@Leisure - Vol-21 | srei
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@Leisure - Vol-21

Newsletter
 

How the US Fed rate impacts the world?

In recent times, there has been talk of the US Federal Reserve (the Fed for short), the central bank of the United States, raising interest rates. So how does this affect the rest of the world?

The US dollar has a unique place in the world –it is the most widely held reserve currency. Through the last decade, an average of 2/3rds of all total allocated foreign exchange reserves of countries have been held in dollars. The expectation that the Fed will raise rates has already had an effect on the dollar; it has increased19 per cent in trade-weighted terms since July of 2014. Let’s see how an interest rate hike can further affect the world:

  1. Trade hit: A strong dollar hits American exports directly as they are priced in dollars and lose competitiveness against similar goods made by other nations. However, the greatest impact may be felt outside of America as it becomes expensive for other countries to import goods and services they need to fuel their growth (most of the world’s trade is carried out in dollars, being a reserve currency). Petroleum products, which nations need for growth becomes costlier as well due to a stronger dollar (the price of oil is also marked in dollars).
  2. Reduce buying power of emerging markets: As emerging markets do not hold excess foreign exchange (forex) reserves, they have limited reserves to pay for their imports. As the value of their own currencies plummets against the dollar, they get fewer dollars for their exports, further denting their forex reserves. Another side effect of falling currencies for emerging markets is a spike in inflation in their domestic markets due to imported goods becoming dearer.
  3. Bond Rates: As the Fed increases interest rates, American government bonds (called US Treasuries) pay out more interest. As US Treasuries are considered a ‘no risk’ investment because the sovereign guarantees them, some investors move money from emerging markets to the US to reduce their exposure to riskier emerging market assets.
  4. Dollar Denominated Debt: Emerging markets have enjoyed cheap credit denominated in dollars. Dollar denominated debt amounts to nearly USD 9 trillion and emerging economies owe USD 3.3 trillion of this debt. Turkey, South Africa and Brazil have been financing their budget deficits with this ‘cheap’ money. An increase in interest rates in the US is a double whammy for emerging markets as it affects the price of their currencies vis-à-vis the dollar as they must still service their debt in dollars, which sucks capital out of the economies. If they have borrowed abroad, they also may need to pay more interest on existing loans or refinance at higher rates.

Conclusion: When America sneezes the world catches the cold. As the single largest economic powerhouse in the world, whose currency enjoys a special status, what happens in the US impacts all of us; the interest rate hike will definitely have an impact, just how deep, only time will tell.

 

'Make in India' will help Business Houses like Srei 

The Indian economy has been focused on the services sector for a while. The Indian government, at the initiative of the Prime Minister Narendra Modi, launched the ‘Make in India’ programme which aims to give both Indian as well as foreign industrialists incentives to boost manufacturing at home. This is how ‘Make in India’ will help:

  • Boost in growth: The governmental push towards ‘Make in India’ will bring focus to manufacturing. It is estimated that each 1 per cent increase in Foreign Direct Investment (FDI) leads to an addition of 0.4 per cent to the country’s GDP growth; clearly ‘Make in India’ is vital.
  • Create Jobs: As more companies choose to ‘Make in India’ there will be a need for manufacturing sector workers and more people tend to gain employment. There will be a particularly high demand for jobs in export-oriented industries.
  • Stimulate local demand: A boost in employment leads to better living conditions. Domestic demand can stimulate the economy even further. As costs of labour in competing economies like China rise, India can offer an attractive option with skilled labour at comparatively cheaper costs.
  • Boost infrastructure: India needs investment in infrastructure foremost in order to revive manufacturing. The government is determined to boost infrastructure projects like the Delhi-Mumbai Industrial Corridor with a dedicated Railway Freight Corridor as its support structure. There will be a creation of 24 new manufacturing cities along this corridor.
  • Attract investments: In the first year of ‘Make in India’ alone, investments worth over USD 11 billion have been pledged. The programme has found many takers; manufacturing companies like Foxconn, Phillips, Posco and others have pledged to ‘Make in India’.

Conclusion: Srei has been at the forefront of infrastructure and equipment finance. We believe a boost in manufacturing at home will be good for us and for business at large as all these growth plans need financing partners like us. We aim to support ‘Make in India’ by helping businesses start up in India and by funding their growth plans.

1. http://atimes.com/2015/07/make-in-india-boosts-record-foreign-investments/
2. http://www.thehindubusinessline.com/economy/make-in-india-investments-wo...

 
 

Why are bonds used to fund infrastructure?

Good infrastructure is considered to be the backbone of economic development of a country. Roads, power, telecommunication, ports, etc. are the basic building blocks of progress. India, being a large developing country, has a huge appetite for such infrastructure facilities. These projects often involve huge capital outlay with gestation periods stretching over years or even decades. Funding therefore becomes a constraint, with conventional sources of funds facing several limitations. Financing such projects through bond issues is fast gaining ground in India.

The bond advantage

The project financing landscape is undergoing a sea change in India with the development of the capital markets and the advent of innovative debt instruments. Indian developers are now scouting for cost effective long term financing options and bonds seem to be fitting their bill quite well. Apart from retail investors, institutions such as mutual funds and insurance companies have an appetite for such bonds. As these bonds tap investors’ money directly, they cost lesser than bank funds. Given the huge size of borrowing and the competitive scenario in project development, even a small saving in funding cost is welcome and favourable to the developers. With good credit rating, developers can lower their funding costs significantly through bond issues. 

 

Having a large base of investors ready to invest their savings for medium to long term is another advantage of taking the bond route to infrastructure financing. It reduces the risk for developers and improves availability of funds. With the banking sector unable to fully feed the developers’ appetite for funding, partly due to the mismatch in their asset-liability tenures and also due to sectoral caps enforced by prudent lending norms, bonds have emerged as a preferred source of funding for the infrastructure sector.

 

As the country grows and the financial markets develop, there is scope for creating novel new structures that can help in financing and refinancing large scale infrastructure projects that are vital to the growth of the country. Evolving sophistication in debt instruments offers exciting opportunities for both the investors and developers, making bonds a win-win proposition for both.

 
 

Buddy Jokes

1. Mr. Sharma opened a new branch of his shop and was aghast when he received a bouquet with a card, which read ‘Rest in Peace’. Seething with anger he called the florist for the obvious error to lodge a strong complaint:
Mr. Sharma: You are so careless! This is a horrible mix-up.
Florist: Sir I agree but just imagine, somewhere there is a funeral and they have just received a bouquet saying ‘Congratulations on your new location.’

2.A young man applied for a job of an accountant after his B.Com degree. He was interviewing with a small company owner who appeared rather fidgety and nervous. ‘I need someone to take care of the books for me. I see you have a B.Com degree.
Are you good at accounts?’ The young man nodded his head and answered in affirmative. ‘How much would I be paid?’ asked the young man inquisitively. ‘Well I will start you at 20 Lacs per year’. ‘Sir that is a lot of money, how can a small company like this afford that?’ That the boss replied is ‘the first thing you figure out.’

3. A man is flying in a hot air balloon and realises he is lost. He reduces the height and finds a man down below. “Excuse me, can you tell me where I am?’ says the balloonist.
The man on the ground says: “Yes, you're in a hot air balloon, 50 feet above a field.”
"You must be an engineer,” says the man in the balloon.
"I am" shouts the man. "How did you know?"
"Well," says the balloonist, "What you have told me is technically correct, but it's no use to anyone."
The man on the ground says, "You must be in management."
"I am" replies the guy in the balloon, "but how did you know?"
"Well," says the engineer, "you don't know where you are and where you're going, but you expect me to be able to help. You are where you were and now you blame me for the spot you find yourself in."

 

Buddy Quiz

  1. Dollar denominated debt amounts to nearly USD 9 trillion and emerging economies owe USD _______ of this debt.
    1. 3.3 trillion
    2. 3.3 billion
    3. 3.3 million
  2. An average of 2/3rds of all total allocated foreign exchange reserves of countries have been held in _______.
    1. Indian Rupees
    2. US Dollars
    3. Japanese Yen
  3. _________ is considered to be the backbone of economic development of a country.
    1. Good infrastructure
    2. Import and export
    3. Equity
  4. FDI stands for ____________.
    1. Foreign Direct Investment
    2. Foreign Direct Investor
    3. Foreign Domestic Investment
  5. In the first year of 'Make in India' alone, investments worth over USD ______ have been pledged.
    1. 15 billion
    2. 7 billion
    3. 11 billion

Answer: 1. (a); 2. (b); 3. (a); 4. (a); 5. (c).