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Equity Market

By: Punam Sharma

  • Equity market, also known as stock market refers to a market where company shares are traded.
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  • Equity market participants include individuals, mutual funds, FII etc.
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  • Generally, shares are traded through a stock exchange.
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  • Stock exchange is an organized market place where capital market products are traded
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  • Its main purpose is to assist, regulate and control buying and selling of securities.
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  • A stock exchange acts as a barometer of economic and business condition of a country.
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  • Stock exchanges in India are regulated by SEBI, under the SEBI Act, 1992.
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  • Two leading stock exchanges in India are Bombay Stock Exchange (BSE) and National stock Exchange (NSE).
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  • Established in 1875, BSE is the oldest exchange in India as well as Asia. NSE was incorporated in 1992.
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BSE and NSE Snap Shot

 
Phases of Stock Market
 

  • Generally stock market goes through two phases: Bull market phase and Bear market phase.
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  • Bull Market is a term used to describe the stock market which has rising prices as its main characteristics.
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  • Bear Market is a term used to describe the stock market which has falling prices as its main feature.
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  • Indian equity market has witnessed many bull and bear market. However the prominent bull market phase was during 2003 to 2007 and bear market phase was during 2008.
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  • From the bottom of 2003 towards the end of 2007 bull market, Sensex return was 7 times1.
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  • Maximum loss in the index during any bear market has been 60%.
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  • Highest PE2 of Sensex during bull market has been around 26 (April 2000) while lowest Sensex PE during bear market has been around 10 (April 2003).
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Fiscal Policy

By: Punam Sharma

  • Government of India has many important roles to play for the overall economic development of the country.
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Role of GOI

 

  • To attain the above mentioned objectives, Government needs to generate revenue and incur expenditure in an efficient manner.
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  • Government receipts and expenditure is broadly divided in two groups namely Revenue and Capital receipts and expenditure.
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  • Government generates receipts through taxation, dividends, interest receipts, disinvestments, public borrowings etc.
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  • Government incurs expenditure on subsidy, interest on debt borrowed by government, infrastructure projects etc.
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  • For receipt generation and expenditure, government frames the fiscal policy.
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  • Fiscal policy refers to government’s financial management.
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  • When government spends more than it receives, it faces fiscal imbalance (deficit).
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  • To reduce the imbalance, government can either resort to public borrowing, printing currency, increasing tax etc. This in turn has different effects on different part of the economy.
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  • Increment in public borrowing can cause private sector crowding out effect, higher interest and repayment in future, increase in government debt etc while printing more currency via RBI can lead to inflation.
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  • Higher taxes can reduce consumption or impact certain sectors on which tax is imposed.
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  • Fiscal policy can also affect India’s trade balance thereby creating balance of payment crisis.
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  • Fiscal policy is an important part of the economic framework which refers to the prudent use of government receipts broadly taxation and government spending to influence the economy and attain government objectives.
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  • Government receipts and expenditure forms part of Budget which is announced end of every financial year in which the government provides guidance on fiscal policy for next financial year and accomplishment of its objectives in the current financial year.
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  • Chart below gives a snap shot on fiscal policy.
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Fiscal Policy Snap Shot

 

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Monetary Policy

By: Punam Sharma

  • RBI commenced its operations in 1935 in accordance with the provision of RBI Act, 1934.
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Role of RBI

 

  • As banker to government, RBI performs merchant banking function and maintains account of central and state government.
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  • RBI role as banker’s bank is to help maintain liquidity in the system and acts as lender of the last resort for banks facing liquidity issues.
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  • RBI also maintains accounts of all scheduled banks.
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  • RBI’s role as supervisor of financial system is to set regulations for smooth functioning of banks and financial institutions including Non Banking Financial Companies (NBFC).
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  • RBI also needs to maintain public confidence in the financial system and protect depositor’s
    interest.
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  • One of the most important functions of RBI is money supply management which is done through monetary policy.
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  • Monetary Policy is a process by which RBI controls money supply in the economy and influences liquidity cost in the financial system.
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  • RBI uses different monetary policy tools at different times based on assessment of macroeconomic and financial developments in the economy.
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  • Chart below gives a snap shot on monetary policy.
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Monetary Policy Snap Shot

 

  • Prevalent macroeconomic or financial situation in the economy determines RBI’s direction of monetary policy.
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  • RBI either takes a contractionary (tighten money supply) or expansionary (loosen money supply) monetary policy measures.
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  • RBI takes a contractionary monetary policy measure by raising policy rates like CRR, Repo rate, MSF or conducts OMO sales thereby reducing money supply.
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  • RBI expands money supply by lowering the policy rates or by buying OMOs.
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Foreign Direct Investment

By: Punam Sharma

What is foreign direct investment (FDI)?
 

  • FDI refers to investment in India by nonresident entity or person through merger & acquisition or setting up new operations.
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  • It’s an investment made to acquire lasting interest in the enterprise operating outside of the economy of the investor.
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  • Department of Industrial Policy & Promotion (DIPP) is the nodal department for formulation of the Government policy on FDI.
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  • It is also responsible for maintenance and management of data on FDI inflows, based upon the remittances reported by the RBI.
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  • Foreign Investment Promotion Board (FIPB) is responsible for clearance of FDI proposals and review of the implementation of cleared proposals.
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Procedure to receive FDI in an Indian company
 

  • An Indian company may receive FDI under the two routes:
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  • Automatic Route- Under the automatic route FDI is allowed without prior approval either of the Government or the RBI in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.
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  • Government Route-FDI in activities not covered under the automatic route requires prior approval of the Government which is considered by the FIPB, Department of Economic Affairs, Ministry of Finance.
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Benefits of FDI
 

  • Improves forex position
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  • Brings in fresh capital thereby helping in capital formation
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  • Generates employment
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  • Increases production etc
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Sectors prohibited for FDI
 

  • Over the years, Government has relaxed FDI limits in various sectors. However in the following sectors FDI is prohibited under both the routes:
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FDI trend in India
 

  • Chart below shows net1 FDI trend over the years
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FDI India Trend

 

  • Over the years, FDI inflows have increased from $3.3bn in 2001 to $19.8bn in 2013.
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  • Though FDI flows have fluctuated over years, India has not seen negative FDI flows.
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  • For Q1FY14 net FDI flows were $ 6.5bn.
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  • Below charts show top investing countries and sectors for FDI inflows as % of total FDI inflows from April 2000 to July 2013.
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Top Investing Countries and Sectors for FDI

 

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