2018

Volume 5

THIS MONTH

Season’s greetings!

In this issue, Mr. Andrew Gurney, Head – International Regulatory Affairs, Lloyd’s, has presented his

thoughts on volatility and risks in Global and Indian markets in his article – ‘May you live in

interesting times’. We thank Mr. Gurney for his contribution to the APAS Monthly publication.

This month, the APAS column presents its views on Insurance as savings avenue – Overview and

strategies to be adopted by the insurance companies’ leadership.

The economic indicators showed mixed performance. Manufacturing PMI rose to 51.6 in April from

51 in March. India’s annual infrastructure output in April grew at 4.7%. India's Index of Industrial

Production (IIP) hit a 5-month low of 4.4% in March. PMI services rose to a 3-month high of 51.4 in

April from 50.3 in March, while composite PMI also rose to a 3-month high of 51.9 in April from 50.8

in March. CPI inflation rose to 4.58% in April from 4.28% in March. WPI inflation hit a 4-month high

of 3.18% in April from 2.47% in March.

The Gross Domestic Product (GDP) growth rate for the fourth quarter (January-March) of 2017-18

accelerated to 7.7%, which was the fastest pace of growth for the economy in 7 quarters and helped

India retain its position as the world’s fastest growing major economy. For the full year 2017-18, GDP

expanded at 6.7%.

APAS

MONTHLY

The Reserve Bank of India (RBI) released the Second Bi-monthly Monetary Policy Statement, 2018-

19 and increased the policy repo rate by 25 basis points to 6.25%. The RBI also released a notification

on Storage of Payment system data, important for service providers.

The Insurance Regulatory and Development Authority of India (IRDAI) Chairman took charge. The

IRDAI notified on Solvency Margin for Crop Insurance business.

Cabinet approved continuation of Pradhan Mantri Swasthya Suraksha Yojana up to 2019-20. Cabinet

also approved strengthening the mechanism for resolution of commercial disputes of Central Public-

Sector Enterprises. Cabinet also approved National Policy on Biofuels – 2018.

The Securities and Exchange Board of India (SEBI) released a circular on Uday Kotak committee

recommendations on Corporate Governance. The SEBI also released a circular on Non-compliance

with certain provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations,

2015 and the Standard Operating Procedure for suspension and revocation of trading of specified

securities.

We hope that this APAS Monthly is insightful. We welcome your inputs and thoughts and encourage

you to share them with us.

Ashvin parekh

On the cover

GUEST COLUMN

Mr. Andrew Gurney Head, International Regulatory Affairs Lloyd's

May you live in interesting times

ECONOMY

➢ Index of Industrial Production – March

➢ Inflation update – April

➢ PMI update – April

➢ Core Sector – April

➢ GDP – Q4 – FY 17-18

APAS COLUMN

Insurance as savings avenue – Overview and strategies to be

adopted by the insurance companies’ leadership

BANKING

➢ RBI Second Bi-monthly Monetary Policy Statement,

2018-19

➢ Storage of Payment System Data

INSURANCE ➢ IRDAI Chairman takes charge

➢ Solvency Margin for Crop Insurance

business

INFRASTRUCTURE ➢ Cabinet approves continuation of Pradhan Mantri

Swasthya Suraksha Yojana up to 2019-20

➢ Cabinet approves strengthening the mechanism

for resolution of commercial disputes of Central

Public Sector Enterprises ➢ Cabinet approves National Policy on Biofuels -

2018

ECONOMIC DATA SNAPSHOT

➢ Global GDP, CPI, Current account balance, budget

balance, Interest rates

CAPITAL MARKETS

➢ Uday Kotak committee recommendations on

Corporate Governance

➢ Non-compliance with certain provisions of the SEBI

(Listing Obligations and Disclosure Requirements)

Regulations, 2015 and the Standard Operating

Procedure for suspension and revocation of trading

of specified securities

CAPITAL MARKETS SNAPSHOT

➢ CNX Nifty, BSE Sensex, India VIX, $/₹, GIND 10Y

“May you live in interesting times…”

So, the curse says. Well, as an industry, we exist in times which have certainly become increasingly

“interesting” of late.

A brave new world?

Global economic growth, according to the IMF, will expand in 2018 at the fastest rate in almost a decade.

Political upheaval and uncertainty appears to be increasing at least as fast. Meanwhile the changes in the way

we all live and work, from the internet of things, AI, Big Data, the acceleration of the growth in Mega-Cities,

Smart Cities and mass urbanization, climate change, the ubiquitous sharing economy, to the way we purchase

and pay for anything and everything is changing behavior to an extent that may never have been seen before

and provides risks, challenges and opportunities on a global scale.

At the same time, a wave of political populism has increased tensions amongst the largest global economies,

threatening a rising tide of protectionism and barriers to trade, and an undercurrent of uncertainty driven by

a significant number of elections across Latin America, Asia and Europe over the coming year and of course,

Brexit. We are operating in a global risk landscape which is dynamic, and which requires both business models

and regulatory frameworks that match the new realities. As a result, the international reinsurance sector is

working hard to innovate and adapt to meet the demand of local insurers, regulators and governments to

provide the cover needed to protect policyholders in this new inter-connected world.

Mind the gap…

As part of its work looking at emerging risks, Lloyd’s has published reports this year alone ranging from the

need to consider a different approach to modelling marine risk, to the impact of a major cloud outage, the

perception of risk by customers, providers and platforms in the sharing economy, to exploring crop

(re)insurance in India.

May you live in interesting

times Mr. Andrew Gurney Head, International Regulatory Affairs Lloyd's

Emerging risks threaten to exacerbate existing problems resulting from the large protection gap which still

exists across many parts of the world. The insurance penetration rate in countries which are rapidly moving

up the economic ladder continues to lag significantly behind the global average. New distribution channels

such as the increasing use of mobile devices, FinTech, distribution via platforms like WeChat in China and the

growing role governments are playing as insurers, bring opportunities and challenges for both the industry

and regulators. They help to facilitate widespread coverage but demand new business models and innovative

technologies to manage risk effectively – and the fact that many of these risks do not respect borders, means

that the responses to the risks need to be global in their perspective.

Example: Indian crop insurance

A good example is the Indian agricultural sector. Lloyd’s and RMS recent report1 shows that crop insurance is

now the third largest non-life market in India. India is the world’s second largest agricultural economy with

agriculture GDP of USD 392 billion – some 17% of India’s GDP. Crops grown in India are vulnerable to a wide-

range of adverse weather events and man-made risks, and despite an increase in associated premium of

almost 300% to more than USD 3 billion driven by the introduction of the Government’s PMFBY and RWBCIS

schemes, a significant majority of crops remain uninsured.

Globally diversified risk is key

Diversifying risks of this magnitude internationally is an effective way of providing protection to individuals

and businesses and helping local communities and economies to be more resilient in the face of disaster. The

2017 Atlantic hurricane season saw estimated economic losses of over USD 200 billion across the US and

Caribbean, making it one of the costliest years for natural catastrophes in the last decade. However,

international reinsurers are playing a key role in providing support to those individuals, businesses,

communities and economies affected through the provision of cross-border reinsurance, enabling continuing

cover and creating capital inflows.

International reinsurance works best when it is allowed to flow freely across borders to where it is needed

most, particularly to those places which are affected by large and emerging risks. Pooling risk and capital, and

bringing truly global, innovative expertise to bear can present new solutions to the emerging risks and issues

we are seeing develop.

What is clear is that whether it be cyberspace, Artificial Intelligence, disaster risk financing or one of the other

emerging risks or solutions, regulators and reinsurers will have to work together closely to maintain the

robustness and resiliency of the global insurance industry in this ever-evolving risk climate.

*Views are personal. Neither APAS nor any of its employees endorse any view, product or services mentioned in the article.

1 https://www.lloyds.com/news-and-risk-insight/risk-reports/library/society-and-security/harvesting-opportunity

Insurance products have always been categorized as savings and protection schemes. With the increasing risk

to retail investors due to market volatility, insurance can mark itself as a desired avenue for investors for their

savings and protection. While trying to understand this, we also envisage strategies that insurance CEOs can

undertake to create a leading position in the financial services industry. For a retail customer, the spectrum of investment options (in the Indian context) ranges from bank fixed

deposits, to government instruments, to mutual funds to direct equity market investments and more. The

investor may choose from these as per his/her risk appetite.

Bank deposits lie at the lower end of risk-return frontier. Post demonetization, banks received huge cash

deposits, which increased their liquidity. This led them to lower interest rates on savings products. Also, in the

current market conditions, both global and domestic, debt yields have risen. The lower returns on fixed

deposits, when inflation-adjusted and tax-deducted, lead to much lower returns.

Investors can participate in equity markets directly or via other instruments like mutual funds. In 2017-18

Union budget, the government reintroduced the long-term capital gains (LTCG) tax on equity (for capital gains

of more than INR 1 lakh). This partially reduced the incentive for investors to remain invested in stock markets

and equity mutual funds for a long term.

The idea of a life insurance savings product is that a person will be able to meet his/her financial objectives,

whether dead or alive. This protection aspect of life insurance products needs to be highlighted to the

customers, as it differentiates it from all other financial savings products. The tax benefit offered on all life

insurance products is an added advantage that they offer.

India offers growth opportunity to the life insurance industry at both ends of the age spectrum. On one hand,

India’s millennial population is expected to cross 45 crores and on the other hand, the elderly population will

be over 10 crores by 2020. Life insurers will also have access to a concentrated market of households who do

not have the traditional security of joint family. With millennials having higher risk-taking ability and greater

awareness of the need to hedge those risks in life, the demand for protection oriented financial products

would witness further increase.

Insurance as savings

avenue – Overview and

strategies to be adopted

by the insurance

companies’ leadership

Infrastructure for distribution would be a crucial factor. While millennials may prefer the convenience of

online purchase journey, a large set of Indians would still need the support of physical sellers. There would

also be those in between, who would research online, but prefer to buy offline. These multiple customer

segments will touch several distribution channels in a single purchase journey, making it imperative for life

insurers to offer a seamless omni-channel experience.

Strategy for insurance leadership to stay ahead

We understood above, the basis for insurance sector to carve out a role for itself as an important investment

avenue. However, in order to scale up, the insurance leadership should step up its efforts to materialize such

visualization. As the industry leadership undergoes a change, we try to envisage the key areas of focus for the

forthcoming leadership, for the insurance sector to occupy an important space in the Indian financial services

sector.

Post the increase in limit in FDI to 49%, a greater diversity has been observed in the boards and top

management of insurance companies. The foreign partnerships have brought in greater amount of knowledge

on products, governance and strategies on distribution and marketing. However, these strategies still need a

greater amount of customization in accordance with Indian markets. The leadership needs to focus not only

on increasing the popularity of insurance products, but also on enhancing key ratios of their companies to

achieve required margins.

The key areas of focus for insurance companies remain marketing and distribution.

In the recent years, sale of insurance products has been actively encouraged by both the Government and the

regulator. Government has introduced several crucial products for specific customer classes, like life

insurance, accident insurance, crop insurance, health insurance schemes, etc. These schemes have facilitated

the insurance industry to do more business, but the impact could have been higher, with higher publicity. An

appealing factor of government products is their simplicity. Insurers create fancy products, which are complex

in nature. The inadequate penetration of insurance products can also be attributed to their complexity. In

comparison, mutual funds’ advertising campaigns have been a popular medium for actively resolving

investors’ queries and spread of mutual fund awareness.

With respect to distribution, insurance companies are more retail, compared to mutual funds. Mutual funds

are focused on large cities, driven by corporate distribution and their concentration is high. Insurance industry

has been able to do better than mutual funds in asset build up. Insurance industry should continue focusing

on its wide distribution network to reach out to the retail customers.

With the rise in internet penetration, online insurance selling platforms have become an important medium

for sales. They have started facilitating the customers’ need for a one-stop shop for all the insurance products.

For insurers, convenience, detailed information at a single place and providing explanation of the key terms

might be key pressing buttons to understand needs of customers.

One of the strategies that can be adopted by the insurers, could be to envisage a customer-centric approach

to sales and selective bancassurance participation, catering with the selected products only to one specific

class of customers via just few specific bank channels.

Insurance companies should also consider enhancement of their key ratios, simultaneously. While increase in

volumes would compensate for distribution costs, it is important that the insurers keep in check various key

ratios like expense ratios, solvency ratios, net profit margins, etc. This would help in retaining the profitability

in the short term, while increasing the companies’ sustainability in the long term.

Insurance sector must also recognize the significant regulatory support that it has received in the last few

years. Easing the FDI limit, increasing capital raising avenues, easing norms for bancassurance, reinsurance

regulations, etc. have been positive developments made by the regulator. The pressure on the CEO’s desk has

eased to a great extent.

Insurance has an opportunity to become an avenue for parking funds for the risk-averse investors and act as

a hedging instrument for the risk-prone investors. Also, the diversity in the products caters to every age group.

The leadership may want to recognize the growing investor awareness and strategize their focus areas

accordingly. Insurance still stands as a push product for almost every customer segment. Tapping the right

customer segment with appropriate product segment, may serve the purpose in the long-term.

-APAS

IIP (Index of Industrial Production) – March

Index of Industrial Production (IIP) or factory output for the month of March 2018 grew at 4.4%, hitting a 5-

month low, compared to 7.1% in February 2018 and same as 4.4% in March 2017.

This was due to an unfavorable base effect of March 2017 and a broad-based slowdown in output of goods.

The cumulative growth for the period April-March slipped to 4.3% from 4.6% in the corresponding period of

the previous year.

As per Use-based classification, construction goods expanded by 8.8%, while primary goods and intermediate

goods recorded a sub-3% growth in March 2018.

Capital goods output declined by 1.8% in March 2018, as against a growth of 9.4% a year ago. Consumer non-

durable goods showed an impressive growth of 10.9%, as against a growth of 7.5%, while consumer durable

goods recorded a growth rate of 2.9%, against a contraction of 0.6% a year ago.

The manufacturing sector, which constitutes 77.63% of the index, grew by 4.4% in March 2018, as compared

to 3.3% in March 2017.

Electricity generation grew by 5.9%, compared to 6.2% a year ago.

Mining output decelerated to 2.8%, compared to a growth of 10.1% a year ago.

In terms of industries, 11 out of 23 industry groups in the manufacturing sector showed positive growth in

March 2018.

ECONOMY

Source: APAS BRT, www.mospi.gov.in

CPI (Consumer Price Index) – April

India's consumer price index (CPI) or retail inflation rose to 4.58% in April 2018, compared to 4.28% in March

2018 and 2.99% in April 2017.

The corresponding provisional inflation rates for rural and urban areas are 4.67% and 4.42% respectively.

The Consumer food price index (CFPI) grew at 2.8% in April 2018, compared to 2.81% in March.

The core CPI inflation rose to a 44-month high of 5.9%.

Among the CPI components, inflation for food and beverages eased to 3% in April 2018 from 3.08% in March

2018.

Within the food items, the inflation fell for vegetables to 7.29%, sugar and confectionery to -4.05%, milk and

products to 3.21% and eggs to 6.26%. However, the inflation jumped for fruits to 9.65%, cereals and products

to 2.56%, pulses and products to -12.35%, spices to 1.25%, prepared meals, snacks, sweets, etc. to 4.85%, oils

and fats to 2.11% and meat and fish to 3.59%.

The inflation for housing rose to 8.5%, while that for miscellaneous items moved up to 4.96%.

Within the miscellaneous items, the inflation increased for transport and communication to 4.55%, education

to 5.06%, health to 5.54%, household goods and services to 4.75%, personal care and effects to 4.96% and

recreation and amusement to 4.96%.

The inflation for clothing and footwear was higher at 5.11%, while that for fuel and light eased to 5.24%.

2.2

8.4

7.17.5

7.1

4.4

Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18

IIP (% YoY)

Base rate 2011-12

Source: APAS BRT, www.mospi.gov.in

WPI (Wholesale Price Index) – April

India's wholesale price index (WPI) inflation hit a 4-month high at 3.18% in April 2018, as compared to 2.47% in

March 2018 and 3.85% in April 2017.

The rate of inflation based on WPI Food Index increased to 0.67% in April from (-) 0.07% in March.

The index for primary articles rose by 1.4% from the previous month.

Under primary articles, ‘Food articles’ group rose by 1.9% due to higher prices of tea (18%), peas/chawali (13%),

fruits & vegetables (8%), fish-marine (4%) and pork, paddy and maize (1% each).

‘Non-food articles’ group declined by 0.9% due to lower prices of raw silk (9%), floriculture (7%), niger seed (6%),

guar seed (5%), groundnut seed and linseed (4% each), raw rubber (3%), cotton seed, castor seed and gingelly

seed (2% each) and hides (raw), safflower (kardi seed) and raw cotton (1% each).

‘Minerals’ group rose by 1.6% due to higher prices of manganese ore (4%), copper concentrate and limestone

(3% each) and zinc concentrate and lead concentrate (1% each).

‘Crude petroleum and natural gas’ group rose by 2.4% due to higher prices of natural gas (4%) and crude

petroleum (2%).

The index for fuel and power rose by 0.9% from the previous month.

The index for manufactured products rose by 0.3% from the previous month.

4.885.21 5.07

4.44 4.284.58

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18

CPI

Base rate 2011-12

Source: APAS BRT, www.mospi.gov.in

Manufacturing PMI – April The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) accelerated, supported by faster expansions

in output and new orders.

The Manufacturing PMI rose to 51.6 in April 2018 from 51 in March. It stayed above the 50 level, that separates

expansion from contraction, for the ninth consecutive month.

Output growth was solid and picked up from March’s 5-month low, but remained slightly below the average for

the current 9-month period of expansion.

New business placed at manufacturing companies rose for the sixth consecutive month. Although modest, the

rate of expansion accelerated since March. Stronger market demand led to greater client wins.

New orders from overseas rose for the sixth successive month in April, albeit only marginally. Moreover, the

rate of expansion moderated to the weakest since November 2017.

Following a marginal decline in March, outstanding work rose during April. Delayed payments from clients partly

led to the latest increase in backlogs.

Improvements in demand conditions and rising production resulted in job creation during April. However, the

growth was marginal.

Reflecting sustained growth in production and new orders, Indian manufacturers were prompted to raise their

purchasing activity for the sixth consecutive month in April. Despite being modest, the rate of increase

accelerated to the strongest since January.

Indian manufacturers faced higher input costs during April, thereby extending the current period of inflation to

just over two and a half years. Although solid, input cost inflation moderated for the second month in a row to

3.933.58

2.842.48 2.47

3.18

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18

WPI

Base rate 2011-12

the weakest since last September. Meanwhile, firms raised their selling prices at the weakest rate in the current

9-month sequence of inflation.

Business sentiment was at the strongest level seen since the implementation of the Goods and Services Tax

(GST) in July 2017. Optimism reflected expectations that new business and demand conditions will improve over

the coming 12 months.

Source: www.tradingeconomics.com

Services PMI – April

The Indian services sector showed improvement for the second straight month in April, with business activity

rising at a faster pace, supported by new order growth.

The Nikkei India Services Purchasing Managers’ Index (PMI) Business Activity Index rose to a 3-month high of

51.4 in April from 50.3 in March. The index stayed above the neutral mark of 50, which separates expansion

from contraction.

Reflecting improvements in demand conditions, job creation accelerated to the sharpest since March 2011.

Inflationary price pressures continued to ease further, with input and output charge inflation registering below

their respective historical averages.

The seasonally adjusted Nikkei India Composite PMI Output Index rose to a 3-month high of 51.9 in April from

50.8 in March, driven by faster output growth in both the manufacturing and services sectors. The index was

consistent with a modest rise in overall business activity.

April data pointed to higher order book volumes across India’s services sector. Although modest, the latest

expansion accelerated from the preceding month. Favourable demand conditions were behind the latest rise.

Strong domestic and foreign demand drove the sub-index on new business to 51.4 in April from 50.6 in March.

Outstanding business at services companies continued to increase during April. Despite softening from the prior

month, the pace of accumulation was solid.

Meanwhile, services sector output prices also rose at a modest pace in April.

Services providers remained optimistic about growth in the year ahead.

Source: www.tradingeconomics.com

Core Sector Data – April

Eight infrastructure sectors grew by 4.7% in April 2018, led by increased output of coal, natural gas and cement.

The eight core sectors – coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity –

had grown 4.4% in March 2018 and 2.6% in April 2017.

Coal production increased by 16%, crude oil production declined by 0.8%, natural gas production increased by

7.4%, petroleum refinery production increased by 2.7%, fertilisers production increased by 4.6%, steel

production increased by 3.5%, cement production increased by 16.6% and electricity generation increased by

2.2% in April 2018 over April 2017.

Source: APAS BRT, www.eaindustry.nic.in

GDP – Quarter 4 – FY 17-18

India retained its position as the world’s fastest growing major economy in the January-March quarter,

outpacing China by nearly a percentage point.

India’s Gross Domestic Product (GDP) growth for the fourth quarter (January-March) of 2017-18 accelerated to

7.7%. The economy grew at its fastest pace in 7 quarters, bolstered by strong performance in agriculture,

construction, manufacturing and public services.

China’s economy grew 6.8% in the quarter ended March.

For the full year 2017-18, India’s GDP expanded at 6.7%, higher than the second advance estimate of 6.6%

released in February and in line with the growth forecast of 6.75% by the Economic Survey. The growth was

lower than 7.1% recorded in the previous year, with the slowdown being attributed to the lingering effect of

demonetization and the rollout of the Goods and Services Tax (GST).

Growth measured in gross value added (GVA) terms rose 6.5% in FY 18, slower than 7.1% in FY 17. GVA growth

in Q4 was the fastest in 7 quarters, at 7.6%.

Growth in the agriculture, manufacturing and construction sectors stood at 4.5%, 9.1% and 11.5%, respectively,

with construction benefitting from a strong base effect of 3.9% negative growth in the previous year.

Trade, hotels, transportation, communication and services grew at 8% during FY 18, compared with 7.2% growth

in FY 17.

The pickup in credit offtake helped financial services grow 6.6%, faster than 6% growth in the previous year.

Public administration, defence and other services grew at 10% on an annual basis, marginally lower than 10.7%

growth in the previous year.

2.5

3.6

0.4

2.4

4.9 5.24.7

6.8

4.0

6.7

5.3

4.14.7

Co

re s

ect

or

dat

a %

Month

Core sector Trend - Monthwise

Though private final consumption expenditure growth in FY 18 came in at a 3-year low of 6.6%, it turned around

in Q4.

Gross fixed capital formation, an indicator of investment demand in the economy, rose 14.4% in Q4, reaching a

32.2% share in GDP, the highest in 6 quarters. For FY 18, it was up 7.6%, against 10.1% in FY 17.

Source: APAS BRT, www.mospi.gov.in

7.2 7.4 7.06.1 5.7

6.37.2

7.7

Q1 16-17 Q2 16-17 Q3 16-17 Q4 16-17 Q1 17-18 Q2 17-18 Q3 17-18 Q4 17-18

GD

P %

Quarter

GDP Trend

RBI Second Bi-monthly Monetary Policy Statement, 2018-19

RBI released the Second Bi-monthly Monetary Policy Statement, 2018-19. On the basis of an assessment of

the current and evolving macroeconomic situation at its meeting, the Monetary Policy Committee (MPC)

decided to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to

6.25%.

Consequently, the reverse repo rate under the LAF stands adjusted to 6% and the marginal standing facility

(MSF) rate and the Bank rate to 6.5%.

The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the

objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a

band of +/- 2 per cent, while supporting growth.

The first bi-monthly resolution of 2018-19 in April projected CPI inflation in the range of 4.7-5.1 per cent in

H1:2018-19 and 4.4 per cent in H2, including the HRA impact for central government employees with risks

tilted to the upside. Excluding the impact of HRA revisions, CPI inflation was projected at 4.4-4.7 per cent in

H1:2018-19 and 4.4 per cent in H2. Actual inflation outcomes since the April policy have evolved broadly on

the lines of the projected trajectory. However, there has been an important compositional shift. While the

summer momentum in vegetable prices was weaker than the usual pattern, there was an abrupt acceleration

in CPI inflation excluding food and fuel.

Turning to the growth outlook, the CSO’s provisional estimates have placed GDP growth for Q4:2017-18 at 7.7

per cent – 70 basis points higher than that in Q3 – given the sharp acceleration in investment and construction

activity.

A major upside risk to the baseline inflation path in the April resolution has materialised, viz., 12 per cent

increase in the price of Indian crude basket, which was sharper, earlier than expected and seems to be durable.

Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook

– both on the upside and the downside. Several other risks remain. First, global financial market developments

have emerged as another important source of uncertainty. Second, the significant rise in households’ inflation

expectations as gathered in the May 2018 round of the Reserve Bank’s survey could feed into wages and input

costs in the coming months. However, the pass-through to output prices remains muted presently. Third, the

staggered impact of HRA revisions by various state governments may push headline inflation up. While the

statistical impact of HRA revisions will be looked through, there is a need to watch out for any second round

BANKING

impact on inflation. Fourth, the impact of the revision in the MSP formula for kharif crops is not possible to

assess at this stage in the absence of adequate details. Fifth, as forecast by the IMD, if the monsoon is normal

and well-distributed temporally and spatially, it may help keep food inflation benign.

Against the above backdrop, the MPC decided to increase the policy repo rate by 25 basis points and keep the

stance neutral. The MPC reiterates its commitment to achieving the medium-term target for headline inflation

of 4 per cent on a durable basis.

The next meeting of the MPC is scheduled on July 31 and August 1, 2018.

Storage of Payment System Data

In recent times, there has been considerable growth in the payment ecosystem in the country. Such systems

are also highly technology dependent, which necessitate adoption of safety and security measures, which are

best in class, on a continuous basis.

RBI observed that not all system providers store the payments data in India. In order to ensure better

monitoring, it is important to have unfettered supervisory access to data stored with these system providers

as also with their service providers / intermediaries/ third party vendors and other entities in the payment

ecosystem. Therefore, RBI has decided that:

a. All system providers shall ensure that the entire data relating to payment systems operated by them are

stored in a system only in India. This data should include the full end-to-end transaction details /

information collected / carried / processed as part of the message / payment instruction. For the foreign

leg of the transaction, if any, the data can also be stored in the foreign country, if required.

b. System providers shall ensure compliance of (i) above within a period of six months and report

compliance of the same to the Reserve Bank latest by October 15, 2018.

c. System providers shall submit the System Audit Report (SAR) on completion of the requirement at (i)

above. The audit should be conducted by CERT-IN empaneled auditors certifying completion of activity

at (i) above. The SAR duly approved by the Board of the system providers should be submitted to the

Reserve Bank not later than December 31, 2018.

IRDAI Chairman takes charge

Dr. Subhash C. Khuntia has taken charge as Chairman of the Insurance Regulatory and Development Authority

of India (IRDAI). A Karnataka Cadre IAS officer of 1981 Batch, Dr. Khuntia has vast administrative experience

of working in several Departments at the Central Government, including Ministry of Finance (Department of

Economic Affairs); Ministry of Human Resource Development (School Education and Literacy) and Ministry of

Petroleum and Natural Gas. In Government of Karnataka, he worked in Departments of Finance, Revenue,

Personnel, Urban Development, Public Works and Ports. He has served as Secretary to Government of India,

Department of School Education and Literacy and retired as Chief Secretary to Government of Karnataka.

Dr. Khuntia holds a Doctorate in Economics and Post Graduate degrees in Economics, Computer Science,

Physics, Sociology, Political Science and Philosophy. Dr. Khuntia is also a Graduate in Law. He is an alumnus of

Ravenshaw College, Cuttack, Indian Institute of Technology, Kanpur and London School of Economics.

INSURANCE

Solvency Margin for Crop Insurance business

IRDAI released a circular regarding the Solvency Business associated with crop insurance business in India. The

amendment was brought about in the Circular released by the Regulator with regard to Solvency margin in

March 2017.

IRDAI received representations from various Non-Life Insurance companies writing State/Central Government

sponsored schemes to recognize the premium receivable relating to this scheme as an eligible asset for the

computation of Solvency Margin and reduce the Required Solvency Margin (RSM) factors applicable to crop

insurance.

Insurance Regulatory and Development Authority of India (Assets, Liabilities, and Solvency Margin of General

Insurance business) Regulations, 2016 mentions factors for calculation of RSM for various lines of business

and has “Crop Insurance” under “Miscellaneous” Line of Business for the purpose of determination of RSM.

However, based on the circular, there shall be an additional Item No. 10 with Line of Business “Crop Insurance”

in Table 1 under Schedule III of the Regulations and the RSM factor applicable for Factor A and Factor B for

Item No. 10 with Line of Business “Crop Insurance” are –

Item No. Line of Business Factor A Factor B

(1) (2) (10) (11)

10 Crop Insurance 0.5 0.5

Also, as per the circular, Premiums receivables relating to State/Central Government sponsored schemes, to

the extent they are not realized within a period of one year, as against a period of 180 days as per previous

circular, should be placed with value zero.

The concession granted in the para above was effective for a period up to 31st March 2018.

The provisions of the Para shall now remain effective for one more year, that is, for the period up to 31st

March, 2019 and the situation will be reviewed accordingly.

Cabinet approves continuation of Pradhan Mantri Swasthya Suraksha Yojana up to 2019-20

In a major boost to the expansion of healthcare infrastructure in the country, the Union Cabinet Chaired by

Prime Minister Shri Narendra Modi has approved the continuation of Pradhan Mantri Swasthya Suraksha

Yojana (PMSSY) beyond 12th Five Year Plan to 2019-20. The financial outlay for this purpose is Rs 14,832

crore. Under this scheme, new AIIMS are established and Government medical colleges are upgraded.

Objectives:

The PMSSY, a Central Sector Scheme, aims at correcting the imbalances in the availability of affordable tertiary

healthcare facilities in different parts of the country in general, and augmenting facilities for quality medical

education in the under-served States in particular.

Impact:

Setting up of new AIIMS would not only transform health education and training but also address the shortfall

of health care professionals in the region. Construction of new AIIMS is fully funded by the Central

Government. The Operations & Maintenance expenses on new AIIMS are also fully borne by the Central

Government.

Upgradation programme broadly envisages improving health infrastructure through construction of Super

Specialty Blocks/Trauma Centers etc. and procurement of medical equipment for existing as well as new

facilities on Central and State share basis.

Employment Generation:

Setting up new AIIMS in various states will lead to employment generation for nearly 3000 people in various

faculty & non-faculty posts in each of the AIIMS. Further, indirect employment generation will take place due

to facilities & services like shopping centre, canteens, etc. coming in the vicinity of new AIIMS.

The upgradation programme is carried out in selected Government Medical Colleges (GMCs) by agencies

appointed by the Government of India under the direct supervision of the Central Government. Post-Graduate

INFRASTRUCTURE

seats and additional faculty posts as per norms will be created and filled up in these GMCs by the respective

State/UT Governments.

The construction activity involved for creation of the physical infrastructure for the various new AIIMS and

Government Medical Colleges' upgradation projects being undertaken under the scheme is also expected to

generate substantial employment in the construction phase as well.

Cabinet approves strengthening the mechanism for resolution of commercial disputes of Central

Public Sector Enterprises

The Union Cabinet Chaired by Prime Minister Shri Narendra Modi has approved the strengthening of the

mechanism for resolution of commercial disputes of Central Public Sector Enterprises (CPSEs) inter se and also

between CPSEs and other Government Departments/Organizations. The Cabinet decision is based on

recommendations of the Committee of Secretaries (CoS). The decision will put in place an institutionalized

mechanism within the Government for speedy resolution of commercial disputes of CPSEs without the matter

being referred to the Courts of law.

Details:

• A new two-tier mechanism will be put in place of the existing Permanent Machinery of Arbitration

(PMA) mechanism to resolve commercial disputes (excluding disputes concerning the Railways,

Income Tax, Custom & Excise Departments) between CPSEs inter se and CPSEs and Government

Departments/Organizations, outside the Courts of law.

• At the First level (tier), such commercial disputes will be referred to a Committee comprising of

Secretaries of the administrative Ministries/Departments to which the disputing CPSEs/Parties belong

and Secretary-Department of Legal Affairs. The Financial Advisors (FAs) of the two concerned

administrative Ministries/Departments will represent the issues related to the dispute in question

before the above Committee. In case the two disputing parties belong to the same

Ministry/Department, the Committee will comprise Secretary of the administrative

Ministry/Department concerned, Secretary of Department of Legal Affairs and Secretary-Department

of Public Enterprises. In such a case, the matter may be represented before the Committee by the FA

and one Joint Secretary of that Ministry/Department.

• Further, in case of a dispute between CPSE and State Government's Department/Organization, the

Committee will be comprised the Secretary of the Ministry/Department of the Union to which the

CPSE belongs and Secretary of Department of Legal Affairs and a senior officer nominated by the Chief

Secretary of the State concerned. In such a case, the matter may be represented before the

Committee by concerned Principal Secretary of the State Government's Department/ Organization.

• At the Second level (tier), in case the dispute remains unresolved, even after consideration by the

above Committee, the same will be referred to the Cabinet Secretary, whose decision will be final and

binding on all concerned.

• For the prompt disposal of disputes, a time schedule of 3 months at the first level has been prescribed.

Department of Public Enterprises (DPE) will issue guidelines immediately to all CPSEs through their

administrative Ministries/Departments and State Governments/UTs for compliance.

The new mechanism will promote equity through mutual/collective efforts to resolve commercial disputes

thereby reducing the number of litigations regarding commercial disputes in Court of Law and also avoid

wastage of public money.

Cabinet approves National Policy on Biofuels – 2018

The Union cabinet chaired by the Prime Minister Shri Narendra Modi has approved National Policy on Biofuels

– 2018.

Salient Features:

• The Policy categorizes biofuels as "Basic Biofuels" viz. First Generation (1G) bioethanol & biodiesel

and "Advanced Biofuels" - Second Generation (2G) ethanol, Municipal Solid Waste (MSW) to drop-in

fuels, Third Generation (3G) biofuels, bio-CNG etc. to enable extension of appropriate financial and

fiscal incentives under each category.

• The Policy expands the scope of raw material for ethanol production by allowing use of Sugarcane

Juice, Sugar containing materials like Sugar Beet, Sweet Sorghum, Starch containing materials like

Corn, Cassava, Damaged food grains like wheat, broken rice, Rotten Potatoes, unfit for human

consumption for ethanol production.

• Farmers are at a risk of not getting appropriate price for their produce during the surplus production

phase. Taking this into account, the Policy allows use of surplus food grains for production of ethanol

for blending with petrol with the approval of National Biofuel Coordination Committee.

• With a thrust on Advanced Biofuels, the Policy indicates a viability gap funding scheme for 2G ethanol

Bio refineries of Rs.5000 crore in 6 years in addition to additional tax incentives, higher purchase price

as compared to 1G biofuels.

• The Policy encourages setting up of supply chain mechanisms for biodiesel production from non-

edible oilseeds, Used Cooking Oil, short gestation crops.

• Roles and responsibilities of all the concerned Ministries/Departments with respect to biofuels has

been captured in the Policy document to synergize efforts.

Expected Benefits:

• Reduce Import Dependency: One crore lit of E10 saves Rs.28 crore of forex at current rates. The

ethanol supply year 2017-18 is likely to see a supply of around 150 crore litres of ethanol which will

result in savings of over Rs.4000 crore of forex.

• Cleaner Environment: One crore lit of E-10 saves around 20,000 ton of CO2 emissions. For the ethanol

supply year 2017-18, there will be lesser emissions of CO2 to the tune of 30 lakh ton. By reducing crop

burning & conversion of agricultural residues/wastes to biofuels there will be further reduction in

Green House Gas emissions.

• Health benefits: Prolonged reuse of Cooking Oil for preparing food, particularly in deep-frying is a

potential health hazard and can lead to many diseases. Used Cooking Oil is a potential feedstock for

biodiesel and its use for making biodiesel will prevent diversion of used cooking oil in the food

industry.

• MSW Management: It is estimated that, annually 62 MMT of Municipal Solid Waste gets generated

in India. There are technologies available which can convert waste/plastic, MSW to drop in fuels.

One ton of such waste has the potential to provide around 20% of drop in fuels.

• Infrastructural Investment in Rural Areas: It is estimated that, one 100klpd bio refinery will require

around Rs.800 crore capital investment. At present Oil Marketing Companies are in the process of

setting up twelve 2G bio refineries with an investment of around Rs. 10,000 crores. Further addition

of 2G bio refineries across the Country will spur infrastructural investment in the rural areas.

• Employment Generation: One 100klpd 2G bio refinery can contribute 1200 jobs in Plant Operations,

Village Level Entrepreneurs and Supply Chain Management.

Uday Kotak committee recommendations on Corporate Governance

• The Committee on Corporate Governance under the Chairmanship of Shri Uday Kotak made several

recommendations. Most of amendments necessary to implement these recommendations have been

made in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 vide notification

dated May 9, 2018.There a few recommendations as accepted by the Board, which are to be implemented

through issue of a circular.

• Accordingly, the following provisions shall apply to entities whose equity shares are listed on a recognized stock exchange:

a. Disclosures on Board Evaluation: The listed entity may consider the following as a part of its disclosures

on board evaluation:

o Observations of board evaluation carried out for the year.

o Previous year’s observations and actions taken.

o Proposed actions based on current year observations.

• b. Group Governance Unit:

o Where the listed entity has a large number of unlisted subsidiaries:

o The listed entity may monitor their governance through a dedicated group governance unit or

Governance Committee comprising the members of its board of directors.

o A strong and effective group governance policy may be established by the entity.

o The decision of setting up of such a unit/committee or having such a policy shall lie with the board

of directors of the listed entity.

• c. Medium-term and long-term strategy:

o The listed entity may consider the following with respect to disclosure of medium-term and long-

term strategy of the entity:

o It may disclose, under the Management Discussion and Analysis section of the Annual report,

within the limits set by its competitive position, its medium-term and long-term strategy based

on a time frame as determined by its board of directors.

o The listed entity may articulate a clear set of long-term metrics specific to the company's long-

term strategy to allow for appropriate measurement of progress.

CAPITAL MARKETS

Non-compliance with certain provisions of the SEBI (Listing Obligations and Disclosure

Requirements) Regulations, 2015 and the Standard Operating Procedure for suspension and

revocation of trading of specified securities

Previous circulars of SEBI specified the uniform structure for imposing fines as a first resort for non-compliance

with certain provisions of the Listing Regulations and the standard operating procedure for suspension of

trading in case the non-compliance is continuing and/or repetitive.

Thereafter, SEBI had issued another Circular, advising the manner of freezing of holdings of the promoter and

promoter group of a listed entity that failed to pay fines levied by the stock exchange(s).

On the basis of the experience gained and to streamline the process, to maintain consistency and to adopt a

uniform approach in the matter of levy of fines for non-compliance with certain provisions of the Listing

Regulations, the manner of suspension of trading of securities of a listed entity and the manner of freezing

the holdings of the promoter and promoter group of a non-compliant listed entity, it has been decided to

issue the present Circular.

In the current circular, following penalties on specific conditions have been imposed:

• Henceforth, the stock exchanges shall, having regard to the interests of investors and the securities

market:

a) Take action in case of non-compliances with the Listing Regulations as specified in Annexure I of this Circular, and. b) Follow the Standard Operating Procedure (“SOP”) for suspension and revocation of suspension of trading of specified securities as specified in Annexure II of this Circular. Stock Exchanges may deviate from the above, if found necessary, only after recording reasons in writing.

• In order to ensure effective enforcement of the Listing Regulations, the depositories, on receipt of

intimation from the concerned recognized stock exchange, shall freeze or unfreeze, as the case may be,

the entire shareholding of the promoter and promoter group in such non-compliant listed entity as well

as all other securities held in the demat account of the promoter and promoter group. Further, if a non-

compliant entity is listed on more than one recognized stock exchange, the concerned recognized stock

exchanges shall take uniform action under this Circular in consultation with each other.

• The recognized stock exchanges may keep in abeyance the action or withdraw the action in specific cases

where specific exemption from compliance with the requirements under the Listing

Regulations/moratorium on enforcement proceedings has been provided for under any Act,

Court/Tribunal Orders etc.

CAPITAL MARKETS SNAPSHOT

Overseas portfolio investors have turned extremely cautious

on Indian equities, as reflected by their net seller status in 33

out of 40 trading sessions till May 25, meaning they offloaded

shares on all these days. Their net outflow stood at INR

7,818.94 crore on a month-to-date basis, compared with INR

5,552.21 crore in April. In total, FIIs’ net investment so far in

2018 has been just INR 1,027.20 crore against DIIs’ total net

inflow of INR 46,649 crore. Weakness in emerging market

currencies against the greenback, softer earnings growth,

concerns over corporate governance issues and political risks

ahead of the general elections in 2019 are some of the factors

that have kept FIIs jittery. The Indian rupee has plunged over

7 per cent to 68.26 against the dollar as of May 25, from

63.67 on January 1 this year, Reserve Bank of India (RBI) data

showed. On the other hand, crude oil topped $80 a barrel

level recently for the first time since late 2014.

Source: National Stock Exchange

2-M

ay-1

8

4-M

ay-1

8

6-M

ay-1

8

8-M

ay-1

8

10

-May

-18

12

-May

-18

14

-May

-18

16

-May

-18

18

-May

-18

20

-May

-18

22

-May

-18

24

-May

-18

26

-May

-18

28

-May

-18

30

-May

-18

CNX Nifty (May-2018)

2-M

ay-1

8

4-M

ay-1

8

6-M

ay-1

8

8-M

ay-1

8

10

-May

-18

12

-May

-18

14

-May

-18

16

-May

-18

18

-May

-18

20

-May

-18

22

-May

-18

24

-May

-18

26

-May

-18

28

-May

-18

30

-May

-18

BSE Sensex (May-2018)

10.00

10.80

11.60

12.40

13.20

14.00

14.80

2-M

ay-1

8

4-M

ay-1

8

6-M

ay-1

8

8-M

ay-1

8

10

-May

-18

12

-May

-18

14

-May

-18

16

-May

-18

18

-May

-18

20

-May

-18

22

-May

-18

24

-May

-18

26

-May

-18

28

-May

-18

30

-May

-18

Indian VIX (May-2018)

65.50

66.00

66.50

67.00

67.50

68.00

68.50

1-M

ay-1

8

3-M

ay-1

8

5-M

ay-1

8

7-M

ay-1

8

9-M

ay-1

8

11

-May

-18

13

-May

-18

15

-May

-18

17

-May

-18

19

-May

-18

21

-May

-18

23

-May

-18

25

-May

-18

27

-May

-18

29

-May

-18

31

-May

-18

$/₹ (May-2018)

7.40

7.50

7.60

7.70

7.80

7.90

8.00

2-M

ay-1

8

4-M

ay-1

8

6-M

ay-1

8

8-M

ay-1

8

10

-May

-18

12

-May

-18

14

-May

-18

16

-May

-18

18

-May

-18

20

-May

-18

22

-May

-18

24

-May

-18

26

-May

-18

28

-May

-18

30

-May

-18

GIND10Y(May-2018)

Sources: APAS Business Research Team

Sources: APAS Business Research Team

Source: National Stock Exchange Source: Bombay Stock Exchange

ECONOMIC DATA SNAPSHOT

* The Economist poll or Economist Intelligence Unit estimate/forecast;

^ 5-year yield

Quarter represents a three-month period of a financial year beginning 1st April

Countries GDP CPI

Current

Account

Balance

Budget

Balance Interest Rates

Latest 2018* 2019* Latest 2018*

% of GDP,

2018*

% of GDP,

2018* (10YGov), Latest

Brazil 1.2Q1 2.6 2.9 2.8 Apr 3.4 -1.2 -7.0 8.77

Russia 1.3 Q1 1.7 1.8 2.4 Apr 3.1 3.4 0.3 8.13

India 7.7 Q1 7.2 7.5 4.6 Apr 4.8 -2.0 -3.5 7.78

China 6.8 Q1 6.6 6.4 1.8 Apr 2.3 1.1 -3.5 3.45^

S Africa 1.5 Q4 1.9 2.1 4.5 Apr 4.8 -2.8 -3.5 8.53

USA 2.8 Q1 2.8 2.5 2.5 Apr 2.4 -2.8 -4.6 2.78

Canada 2.3 Q1 2.3 2.1 2.2 Apr 2.2 -2.7 -1.9 2.27

Mexico 1.3 Q1 2.1 2.3 4.6 Apr 4.3 -1.8 -2.3 7.77

Euro Area 2.5 Q1 2.3 2.0 1.9 May 1.5 3.3 -0.8 0.36

Germany 2.3 Q1 2.3 2.1 2.2 May 1.6 7.7 1.0 0.36

Britain 1.2 Q1 1.4 1.5 2.4 Apr 2.5 -3.7 -1.8 1.33

Australia 2.4 Q4 2.7 2.7 1.9 Q1 2.1 -2.2 -1.2 2.65

Indonesia 5.1 Q1 5.3 5.5 3.4 Apr 3.5 -2.1 -2.5 6.92

Malaysia 5.4 Q1 5.5 5.4 1.4 Apr 2.5 3.2 -2.8 4.27

Singapore 4.4 Q1 3.2 2.9 0.1 Apr 0.9 20.6 -0.7 2.58

S Korea 2.9 Q1 2.9 2.8 1.6 Apr 1.7 4.7 0.7 2.70

Sources: The Economist

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