Financial Economics and Capital Markets

The audience at the Indian Association of Investment Professionals (IAIP) speaker event at Bangalore on March 22, 2013, was treated with enlightening discussion on Financial Economics and Capital Markets, more specifically on the importance of Sovereign Ratings on India’s economy. What else could have been better with Paul J. Alapat, Ph.D., Managing Director, Amba Research (Amba) presiding over as IAIP’s honored speaker for the event. The meeting had an apt end with a conversation on the opportunities for Chartered Financial Analysts (CFAs) in an equity research firm.


The discussion focused on many aspects that impact India’s sovereign ratings.  Paul introduced this topic by providing a brief overview on India’s current sovereign ratings and rationale for India’s long term sovereign credit rating of BBB- or its equivalent by the global credit rating organizations such as Standard and Poor’s, Fitch and Moody’s. This was followed with an extensive examination of India’s economic scenario during fiscal year 2012 (FY12). He reiterated that India is moving to a stagflationary economy with India’s Gross Domestic Product (GDP) growing at around 5.0 percent and the inflation hovering around 7.5 percent. Further, India’s credit rating has been impacted by various factors such as supply-side constraints, weak global and internal demand, limited room for policy discretion on monetary or fiscal fronts, political paralysis, reform seizure and corruption overhang.

Paul walked us through the sovereign credit rating process, which involves a thorough evaluation of the past events& current economic situations, expected economic situation and above all sensitivity to market feel. Certain important factors that affect each of these aspects are discussed below:

The past events & current economic situations:

  • India has been facing weak public finances, and crowding out of private spending over the past few years.
  • A floundering social and physical infrastructure constraining growth and underpinning price pressures
  • Internal political gridlock compounded by weak global economic condition: Euro crisis, recession in Japan.

Expected economic situation:

  • International Monetary Fund forecasts global economic growth to improve to 3.5 percent in 2013 (from 3.2 percent in 2012), and then 4.1 percent in 2014
  • India’s GDP is forecasted to expand by 5.9 percent in FY13 and to 6.4 percent in FY14
  • Government forecasts fiscal deficit to narrow to 4.8 percent of GDP in FY14 from 5.2 percent in FY13
  • Opening of India’s economy to global markets through Foreign Direct Investment reforms in retail, civil aviation & insurance is considered favorable to India’s credit rating
  • Reasonable Public Sector Understanding disinvestment target
  • Overall food and fuel subsidy bill is set to grow, though a genuine effort is undertaken by the Government to reduce/eliminate fuel related subsidies

Market Feel – Positives: Asset market recovery globally and in India greases the wheels for spending recovery

  • Asset markets are currently considered not expensive and event risk fears are considering abating
  • Indian banking Non-Performing Assets generally under control and financial system is viewed as relatively stable
  • Wholesale price index has started reigning into control
  • India has never defaulted or rescheduled its sovereign debt
  • Longer term strengths, potential demographic dividend, emerging stronger middle class and increased globalization

Market Feel – Negatives:

  • Reforms just to window dress and cuts temporary expenditure cuts because of elections pressures and political compromises
  • Political gridlock both globally and in India
  • Europe event risk

The speaker expects the India’s current credit rating to be constant with a stable or a positive long term economic outlook.


Paul highlighted that Amba provides various services to its clients such as Research (equities, fixed income and credit, macroeconomics & forex (FX), commodities); index & quant analytics; origination & corporate finance; structuring & trading support; shared services (risk and controls, capital markets technology & data management, publishing and operations, capital markets training).

It is pertinent to note that Amba has entered into partnership with the CFA Institute to impart 40 Credit Equivalent hours of analyst training as part of the Institute’s Approved-Provider Program to enhance the analyst’s knowledge required for his job.

He concluded his speech by highlighting the importance of the CFA program in his organization. He added that around 42.0 percent of Amba’s employees are either pursuing or have completed their CFA accreditation and that the Company plans to hire a few CFAs during the year. He emphasized the importance of long term commitment to one’s job in order to enable value addition both for the employee and for the Organization.

The meeting was concluded with a networking opportunity during a sumptuous dinner organized by the society.

Contributed by: Hareesh Mothi, CFA and Saurabh Mundra, CFA

Photo Courtesy: Dilip Jain

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