October' 22
Focus
In the second paper, "Application of Monsoon Derivatives in Indian Hydroelectricity Sector: A Case-Based Analysis", Mahuya Basu and Tanupa Chakraborty attempt to analyze the applicability and efficiency of a designed monsoon derivative in mitigating the monsoon risk of a representative hydroelectricity firm using Augmented Dickey-Fuller (ADF) unit root test for the period 1934 to 2013. The study reveals that the firm can successfully hedge the rainfall risk through financial derivatives and attain a superior position vis-a-vis risk-return. The study also indicates the use of a weather option contract based on the accumulated monsoon rainfall of the river basin in mitigating the risk.
In the third paper, "Coupling Coordination Degree Among Indian Banking and Auto Sectors, DII and FII: An Empirical Investigation", Goutam Sutar, Krantiraditya Dhalmahapatra and Sayan Chakraborty analyze the degree of coupling coordination between the Foreign Institutional Investors (FII) and Domestic Institutional Investors (DII) with the automobile and the banking industries in India using the Coupling Coordination Degree (CCD) framework for the period FY2010 to FY2019. The results reveal that the coupling between the automobile and the banking industry is at a higher level due to several factors, including foreign investments. The results also indicate that policymakers should concentrate more on foreign investments for the development of the economy. The study also highlights that the coupling coordination between DII and automobile sector has been very strong for the past three years, which may help the authorities to formulate more effective policies.
In the fourth paper, "Influence of Bank-Specific and Macroeconomic Factors on the Profitability of Indian Commercial Banks", Sathish Kotte, Irala Lokanandha Reddy and Srinivas Bolagani examine the impact of bank-specific and macroeconomic factors on the profitability of Indian scheduled commercial banks using linear regression model with pooled, fixed and random effect methods for the period 2005 to 2019. The study reveals that the bank-specific factors such as operating efficiency, non-performing assets and ratio of interest income have a negative effect on Return on Assets (ROA), while asset management has a favorable influence on ROA. The study also reveals that bank size, credit risk, capital ratio and deposit ratio are coefficiently negative and have insignificant impact on ROA, while cost of capital, ratio of priority sector lending, and liquidity have positive coefficient but have insignificant impact on ROA. The study further reveals that GDP, interest rate, demonetization and financial crisis have a negative impact on ROA, while inflation has a coefficiently negative but insignificant impact on ROA. The authors opine that the policymakers and regulators should focus on macroeconomic factors. Interest rate, inflation and demonetization have important impacts on the performance of the banking sector.
The current issue also features an interview with Prof. Sugata Marjit, the first Distinguished Professor of the Indian Institute of Foreign Trade and the former Vice Chancellor of the Calcutta University. Prof. Marjit has been working in the areas of Political Economy and Informal Credit Market, Wage Fund Theory in Trade Models, Role of Factor Endowment in Dixit-Stiglitz-Krugman Model of Monopolistic Competition and Product Diversity, Education and Unemployment, etc. The candid expression of his thoughts on the research trends across the globe will certainly inspire the research community at large.
India and RCEP Agreement: The Cost and Benefit of Joining the Trade Deal
The number and coverage of the free trade agreements across the world has increased significantly in recent decades. The belief that removal of market access barriers enhances economic gain has made many developed and developing countries enter into several bilateral, regional and multilateral trade agreements. The Regional Comprehensive Economic Partnership (RCEP) is one such trade agreement that 10 ASEAN members and its five trading partners have entered into. In this context, the present study attempts to estimate the cost and benefit of joining RCEP for India in two different scenarios. First, using the SMART partial simulation analysis, the study finds that if India joins RCEP, the trade deficit could widen by as much as $23.9 bn annually. Second, the empirical estimation by employing an augmented gravity model shows the relative low impact of tariff on trade among RCEP partners, compared to other explanatory variables in the model. Based on the findings, the study concludes that India's decision to not join RCEP is a wise one at this stage.
Application of Monsoon Derivatives in Indian Hydroelectricity Sector: A Case-Based Analysis
Hydroelectricity is one of the most important sources of renewable power, making it an integral part of emissionless power generation plan for many developing economies, including India. But hydropower firms based on rain-fed rivers in Indian plains and plateaus are highly monsoon-dependent for their generation. The primary objective of this study is to explore the intensity of the risk of fluctuating monsoon rain and securitization of that risk through financial instruments for Indian hydroelectricity sector. The paper analyzes the applicability and efficiency of a designed monsoon derivative in mitigating the monsoon risk of a representative hydroelectricity firm, namely, Damodar Valley Corporation (DVC). The study suggests the use of a weather option contract based on the accumulated monsoon rainfall of the river basin in mitigating the risk. The parameters of such an instrument are estimated and a pricing mechanism is suggested through fitting parametric distribution to the rain data and using a Gaussian copula to capture the interdependencies of rainfall in various locations of the catchment area of the river basin during the monsoon season. The study reveals that the firm can successfully hedge the rainfall risk through financial derivatives and attain a superior position vis-a-vis risk-return.
Coupling Coordination Degree Among Indian Banking and Auto Sectors, DII and FII: An Empirical Investigation
The concept of Coupling Coordination Degree (CCD), which originated in Physics, refers to the phenomenon of variety of interactions between two or more systems and how they affect each other. This study applies the concept to four important Indian sectoral indices, namely, Banking, Automobile, Foreign Institutional Investors (FII) and Domestic Institutional Investors (DII), to understand their interactions in the economy. Using data from FY2010 to FY2019 as a research sample, the CCD of the above-mentioned sectoral indices is measured. The result shows that in recent years, the coupling between the automobile and the banking industry is at a higher level due to several factors including foreign investments. This suggests that policymakers should concentrate more on foreign investments for the development of the economy. The coupling coordination between DII and automobile sector has been very strong for the past three years, which may help the authorities to formulate more effective policies.
Influence of Bank-Specific and Macroeconomic Factors on the Profitability of Indian Commercial Banks
The study examines the impact of bank-specific and macroeconomic factors on the profitability of Indian scheduled commercial banks. The analysis is based on the panel data of 71 scheduled commercial banks in India for a period of 15 years. Traditionally, banking performance is measured by return on assets, and factors such as bank size, operating efficiency, credit risk, Non-Performing Assets (NPA), Ratio of Interest Income (RII), cost of funds, capital ratio, deposit ratio, ratio of priority sector lending, liquidity and asset management are used as bank-specific factors. GDP, inflation, interest rate, demonetization and financial crisis are used as macroeconomic factors. Linear regression model is used with pooled, fixed and random effect methods. The results show that bank-specific factors such as operating efficiency, NPA and RII have a statistically negative impact on ROA, while asset management has a favorable influence. In terms of the effect of macroeconomic determinants, the results show that GDP, interest rate, demonetization and financial crisis have a negative effect, while inflation is coefficiently negative but has an insignificant impact on ROA.
IUPJAE INTERVIEW An Interview With PROFESSOR Sugata Marjit
Sugata Marjit was born on December 4, 1959, to Smt Chitra (Mukherjee) Marjit and Sri Ram Kimar in Maldah, West Bengal. Owing to frequent transfers of his father, this young boy had to pass through seven schools and yet finished schooling securing a position right below the top 10 in the state of West Bengal.
Believing that economics is "a good choice both for competitive exams and pursuing higher studies", young Marjit joined Presidency College, Kolkata-a century-old institution that has groomed many well-known Indian scientists and economists-for doing BA (Honors) in economics. Enjoying the intellectual frisson emanated from his interactions with the brightest students and the galaxy of great professors, he secured first class third position along with a national scholarship for postgraduate studies.
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