stock Exchange Source: Bombay Stock Exchange

Sources: APAS Business Research Team

Sources: APAS Business Research Team

1-F

eb

-17

3-F

eb

-17

5-F

eb

-17

7-F

eb

-17

9-F

eb

-17

11

-Fe

b-1

7

13

-Fe

b-1

7

15

-Fe

b-1

7

17

-Fe

b-1

7

19

-Fe

b-1

7

21

-Fe

b-1

7

23

-Fe

b-1

7

25

-Fe

b-1

7

27

-Fe

b-1

7

CNX Nifty (Feb-2017)

1-F

eb-1

7

2-F

eb-1

7

3-F

eb-1

7

6-F

eb-1

7

7-F

eb-1

7

8-F

eb-1

7

9-F

eb-1

7

10

-Feb

-17

13

-Feb

-17

14

-Feb

-17

15

-Feb

-17

16

-Feb

-17

17

-Feb

-17

20

-Feb

-17

21

-Feb

-17

22

-Feb

-17

23

-Feb

-17

27

-Feb

-17

28

-Feb

-17

BSE Sensex (Feb-2017)

14.91 14.6115.07

15.7915.17

16.01

10

12

14

16

18

20

Indian VIX (Feb-2017)

6.106.206.306.406.506.606.706.806.907.00

1-F

eb-1

7

3-F

eb-1

7

5-F

eb-1

7

7-F

eb-1

7

9-F

eb-1

7

11

-Feb

-17

13

-Feb

-17

15

-Feb

-17

17

-Feb

-17

19

-Feb

-17

21

-Feb

-17

23

-Feb

-17

25

-Feb

-17

27

-Feb

-17

GIND10Y (Feb-2017)

67.21

67.20

67.35

66.77 67.08

67.08

66.70

66.20

66.40

66.60

66.80

67.00

67.20

67.40

67.60

1-F

eb-1

7

3-F

eb-1

7

5-F

eb-1

7

7-F

eb-1

7

9-F

eb-1

7

11

-Feb

-17

13

-Feb

-17

15

-Feb

-17

17

-Feb

-17

19

-Feb

-17

21

-Feb

-17

23

-Feb

-17

25

-Feb

-17

27

-Feb

-17

$/₹ (Feb-2017)

Sources: APAS Business Research Team

Rupee moved with little movements against the

dollar in the process of trading. On the 1st of

March, 2017, the rupee opened nearly 9 paise

down at 66.78 against dollar on account of selling

of American currency by banks and exporters.

Meanwhile the domestic equity market had

opened in green following firm global cues.

U.S. crude stockpiles swelled to a record high

during the week ending February 24. European

markets also rose sharply to hit 15-month highs on

1st of March, 2017.

ECONOMIC DATA SNAPSHOT

* The Economist poll or Economist Intelligence Unit estimate/forecast;

^ 5-year yield

Quarter represents a three-month period of a financial year

Countries GDP CPI Current Account Balance

Budget Balance

Interest Rates

Latest 2016* 2017* Latest 2016* % of GDP,

2016* % of GDP,

2016* (10YGov),

Latest

Brazil -2.9Q3 -3.5 0.7 5.4 Jan 8.1 -1.2 -6.3 10.2

Russia -0.4Q3 -0.5 1.3 5.0 Jan 7.1 2.0 -3.5 8.37

India 7.3 Q3 6.9 7.4 3.2 Jan 4.8 -0.6 -3.8 6.94

China 6.8 Q4 6.7 6.5 2.5 Jan 2.0 2.4 -3.8 3.01^

S Africa 0.7 Q3 0.5 1.2 6.6 Jan 6.3 -3.8 -3.4 8.74

USA 1.9 Q4 1.6 2.2 2.5 Jan 1.3 -2.6 -3.2 2.42

Canada 1.3 Q3 1.2 1.9 1.5 Dec 1.5 -3.5 -2.4 1.72

Mexico 2.4 Q4 2.1 1.6 4.7 Jan 2.9 -2.9 -2.6 7.32

Euro Area 1.7 Q4 1.7 1.5 1.8 Jan 0.2 3.3 -1.9 0.28

Germany 1.8 Q4 1.8 1.5 1.9 Jan 0.4 8.9 0.6 0.28

Britain 2.0 Q4 2.0 1.4 1.8 Jan 0.7 -5.4 -3.7 1.28

Australia 1.8 Q3 2.4 2.6 1.5 Q4 1.3 -3.1 -2.3 2.84

Indonesia 4.9 Q4 5.0 5.2 3.5 Jan 3.5 -2.1 -2.3 7.50

Malaysia 4.5 Q4 4.3 4.6 3.2 Jan 2.1 1.9 -3.4 4.05

Singapore 2.9 Q4 1.8 2.0 0.2 Dec -0.5 23.6 0.7 2.27

S Korea 2.3 Q4 2.7 2.5 2.0 Jan 1.0 7.4 -1.6 2.25

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