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SIGFI, IIM LUCKNOW

Inside this issue:


The Russian Rouble Crisis

Highest funded tech


startups in India

RBI : Repo rate reduced by


25bps

Global Economic Outlook


2015

FiNMAG
18th January, 2015
Volume 8

The Russian Rouble Crisis


2014 has been a rocky year for the largest country in the
world. The economy is witnessing a free fall of its currency by about 50% this year, rising inflation, dip in RTS
(Russian Trading System) index by 30% in a month and a
recession this year, with GDP expected to fall by 4.5% by
Central Bank.

their interest payment obligations on their existing debt.


High Capital outflow
Prior to the drop in oil prices and before the war in
Ukraine, Russia saw more than $120 billion in investment capital flee its borders in 2013.

Causes
Falling oil prices
The price of oil fell from $100 per barrel in June 2014 to
$47per barrel as on 17th January 2015 due to a drop in
global demand. In 2014, Russia needed an oil price of
$100 per barrel just to have a balanced budget.

Fig 2: Capital outflow from Russia, billions of USD


Source: Wikipedia

Impact
GDP contraction in Russia
Fig 1: Oil prices from Aug14-Dec14
Source : NASDAQ

Economic sanctions following Russia's intervention in


Crimea and Ukraine
Despite the financial crisis, that the United States and
the European Union will not ease economic sanctions
imposed on Russia. Economic sanctions have also contributed to the decline of the rouble since Russian companies have been prevented from rolling over debt, forcing companies to exchange their roubles for U.S. dollars
or other foreign currencies on the open market to meet

Russia is facing an economic meltdown. Russia is the


sixth largest of the top seven global economies, with a
$3 trillion gross domestic product this year. Now with oil
prices collapsing, analysts say Russias GDP could contract 5 percent or more next year.
Further capital outflow
In anticipation of declining GDP, investors are fleeing the
country converting their roubles for dollars leading to a
decline in the Russian Rouble. This has prompted Russians to purchase durable goods immediately to get value for their rapidly declining currency as well as change
their pensions and savings from being in roubles to US
dollars or euros, thus creating a cascading effect to the

FiNMAG
and in the middle of the night hiked the key interest rate
by a tremendous 6.5 percentage points to 17 percent.
But that failed to stop the panic, with the rouble dropping by a further 20 percent. With the rouble having
now lost nearly 50 percent of its value against the dollar
in the past year imported food and consumer goods are
quickly becoming luxuries. That trend has begun and
inflation -- already close to ten percent -- threatens to
reach 15 percent in the coming months, thereby triggering fears of another stagflation.
High impact on weaker oil producers
Emerging markets that are producers of commodities
like oil are going to continue to get hurt, especially Venezuela, where oil revenues account for about 95 percent
of export earnings and the oil and gas sector is around
25% of GDP. Larger vulnerabilities still lie in the weaker
oil producers such as West Africa.
Spill over into emerging economies
Ordinarily, manufacturing-heavy economies that import
commodities, such as Thailand and Indonesia, benefit
from lower commodity prices, but thats not happening
indicating poor investor sentiment in emerging economies at the present, leading experts to ponder whether
the global economy is on the cusp of deflationary pressures.
Minimal impact on US and Europe

Outlook
Outlook on the Russian economy is optimistic based on
the assumption that the global price of oil will rise as
cheaper energy prices spur consumer spending and investment across the world. That will lead to higher demand for oil, which will push up the price. Some analysts
estimate that the price will recover to about $80 a barrel
next year. In the short term, this would be good for Russia, given its dependence on the energy sector. Also,
high oil prices over the past decade have allowed Moscow to pile up substantial hard currency reserves. Even
after having spent heavily to support the rouble, the
central bank's reserves still stand at around $400 billion.
Public debt is just over 10 percent of GDP. The budget
remains balanced and the government has a big rainy
day fund to draw upon to sustain social spending.
However, half of the Russian Federation's governmental
revenue comes from the sale of oil and gas. Russia's
economy suffers from Dutch disease, a term economists
use to describe a situation in which a country focuses on
developing its natural resources to the detriment of
other economic activity. In the long term, though, it is
essential that the country tackle some of the economic
challenges it has ducked for the past couple of decades
including the development of alternate sources of economic activity thereby reducing dependence on hydrocarbons.

US has very little to fear from the collapse of the Russian


rouble because the US does very little trade and financial business with Moscow. The 2014 international sanctions on Russia decreased Russia's financial connections
with the broader financial world, which in turn lowered
the risk that an ailing Russian economy would affect the
worldwide economy.

References:

Impact on Asia

http://www.economist.com/blogs/economistexplains/2014/12/economist-explains-16

Asias financial markets have fared better than other


emerging market regions because of three key factors First, the region has few direct links to the crisis in Russia. Second, Asia stands to benefit from falling oil prices
and third, most countries have strong external positions.

http://en.wikipedia.org/wiki/2014%E2%80%
9315_Russian_financial_crisis
http://www.bloombergview.com/articles/2014-11-10/howclose-is-russia-to-financial-crisis
http://www.telegraph.co.uk/finance/economics/11296233/
Russian-economic-crisis-live.html

http://www.aljazeera.com/programmes/insidestory/2014/12/
inside-story-russia-economic-crisis2014122185119161740.html

Highest funded tech startups in India


2014 was a record year for Indian startups when it
comes to venture capital funding. Not surprisingly, ecommerce received the highest amount of funding given
its capital intensive nature of business, at $602 million.
This was followed by the Services sector where startups
that dealt with a wide spectrum of services from payment enablement to event ticket sales. Consumer Web
still remains strong with many innovative business models and web enabled solutions attracting investments.
Surprisingly, Data Analytics, although is seeing a lot of
market traction, has attracted just about $31 million in
funding. Education and Healthcare continue to be average performers.

Heres a look at the 5 highest funded Indian tech


startups
Flipkart US$1.91 billion
Ecommerce leader Flipkart became the first VC-backed
company in India to have a billion dollar funding round.
Tiger Global and South African media group Naspers led
the US$1 billion funding in July. Part of the funds went
into acquiring leading fashion portal Myntra. Tiger Global and Accel were the leading investors in both Flipkart
and Myntra, and are believed to have pushed for the
merger to shore up the battlefront against Amazon.

Volume 8

Highest funded tech startups in India

Fig : VC funding sector wise in first half of 2014


Source: Yourstory.in

Snapdeal US$861 million


Snapdeal raised US$234 million in two back-to-back
funding rounds in February and May. Then Japanese
telecom giant Softbank came to India in October providing US$627 million more in funding to play in the big
leagues.
Ola US$251.5 million
The leading taxi aggregator Ola had a whopping US$210
million from Softbank in October on top of the US$41.5
million it had raised earlier in the year, taking its total
funding in 2014 to over a quarter of a billion dollars.
That gives it ammunition enough to compete with global
rival Uber, provided Indias transport regulators give
them the green signal in the new year.
Quikr US$150 million
Tiger Global came on board to give a boost to local classifieds portal Quikr in its battle with global player OLX.
Two funding rounds of US$90 million and US$60 million

this year were a recognition of the continuing appeal of


the online classified listing sites despite the mushrooming of ecommerce sites.
Housing US$109 million
Real estate portal Housing.com was the third big beneficiary of Softbanks largesse in India, with a US$90 million
infusion of funds. This came on top of a US$19 million
funding round in June, taking its total for the year past
the 100-million-dollar mark. Housing.com has been a
trail-blazer among Indian real estate portals, pioneering
the use of map-based mobile technology to make house
-hunting in a disorganized market easier.
References :
https://www.techinasia.com/indias-30-highest-funded-techstartups-2014/
http://yourstory.com/2014/08/india-startup-funding-report2014/
http://www.indianweb2.com/2014/12/top-10-startup-funding
-in-india-2014/

RBI: Repo Rate reduced by 25bps


The Reserve Bank of India on Thursday slashed the repo
rate by 25 basis points to 7.75 percent from 8 percent.
Repo rate is the rate at which the RBI lends money to
commercial banks in the event of any shortfall of funds.
It is used by monetary authorities to control inflation.
This is the first repo rate cut since May 2013. The cash
reserve ratio (CRR) has been kept unchanged at 4%

while the reverse repo rate stands adjusted to 6.75%.


Finance Minister Arun Jaitley hailed the decision
of RBI to cut the policy rate, saying it is a positive development for the Indian economy and will certainly help in
reviving the investment cycle the government is trying
to restore.

Volume 8

RBI: Repo Rate reduced by 25bps


Reasons for the cut

fiscal year. Recently the Finance Ministry had said that


all efforts were being made to ensure that the government does not default on the fiscal deficit target.

Inflation
The consumer price index inflation has been easing
since July 2014. The path of inflation, while below the
expected trajectory, has been consistent with the assessment of the balance of risks in the Reserve Bank's bi
-monthly monetary policy statements. Lower than expected inflation has been enabled by the sharper than
expected decline in prices of vegetables and fruits since
September, ebbing price pressures in respect of cereals
and the large fall in international commodity prices, particularly crude oil.
Fiscal deficit target
Rajan has acknowledged the government's assurance of
sticking to its fiscal deficit target of 4.1% in the current

The rate of retail inflation increased, but marginally to 5%


from an all-time low of almost
4.4% in November

Copper crashed to a six-year low.


High-grade copper for March
delivery, to $2.51 a pound, hitting
levels not seen since mid-2009

Finance Ministry said it expected


banks to pass on the rate cut to
consumers through a 50 basis point
-reduction in lending rates.

Bond yields fell sharply. The benchmark 10-year bond yield fell 5 basis
points to 7.93 percent on the news.
It had hit a near 1-1/2 year low of
7.82 percent in mid-December

Fall in oil prices and Copper prices


Global oil prices breached the six-year low of $45 a barrel. The low oil prices have kept the good times rolling
for emerging economies such as India. It helped the government to have a sharp reduction in pump prices of
petrol and diesel. Petrol prices are now Rs 12.27 per liter
lower than in August, while diesel prices are down Rs
8.46 a liters since October. Low oil prices would reduce
inflation and the oil import bill, which was $160 billion
last year and is likely to be around $100-110 billion this
year. It would also bring down subsidy on kerosene and
cooking gas. Copper, on Wednesday crashed to a sixyear low. Both slippages have re-ignited fears of another
round of a global growth slowdown.

Inflation outcomes have fallen


significantly below the 8% targeted by January 2015. On current policy settings, inflation is
likely to be below 6% by January 2016

WPI inflation for December


came in at 0.11%, marginally
higher than the flat inflation
logged in November

Low oil prices would reduce inflation and the oil import bill, which
was $160 billion last year and is
likely to be around $100-110 billion this year

Rate cut will lead to more money in


the hands of the consumer for
greater spending

The rupee ended at 62.07 a dollar,


up 0.2% from its previous close of
62.19 but down from its days high
of 61.48

RBIs move will boost investor sentiment and revive growth, It also
sparked a hope that it will further
bring down interest rates to lower
the cost of capital for the industry.

Sensex -- jumped 728.73 points to


close at 28,075.55. Nifty surged
216.60 points and ended at
8,494.15.
The move will boost housing demand and also improve sentiments
in the sluggish property market.

Volume 8

Global Economic Outlook 2015


Global economic growth in 2015 is expected to be
around 3.4 percent in 2015. Downsides to the global
outlook relate to intensifying political and economic
risks; upsides relate to the ability of policy and business
to invest, raise productivity, and rebuild trust and confidence.
US: MODERATELY POSITIVE
US is expected to grow at a modest 2.6 percent in
2015.Profitability may come under increased pressure
as business cycle matures and cost increases are imminent. Americas strength in technological progress needs
to help accelerate productivity. The key challenges for
United States would be increasing income inequality,
geopolitical shifts and adapting to climate change.
EUROPE: CAUTIOUS SHORT-TERM OPTIMISM, BUT
DOWNSIDE RISKS ACCUMULATE
Despite significant downside risks, the Euro Area is projected to grow at 1.6 percent in 2015, almost double
that of 2014.Modest recovery in domestic consumption
is a likely source of growth as labor markets improve.
However, disinflation or even deflation could bring
growth rates down. The key challenges for Europe
would be youth unemployment and EU-Russia relations.
ASIA-PACIFIC: CHALLENGING IN CHINA; MOSTLY POSITIVE ELSEWHERE
Despite softening growth rates, the Asia-Pacific region
remains the leader for global growth. Growth rate for
the region is expected to be around 5.5 percent from
20152019. Despite short-term headwinds from global
economy, Southeast Asia will strengthen as the global
production base. The key challenges for Asia-pacific

would be structural economic reforms and managing


urbanization.
LATIN AMERICA: UPSIDE POTENTIAL
Regional growth is expected to strengthen steadily from
1.9 percent in 2014, to 2.9 percent in 2015 and 3.5 percent in 2016. Decreasing prices of commodities and energy exports provide significant downside. Productivity
growth should can help in building investment and improving business confidence. The key challenges for
Latin America would be education and skill development
and dealing with corruption and income inequality.
AFRICA: POSITIVE, BUT UNCERTAIN
Regional GDP growth is projected to strengthen to 5.1
percent in each of 2015 and 2016, supported by net
foreign direct investment (FDI) flows in the resource
sectors, public investment in infrastructure, and improved agricultural production. Nigeria will be the
strongest performer at 6.7 percent growth in 2015, but
it is heavily dependent on natural resources and vulnerable to global demand. A positive growth outlook for
Africa is strongly dependent on improved institutional
performance and better governance. The key challenges
for Africa would be education and skill development and
delivering hard infrastructure.
References:
http://reports.weforum.org/outlook-global-agenda-2015/
http://www.businessweek.com/articles/2014-11-06/2015global-economic-outlook-better-than-2014-but-not-by-much
https://www.conference-board.org/data/globaloutlook/

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