Thursday, June 25, 2015

Analytics: Missing the woods for the trees

This article was first published in the Analytics India Magazine on June 23rd, 2015; Co-author: Sanjay Fuloria (Cognizant Research Center, Hyderabad)

Big Data Talent Gap is a serious problem. Recognizing it, Universities are introducing courses on Analytics and Big Data. This has resulted in a larger supply of people who are well versed with data manipulation, handling and running codes. But, it has created a gap of another type. In an article on “Three Problems All Data Scientists Experience”, Drew Farris of Booz Allen Hamilton Inc. writes that “…problems go beyond technology and machine learning and are broadly encountered regardless of the task at hand: interpreting the problem, sourcing the data, and describing the outcomes”.

A lot of new joiners in analytics teams across companies face a serious problem especially while describing the outcomes. They fail to understand what their effort will lead to? This effort could be the software code they are working on or the project module that is assigned to them. Why only new joiners? Even employees with 6 to 7 years of experience find it difficult to look at the big picture. The institutes where they learn these analytics’ techniques are partially to be blamed. They are taught to play with the software. It could be coding or working on the dime a dozen graphic user interfaces that are available. They understand how to handle data, get the results and interpret the data. How this interpretation would lead to business gains or efficiency gains is not clear to them!

A simple example could be a segmentation exercise where the collected data is used to segment customers into various groups. These groups could be divided demographically or by using the customers’ choices and preferences. Once this segmentation is done, each segment can be profiled both on the basis of demographics and choices. Up to this point, all analytics greenhorns would do a perfect job. The next step is where complications arise. When they present this to the client, the client enquires about the usage of this exercise. They do not have an answer to this. If they can tell the client how each segment can be uniquely targeted using specific marketing campaigns and what amount of efficiency gains they would achieve, the client would be delighted. If this is done correctly, apart from the short term gain of client appreciation, they can expect long term career growth opportunities.

With so much of data available through various sources like smartphones, internet and social media sites, the requirement for experienced analytics professionals is bound to grow. The beauty of the situation is that this data availability is only going to increase with the advent of internet of things. In internet of things, devices will talk to each other with an app on your smartphone helping you to switch on your television and air conditioning just before you enter your home. A stage will come when the data of your home arrival times can be analyzed and the app will trigger the switching on of your devices   automatically without you even tapping it.

We also keep hearing of big data silos across data stores within the same organization. This happens because people with skills in data analytics do not understand which problem can be solved using the unified data. If they can be exposed to such problems and solutions, a lot of data can be unearthed from data warehouses and used productively.

There is an urgent need for institutions teaching analytics courses to equip their students with the ability to look at the larger business problem and then use their data skills to solve that. Instead of starting with the data, they should start with the business problem and while working on it they should not miss the woods for the trees. This can be done easily when the focus is on the business problem and not on the data.

Tuesday, June 23, 2015

Why does a rate cut matter?

This article was first published in on June 23rd, 2015; Co-author: Anisha Sircar, Flame University, Pune 

The Wholesale Price Index for May 2015 stood at minus 2.36 per cent, continuing its downward trend since the last seven months. The Consumer Price Index stood at 5.01 per cent, well within the range of 2-6 per cent targeted by the Reserve Bank of India. With the release of these figures on June 15, 2015, the demand for a further rate cut have resurfaced.

The industry associations like Confederation of Indian Industries and FICCI have already issued statements to the effect that Reserve Bank of India should continue the “rate easing cycle” to “support demand”.

Repo Rate
Earlier this month, on June 2, the Reserve Bank had cut the Repo rate by 0.25 per cent, third time this year. Repo rate (short for ‘Repurchase Agreement Rate’) is the rate at which the central bank lends money to commercial banks.

When banks experience a shortage of funds, they may borrow money from the RBI. When the RBI increases the repo rate, it becomes more expensive for banks to borrow money, creating a ripple effect that affects businesses and individuals.

Higher the interest rates to acquire loans, lower the profits yielded, which may result in spending cuts and a slowdown in the overall growth of companies.

Similarly, an increase in repo rate results in banks increasing their interest rates charged for consumer loans as well, thus reducing the purchasing power of individuals. The diminished ability for consumers to spend discretionary money results in reduced demand for goods and services and affects businesses as well.

Stock Markets
Stock prices are a function of business operations and expectations people have viz. companies at different points in time. If a company is seen cutting back on spending or making less profit, the expectations of people from that company may go down, resulting in a lower demand for the shares of that company. With decreased demand for the shares of a particular company, the share prices start to fall.

When a macroeconomic factor, such changes to the repo rate, affects the entire market, the indices (like Nifty or Sensex) would go up or down, representing the impact on the market as a whole.

Therefore, when the repo rate is cut, the general effect is an increase in the amount of money in circulation, which makes the stock market a more attractive area of investment.
(However, it is important to note that repo rates are not the only determinant of stock prices and market trends. It must also be noted that the stock markets represent only the organised (listed) sector of the economy. And the indices only represent some of the largest companies listed on the stock exchanges).

Market Reaction
Usually, as in January 15 this year, a repo rate cut should create a positive effect in the stock market.

On June 2, the RBI governor cut the repo rate by 25 basis points to 7.25 per cent. Raghuram Rajan announced, "Banks have started passing through some of the past rate cuts into their lending rates, headline inflation has evolved along the projected path, the impact of unseasonal rains has been moderate so far, administered price increases remain muted, and the timing of normalisation of US monetary policy seems to have been pushed back. With low domestic capacity utilisation, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today."

The markets had been expecting a rate cut and had started to factor its positive impacts in the stock prices even before June 2. See figure 1 below. 


The market had moved up by 1.37% on May 29th, 2015 and remained flat on June 1st, in anticipation of a rate cut. However, in spite of the rate cut on June 2nd, the NIFTY fell by 2.36% and continued its downward trend for the next five trading days.

Why did this happen?
This happened because of the cautious stance of the RBI. The fall in stock prices was because the investors had already expected the third repo rate cut this year and had factored it in, anticipating, in fact, a 50 basis points repo rate cut.

The uncertainty with regards to monsoons which may result in food inflation if not managed properly by the government, rising crude prices amidst considerable volatility and geopolitical risks, and volatility in the external environment, were cited as the reasons for a 25 basis point rate cut rather than a 50 basis point rate cut.

Therefore, overall guidance from RBI was not that of a ‘cheer leader’.

Rate cut again

RBI’s various statements and interactions with the media indicate that further rate cuts in the near future is unlikely. However, with inflation figures expected to be well within RBI’s target, there may be room for further rate cut. Though, RBI would be watching the monsoon and crude oil prices like a hawk before any decision is taken!