@Leisure - Vol-23 | srei

@Leisure - Vol-23

Newsletter
 

Capital Account Convertibility – Should India go for it?

Capital Account Convertibility (CAC) represents the freedom to deal in global financial assets at market-determined rates of exchange. Effectively, it implies a state of the economy where domestic players (including individuals and enterprises) are free to deal in overseas assets (such as equities, property or bonds) and foreign players are free to deal in domestic assets – at market rates – without any restrictions. For this to happen, it is assumed that there would be no regulatory intervention in managing exchange rates.

Generally, international capital flows are not always unrestricted. At present, India has partial capital account convertibility. There are restrictions related to investments in certain sectors (such as real estate, insurance or retail), foreign currency borrowings and overseas transfer of funds. Moreover, the exchange rate is also managed to some extent (by the Reserve Bank of India). The main intention behind this is to insulate the economy from external shocks. However, in order to advance its position in the global economy, India will be required to relax capital controls. How this can be best done, without making the country vulnerable to external shocks, is a challenge for the government and autonomous regulatory authorities. To arrive at a reasonable solution, it’s imperative to know the pros and cons of capital account convertibility.

Merits of Capital Account Convertibility

  • Easy access to foreign capital: Domestic businesses will benefit from easy access to foreign capital, which is usually available at competitive terms. Sectors which find it difficult to raise funds in the domestic market may get funding support from overseas investors. Apart from funds, foreign investments in domestic sector will bring in the much-needed technology know-how which will enable local businesses to scale international standards.
  • Industrial growth: With easy access to capital, domestic enterprises will be poised to register higher growth. At a national level, this will lead to a higher gross domestic product, greater tax revenue, an increase in capital formation and narrowing deficit. At an individual level, the benefits translate into higher income, savings and investment.
  • Higher liquidity in domestic markets: In the absence of restrictions on overseas fund flows, the domestic capital markets will benefit from higher liquidity, which in turn will enhance both – the returns earned by investors and the value of enterprises.
  • Diversification for domestic investors: Capital convertibility also helps domestic investors to diversify their holdings and thereby insulate their investments against internal shocks.

Demerits of Capital Account Convertibility

  • Vulnerability to global market volatility: When capital flows are unrestricted, the domestic economy becomes vulnerable to setbacks in the global economy. A recession or slowdown in major leading economies could trigger huge capital outflows from other economies. The short-term impact of such outflows could be profound. The collateral damage can extend to even those sections which have little or no linkage to the affected economy.
  • Foreign debt burden: With easy access to foreign borrowings, domestic enterprises may become highly leveraged i.e. the enterprises may end up borrowing a lot of funds. This will make them vulnerable to both – the perils of high debt and unfavourable changes in economic scenario and policies of foreign economies.
  • Challenges for export-oriented sectors: Full capital account convertibility presupposes the absence of currency controls. In such a situation, rising domestic currency makes exports less competitive in the international markets. Decline in export earnings will affect both – the export-oriented sectors and the forex reserves of the country.

Upshot on India’s Position

India is amongst the fastest-growing countries with an ambition to rank amongst the top three economies of the world. To become a global leader, the country needs higher integration in the world economy. Capital Account Convertibility is an important step in that direction. However, the roadblocks aren’t few. The country needs to clear several hurdles in the form of high fiscal deficit, infrastructure bottlenecks, lower forex reserves (in comparison to foreign currency borrowings) and high NPAs in the banking system.

 

Srei - Servicing infrastructure needs of India

Srei has been in the infrastructure finance business for a quarter of a century. In 1989 when Srei took its first steps, there was not much quality investment in the infrastructure sector and India was a closed economy. Our company’s aim back then was to address two problem areas of the Indian economy – financing and infrastructure. We are proud to say that we have come a long way. Today, by using the latest technology and by constantly innovating, we have managed to extend the Srei advantage to:

Infrastructure Project Finance: Our project finance division provides total finance solutions to sectors like power, renewable energy, roads and transportation, hospitals, telecom, urban infrastructure, industrial parks and SEZs, warehouses and others.

Transportation and equipment finance: Srei Equipment Finance Limited is one of the largest construction and mining equipment financier in India with over 30,000 customers. We help first-time customers of backhoe loaders, tippers to the largest EPC firms. Srei finances almost all construction, mining, transportation and logistics equipment.

Rural equipment finance: Srei is committed to advancing agricultural growth in India. We provide finance for farming equipment and other related agricultural vehicles like tractors.

Information Technology (IT): India is known as the world’s IT centre and in recognition of that, Srei is helping with the purchase of IT hardware and software, office automation equipment, furniture and fittings. Srei has partnered with globally renowned firms like Fujitsu, EMC, SAP and Oracle among others, to offer finance. Srei offers true operating leases, with or without residual values, and helps clients with purchases of receivables from other leasing companies.

Conclusion: Infrastructure is the backbone of any country and we, at Srei, operate in areas that are the core focus of India’s economy. We recognise the need for supporting this crucial sector to make the India of today, the superpower of tomorrow.

 
 

Compounding your income with bonds

Investing is not just about returns. It is also about one’s preferences and priorities. Some would prefer high returns even if it means a higher risk inherent in their investment portfolio. Others may settle for lower risk even if it is going to mean slightly lesser returns. Equity investments offer good return potential but tend to exhibit higher volatility. Investors who are equity-averse or who prefer investing in the relative stability of debt may invest in bonds. Bonds not only offer a steady interest income but can also help you generate compounded returns.

Bonds offering compounded income

  • You may choose from a variety of bond and debenture offerings to achieve compounded income. To achieve compounded income, you simply have to let your coupons (interest receipts) remain invested so that they too earn returns for you. This can be achieved by either reinvesting coupons after you receive them in your hand or by reinvesting them before you even receive them. While the former is laborious and prone to inertia, the latter emerges a simple but effective way of compounding your bond returns. Government securities usually pay out coupons periodically but private and public sector corporate bonds allow you to receive compounded returns.
  • You may also opt for deep discount bonds which are offered to you at a discount to their face value and are redeemed at their face value on maturity. The difference between the two represents your returns.

About cumulative option

  • Bonds and debentures usually give you two options of receiving your coupons; 1. You may receive the same periodically in your hand (say half-yearly or annual) or, 2. You may opt to receive the same at the end of the tenure of the bond or debenture. Naturally, in the latter case, the issuer would be utilizing your coupon dues till the maturity date and hence, has to compensate you for this. So, they pay you compounded returns which mean they notionally add your periodical coupons to the bond face value and pay you interest on this enhanced notional face value. This process gets repeated till maturity and you are paid the compounded coupons in full.

Compounding is beneficial

  • Compounding is beneficial to you because your money grows faster and larger than it would if you did not compound. Earning interest on interest is an effective way of accelerating your wealth accretion. Moreover, by compounding, you ensure that your periodical coupon receipts do not lay idle in your bank account or get frittered away as an expense.

Conclusion: If you do not require regular cash inflows of your interest income or if you are saving for long-term goals like retirement, the cumulative option in bonds can help you earn more. Over longer periods, the impact of compounding is immense and can help you enhance investment results.

 
 

Buddy Jokes

JOKES

1. One place, where you can always find money? - In the dictionary.

2. The cost of living is the difference between your net income and your gross habits!

3. Money is always there, but the pockets change.

 

Buddy Quiz

True or False

1. CAC stands for Capital Account Convertibility.
a. True
b. False

2. CAC represents the freedom to deal in Indian financial assets at market-determined.
a. True
b. False

3. Equity investments offer good return potential and exhibit less volatility.
a. True
b. False

4. Srei aim to address two problem areas of the Indian economy – financing and infrastructure.
a. True
b. False

5. Bonds offer a steady interest income and also help to generate compounded returns.
a. True
b. False

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