wm financial system & economic environment

8/6/2019 WM Financial System & Economic Environment

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Prof. Rajiv Vohra



` Continuous Evaluation : 20%

Assignments : 10%

Class Interaction : 10%

` Group Presentation/Case Studies : 20%

` Mid Term Examination : 20%` End Term Examination : 40%



` Understanding the Concepts

` Ability to Think and Articulate

` Questioning and Criticizing the Ideas Generated

` Presentation of Facts and Original Ideas



` Why have you taken Wealth Management?

` What are your expectations from the course?

` What do you want to achieve at the end of this course?

` List investment options available to an average Indian?

` What is Money?` What is an Investment?Why do people invest?

` On what parameters are investments made?

` Differencebetween Debt and Equity?



` Money is anything that is accepted as store house of value, which can be

exchanged for payment of debts and purchase of goods or services.

` Is Money an asset?

` Narrow Money (M1): Money supply with the public, currency notes with

the pub

lic and demand deposits with theb

anks` M2=M1+ post office Savings Bank Deposits

` Broad Money (M3)= M2 + Time Deposits with banks

` M4 = M3 + Other Post Office Deposits.



` Non Marketable Financial Assets

Bank Deposits

Post Office Deposits

Company Deposits

PF Deposits

` Equity Shares

` Bonds

Government Securities

PSU Bonds

Debentures

` Money Marker Instruments

Treasury Bills

Commercial Papers

Certificate of Deposits



` Mutual Funds

Equity Mutual Funds

Debt Mutual Funds

Others

`

Life Insurance Unit linked Insurance Policies

Term Insurance

Endowment Policies

` Retirement Solutions

` Real Estate

` Precious Ob jects

` Derivatives



` Rate of return

` Risk

` Marketability, Convenience/Liquidity

` Taxation

` Time Horizon` Amount

` Government Policies



Capital/

Principal

This is principal amount borrowed

And does not vary unless you

Repay funds.

This the value of your shares when

you purchase them and may rise or

fall

Repayment arrangement are

Agreed at the time of debt isdrawn

No repayment options. The shares

Exist till the company is wound up.

Return on funds lent are through

Interest. Interest is either fixed

Or floating

Return is in the form of dividends

And capital appreciation

No ownership rights. Ownership rights

Repayment

Return

Participation in

profit



` Retail Financial Services

Deposits

Lending

Investments

` Wholesale Financial Services

Corporate Borrowing

Merger & Acquisitions

Underwriting new securities (Debt and Equity)

Foreign Exchange Dealing



` Reserve Bank of India

` Banks

` Non Banks

Finance Companies

Fund Managers Housing Finance Companies

Investment Banks

Life Insurance Companies

Stock Brokers

Superannuation Funds



` RBI: Indias Central Bank and is responsible for formulating and pursuing

monetary policy

Monetary Policy

Liquidity Support

Payment System Control

Control on Banking Sector

Control on Foreign Exchange Dealers

Control of Non Banking Financial Companies



` SEBI

Conduct of Underwriter for issue of Capital, FII, Portfolio Managers, Mutual

fund Industry, Credit Rating Agencies.

Conduct of Stock Exchanges, Stock Brokers.

Regulation of Custodian of Securities.

Guidelines for Corporate Governance.

` IRDA

` Pension Fund Regulatory and Development Authority



` What do you understand by the phrase Economic Environment?

` Which factors govern this Economic Environment?

` Do we need to study them?

` What is Monetary & Fiscal Policy ?

` What is Repo Rate and Reverse Repo Rate?` What is a business cycle?



` Objectives of Economic Policies

Guide growth while controlling Inflation.

Achieve Maximum Employment.

Steady growth in national income as measured by output of goods and

services.

Improve balance of payment by guiding foreign trade and investments.

Reduce Regional Imbalances.

Reduce economic Imbalances in the Society.



Macroeconomics: Looks at the overall, big picture and general principles

` Government Policies

` Balance of Payment

Current Account: It encompasses the countrys international trade in goods and

services, the income flow resulting from Non Resident Investments, our

investments overseas.

Capital Account: Flow of capital into and out o India by way of equity investments,direct or portfolio and debt, long and short-term and public and private.

` Foreign Exchange Rates

` The Terms of Trade

` Inflation

` Household Savings RateMicroeconomics: It looks ate the general markets, individual companies and

the impact on individuals



`

Inflation: It is the rise in general level of prices of goods and services.A

nerosion in the purchasing power.

` Is Inflation Bad for an Economy?

` Difference Between Primary & Secondary Markets

Issuance of Prospectus

Increasing obligation by the issuer of securities

` Top Down Investment Approach

` BottomUp Approach



RBI Concerned with Inflation

Reduce Bank Reserves by

Selling Securities in Open Market

Reduction in Bank Reserve leadingTo reduction in Money Supply

Increased Interest Rates and

Tightening of credit norms

Reduction in Long term Investments

Reduction in aggregate demand,

Income, output and thus inflation



` FISCAL POLICY

It refers to the use of government spending and taxing power to achieve

macroeconomic ob jectives.

The government raises its resources through taxation, borrowing and other

revenue sources.

Government expenditure influences both private investments as well as privateconsumption.

Taxation reduces private consumption besides influencing investment and

potential output.



` The total market value of goods and services produced in India after

taking out the cost of goods and services used up, in the productprocess before deducting depreciation of the economys capital stock.

MeasuringGDP

1. The Product Approach: The total valued added by households, farmers,

businesses and each level of government.

2. The IncomeA

pproach: It totals the factor incomes i.e. the grossincomes paid to labour and capital as the factors of production,

depreciation and net indirect taxes.

3. The Expenditure Approach:

1. Consumption

2. Investments

3. Government

4. Exports

5. Imports



` Repo (Repurchase) Rate Repo rate is the rate at which banks borrow fundsfrom the RBI to meet the gap between the demand they are facing for

money (loans) and how much they have on hand to lend.

If the RBI wants to make it more expensive for the banks to borrow money, it

increases the repo rate; similarly, if it wants to make it cheaper for banks to

borrow money, it reduces the repo rate.

` Reverse Repo Rate This is the exact opposite of repo rate. The rate atwhich RBI borrows money from the banks (or banks lend money to the

RBI) is termed the reverse repo rate.

The RBI uses this tool when it feels there is too much money floating in the

banking system If the reverse repo rate is increased, it means the RBI will

borrow money from the bank and offer them a lucrative rate of interest. As a

result, banks would prefer to keep their money with the RBI (which is absolutely

risk free) instead of lending it out (this option comes with a certain amount of

risk)



Consequently, banks would have lesser funds to lend to their customers. This

helps stem the flow of excess money into the economy Reverse repo ratesignifies the rate at which the central bank absorbs liquidity from the banks,while repo signifies the rate at which liquidity is injected.

` Bank Rate This is the rate at which RBI lends money to other banks (orfinancial institutions . The bank rate signals the central banks long-termoutlook on interest rates. If the bank rate moves up, long-term interest

rates also tend to move up, and vice-versa. Banks make a profit by borrowing at a lower rate and lending the same funds at

a higher rate of interest. If the RBI hikes the bank rate (this is currently 6 percent), the interest that a bank pays for borrowing money (banks borrow moneyeither from each other or from the RBI) increases. It, in turn, hikes its ownlending rates to ensure it continues to make a profit.

` Call Rate Call rate is the interest rate paid by the banks for lending andborrowing for daily fund requirement. Since banks need funds on a dailybasis, they lend to and borrow from other banks according to their daily orshort-term requirements on a regular basis.



` Recession

It is a Business Cycle contraction, a general slowdown in economic activity over

a period of time.

It is a decline in a country's gross domestic product (GDP) growth for two or

more consecutive quarters of a year.

` Depression It is a sustained, long-term downturn in economic activity in one or more

economies. It is a more severe downturn than a Recession

Another proposed definition of depression includes two general rules: 1) a

decline in real GDP exceeding 10%, or 2) a recession lasting 2 or more years



`

Trough to expansion WPI Falling

Interest Rates falling

Consumer sentiments increasing

Consumer demands increasing

Retail sales increasing

` Expansion to Peak

GDP increasing, IIP increasing

Capacity Utilization Increasing

WPI Increasing

Labour market tightening

Growing expectations that the boom cannot last



` Peak to Contraction

GDP Falling

Industrial Production Falling

Capacity Utilization falling

Labour productivity increasing

Unit labour cost decreasing

` Contraction to Trough WPI Falling

Retail Sales declining

Unemployment rising

Housing Starts declining

Home lending falling Consumer sentiments decreasing



` Leading Indicators

Consumer sentiments

Consumer purchases around festivals

Movement in realty sector

Automobile sales

` Coincident Indicators

Job advertisements

Credit off take by private sector

` Lagging Indicators

Unemployment Rate

EmploymentGrowth

` These partial indicators along with broader measures such as NationalAccount, Consumer Price Index, Balance of payment and government

policy statements provide information about the current state of economy

and likely direction.

wm financial system & economic environment

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