February 19, 2010
February 17, 2010
T20-Feb17
1. Dollar strengthens as EURO continues to battle its debt woes - Dollex @ $80; could a sustained upmove trigger a downtrend in equities and commodities? Or will it take a breather – see oil chart of point 2. USD chart
2. Crude oil turns bullish? Crude marched up closing @ $74.52 / barrel from $73.14 / barrel a week ago; MACD crosses signal line which indicates a bullish outlook. Crude Oil chart
3. To do or not to do? - US Federal Reserve is in talks with money-market mutual funds on agreements to help drain as much as $1 trillion from the financial system as it prepares for the first interest-rate increase since June 2006
4. Bleeding Greece gets a band-aid - Germany stands upright as the knight in shining armour; more announcements on specifics to trickle in. Will this reduce cash flows into emerging markets?
5. Nifty takes support at 200EMA - With an important event like budget round the corner, will it make or break? Nifty chart
6. Reason for the upmove- FIIs and DIIs turn bullish simultaneously for the first time over past 6 trading sessions - On 11 Feb 2010 DIIs & FIIs stood net buyers @ Rs. 37 Crs and Rs. 351 Crs respectively
7. Gold continues to lure investors - Local yellow metal closed @ Rs. 16731 / 10 gm on 16 Feb 2010, there has been a sharp pullback. Gold chart
8. IIP beats street expectations - IIP exceeded expectations, growing 16.8% in December against Street estimates of 13.5-14%; With skeletons tumbling out of the global closet, can India become a contrarian call? :)
9. Inflation is when you pay 15 dollars for the 10-dollar haircut you used to get for five dollars when you had hair - - Sam Ewing
10. Taming Inflation; Mission Impossible - Food Inflation @ 17.94% against 17.56% last week; no signs of cooling off. Overall Inflation (WPI) soars to 15-Month High Of 8.56%!
11. Business sector loses confidence in Indian political ability: Political confidence index drops 16.5% which indicates that the business sector has lost confidence in the political management of economic policies
12. RBI introduces Base rate to replace BPLR - Banking shares rose after the announcement, this move brings in additional transperancy. This base rate system would be effective from 1st April, 2010
13. Enjoy your long rides until fuel price rise woes last – FM (Finance Minister) and PM (Petroleum Minister) failed to reach consensus on the fuel price increase – has been postponed for the moment.
14. Railway Sector stocks leave the station and accelerate prior to budget –
Company Price
Table
15. Divestment plans on track; Will this help ease fiscal deficit? Govt. mulling capital infusion into Public Sector Banks. SAIL, Hindustan Copper, BSNL stand inline for divestment
16. Bharti Dials Zain - Bharti Airtel is in exclusive talks to buy for USD 10.7 billion in cash most of Zain's African business. Stock’s on a downward spiral, charting indicators turn bearish Bharti chart
17. Spicejet - Fundamentally strong, technically bleak? Logged net profits of 108Cr in Qtr ended Dec ’09; Domestic passenger traffic increased by 23% last month over the same period last year. Istithmar PJSC, Dubai offloaded 13.05% stake in SpiceJet; this was bought by Reliance / Birla SL / DSPBR MFs and an FII SpiceJet chart
18. CalPERS eyeing Indian Infrastructure Projects - One of US’ largest public pension funds is looking at infrastructure investments in India. News floats that Indian Govt. is considering a proposal to raise Rs. 500 bn of funds (via domestic & foreign sources) to meet the long-term needs of PPP projects
19. ULIPs get a makeover - From Diversified Portfolio, ULIP Schemes Now Shift To Sectoral Investment Plans. Private insurers have already launched schemes which invest in sectors like Infrastructure & PSU
20. Now add a dash of International flavor to your portfolio - Benchmark Mutual Fund launches India's 'first-ever international exchange traded fund (ETF)' – Hang Seng BeES
Disclaimer: Right Horizons has used information that is publicly available and developed in-house; and gathered from sources believed to be reliable. Right Horizons does not warrant accuracy and/or completeness of the same. This column is purely for educational purposes, nothing contained herein is a solicitation to trade or recommendation for any specific investment. Right Horizons shall not be responsible for any loss or damage of any nature, including and not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss or profit in any way arising out of any action undertaken by reading this column.
2. Crude oil turns bullish? Crude marched up closing @ $74.52 / barrel from $73.14 / barrel a week ago; MACD crosses signal line which indicates a bullish outlook. Crude Oil chart
3. To do or not to do? - US Federal Reserve is in talks with money-market mutual funds on agreements to help drain as much as $1 trillion from the financial system as it prepares for the first interest-rate increase since June 2006
4. Bleeding Greece gets a band-aid - Germany stands upright as the knight in shining armour; more announcements on specifics to trickle in. Will this reduce cash flows into emerging markets?
5. Nifty takes support at 200EMA - With an important event like budget round the corner, will it make or break? Nifty chart
6. Reason for the upmove- FIIs and DIIs turn bullish simultaneously for the first time over past 6 trading sessions - On 11 Feb 2010 DIIs & FIIs stood net buyers @ Rs. 37 Crs and Rs. 351 Crs respectively
7. Gold continues to lure investors - Local yellow metal closed @ Rs. 16731 / 10 gm on 16 Feb 2010, there has been a sharp pullback. Gold chart
8. IIP beats street expectations - IIP exceeded expectations, growing 16.8% in December against Street estimates of 13.5-14%; With skeletons tumbling out of the global closet, can India become a contrarian call? :)
9. Inflation is when you pay 15 dollars for the 10-dollar haircut you used to get for five dollars when you had hair - - Sam Ewing
10. Taming Inflation; Mission Impossible - Food Inflation @ 17.94% against 17.56% last week; no signs of cooling off. Overall Inflation (WPI) soars to 15-Month High Of 8.56%!
11. Business sector loses confidence in Indian political ability: Political confidence index drops 16.5% which indicates that the business sector has lost confidence in the political management of economic policies
12. RBI introduces Base rate to replace BPLR - Banking shares rose after the announcement, this move brings in additional transperancy. This base rate system would be effective from 1st April, 2010
13. Enjoy your long rides until fuel price rise woes last – FM (Finance Minister) and PM (Petroleum Minister) failed to reach consensus on the fuel price increase – has been postponed for the moment.
14. Railway Sector stocks leave the station and accelerate prior to budget –
Company Price
Table
15. Divestment plans on track; Will this help ease fiscal deficit? Govt. mulling capital infusion into Public Sector Banks. SAIL, Hindustan Copper, BSNL stand inline for divestment
16. Bharti Dials Zain - Bharti Airtel is in exclusive talks to buy for USD 10.7 billion in cash most of Zain's African business. Stock’s on a downward spiral, charting indicators turn bearish Bharti chart
17. Spicejet - Fundamentally strong, technically bleak? Logged net profits of 108Cr in Qtr ended Dec ’09; Domestic passenger traffic increased by 23% last month over the same period last year. Istithmar PJSC, Dubai offloaded 13.05% stake in SpiceJet; this was bought by Reliance / Birla SL / DSPBR MFs and an FII SpiceJet chart
18. CalPERS eyeing Indian Infrastructure Projects - One of US’ largest public pension funds is looking at infrastructure investments in India. News floats that Indian Govt. is considering a proposal to raise Rs. 500 bn of funds (via domestic & foreign sources) to meet the long-term needs of PPP projects
19. ULIPs get a makeover - From Diversified Portfolio, ULIP Schemes Now Shift To Sectoral Investment Plans. Private insurers have already launched schemes which invest in sectors like Infrastructure & PSU
20. Now add a dash of International flavor to your portfolio - Benchmark Mutual Fund launches India's 'first-ever international exchange traded fund (ETF)' – Hang Seng BeES
Disclaimer: Right Horizons has used information that is publicly available and developed in-house; and gathered from sources believed to be reliable. Right Horizons does not warrant accuracy and/or completeness of the same. This column is purely for educational purposes, nothing contained herein is a solicitation to trade or recommendation for any specific investment. Right Horizons shall not be responsible for any loss or damage of any nature, including and not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss or profit in any way arising out of any action undertaken by reading this column.
February 11, 2010
February 10, 2010
T20 10th Feb 2010
1. Global players turn bearish, domestically are we still bullish? Indian Capital markets witnessed Rs. 1124.18 cr selling by FII's for week ended 6th Feb 10 & DII's stood buyers worth Rs. 2663.61 crores
2. The 'PIGS' give Sensex the creeps - European nations Portugal, Italy, Greece, Spain are on the verge of defaulting on their debt payment. Is there more to come?
3. Insurance companies may increase investments in the nation’s stocks by 24% to a record $21 billion next FY as premium collections rise – will domestic institutions lead the next rally?
4. Bears hammer the yellow metal: Goldbees a popular Indian Gold ETF closed below crucial level of 1600 on the last trading day of the week on high volumes. Will there be a pullback?
5. Fiscal Deficit in focus before budget: Is currently at a 16 year high of 6.8%, finance ministry hints to bring it down to 5.5% in FY11 and further to 4% by FY2012- will this be funded by higher taxes or disinvestment?
6. Kirit gets cracking on fuel pricing: Panel headed by Kirit Parekh advocated market based prices for auto fuels and gradual increase for cooking fuels. Negative to consumers, positive to oil marketing companies.
7. GAIL to benefit most by Kirit’s recommendations: GAIL has not been included in the new proposed graded subsidy sharing mechanism as the proposed formula would be applicable only to players that were given nominated blocks by the government (ONGC, OIL).
8. One burning issue apart from 'Mumbai and Marathis', is the food inflation: For week ended Jan 23, 2010 it was pegged @ 17.56% as against 17.4% previous week.
9. Credit Suisse downgrades India to 'Underweight' - sell real estate, consumer cyclicals and rate sensitive stocks - Historically cyclicals & rate sensitive tend to underperform in a rising interest rate environment
10. Except for Consumer Durables sector which gained 2.9% all other indices ended lower. Worst performing indices during the week were Realty (-7.1%), Banking(-4.5%), PSU(-3.9%), Power(-3.8%) & Metal(-3.8%).
11. Indian auto industry shines: Highest ever sales in a single month at over 11 lakh units in January 10, boosted by easy availability of retail finance and soft interest rates. Does this signal an economic revival?
12. Private equity firm TPG is eyeing major stake in crises hit Vishal Retail. Likely to infuse Rs. 250 Crore
13. IDBI Bank ready to acquire a regional bank to establish their presence in south India - Probable acquisition targets are Karur Vysya Bank, Karnataka Bank or Lakshmi Vilas Bank.
14. Guj NRE Coke has posted a Net profit at Rs267m improved 100% YoY and 32% QoQ. The World coal consumption in year 2008 was at 6.7billion tonne vs production of 6.8b tonne. With the coal demand seeing an upturn this could benefit the company further.
15. Axis bank withdraws its teaser home loan scheme before schedule - The increase in the cash reserve ratio (CRR) seems to have started taking a toll on interest rates
16. Siemens & Astra micro budget play, defense allocation exposure
17. Jet airways on cloud nine: The airline has reported a 25.9% surge in domestic and 29.6% surge in international passenger traffic in January against the same period last year.
18. "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."- George Soros
19. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is market down – Warren Buffet
20. In stocks, Time is your friend, impulse is your enemy. –John Bogle
2. The 'PIGS' give Sensex the creeps - European nations Portugal, Italy, Greece, Spain are on the verge of defaulting on their debt payment. Is there more to come?
3. Insurance companies may increase investments in the nation’s stocks by 24% to a record $21 billion next FY as premium collections rise – will domestic institutions lead the next rally?
4. Bears hammer the yellow metal: Goldbees a popular Indian Gold ETF closed below crucial level of 1600 on the last trading day of the week on high volumes. Will there be a pullback?
5. Fiscal Deficit in focus before budget: Is currently at a 16 year high of 6.8%, finance ministry hints to bring it down to 5.5% in FY11 and further to 4% by FY2012- will this be funded by higher taxes or disinvestment?
6. Kirit gets cracking on fuel pricing: Panel headed by Kirit Parekh advocated market based prices for auto fuels and gradual increase for cooking fuels. Negative to consumers, positive to oil marketing companies.
7. GAIL to benefit most by Kirit’s recommendations: GAIL has not been included in the new proposed graded subsidy sharing mechanism as the proposed formula would be applicable only to players that were given nominated blocks by the government (ONGC, OIL).
8. One burning issue apart from 'Mumbai and Marathis', is the food inflation: For week ended Jan 23, 2010 it was pegged @ 17.56% as against 17.4% previous week.
9. Credit Suisse downgrades India to 'Underweight' - sell real estate, consumer cyclicals and rate sensitive stocks - Historically cyclicals & rate sensitive tend to underperform in a rising interest rate environment
10. Except for Consumer Durables sector which gained 2.9% all other indices ended lower. Worst performing indices during the week were Realty (-7.1%), Banking(-4.5%), PSU(-3.9%), Power(-3.8%) & Metal(-3.8%).
11. Indian auto industry shines: Highest ever sales in a single month at over 11 lakh units in January 10, boosted by easy availability of retail finance and soft interest rates. Does this signal an economic revival?
12. Private equity firm TPG is eyeing major stake in crises hit Vishal Retail. Likely to infuse Rs. 250 Crore
13. IDBI Bank ready to acquire a regional bank to establish their presence in south India - Probable acquisition targets are Karur Vysya Bank, Karnataka Bank or Lakshmi Vilas Bank.
14. Guj NRE Coke has posted a Net profit at Rs267m improved 100% YoY and 32% QoQ. The World coal consumption in year 2008 was at 6.7billion tonne vs production of 6.8b tonne. With the coal demand seeing an upturn this could benefit the company further.
15. Axis bank withdraws its teaser home loan scheme before schedule - The increase in the cash reserve ratio (CRR) seems to have started taking a toll on interest rates
16. Siemens & Astra micro budget play, defense allocation exposure
17. Jet airways on cloud nine: The airline has reported a 25.9% surge in domestic and 29.6% surge in international passenger traffic in January against the same period last year.
18. "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."- George Soros
19. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is market down – Warren Buffet
20. In stocks, Time is your friend, impulse is your enemy. –John Bogle
February 04, 2010
Global Cues 4th Feb 2010
Your peek into important global cues for this week. Please follow the link..Global Cues 04 Feb 2010
February 03, 2010
T20 3rd Feb 2010
1. Nifty in the month of January lost 6%. This is real loss of momentum considering that Nifty broke out above 5180 and then collapsed - thanks to sell off in Global markets.
2. S&P 500 - US benchmark index lost 3.7%. MSCI Emerging market index lost 5% in January.
3. Since 1950, the S&P has matched its January performance more than 70% of the time. There is strong belief that January sets the tone for the rest of the year at least for US markets. Since, financial markets are highly correlated now-a-days - does that mean 2010 will be down year for Indian markets? [Remember, in 2009 - this trend did not work]
4. In bearish market environment - Good news = Bad News. US GDP data came at 5.7% on Friday but market still tanked.
5. Who says Trees don't go to skies? The Budget Deficit in US seems to be going that way. The US Budget Deficit is estimated to be USD 1.56 trillion in 2010.
6. Feb = Budget Month. The market will keep a close eye on Budget Deficit here in India which is expected to throw a positive surprise thanks to aggressive Disinvestment and robust tax collections. It will be interesting to watch market reaction on good news.
7. It is always difficult to trade a choppy-cum-bearish market. This time seems no different. After two days of gains on Friday and Monday, the market seems to be losing the momentum.
8. Two stocks that are holding the market up - ITC and Reliance. They have not cracked below their critical support levels.
9. Reserve Bank of India's Monetary Policy inline with expectations - Has hiked the Cash Reserve Ratio (CRR) by 75 basis points (bps) to 5.75 per cent, repo and reverse repo rates remain unchanged - CRR to be raised in 2 phases - 50 bps w.e.f Feb 13, 2010 and 25 bps w.e.f Feb 27, 2010. This will drain out Rs 36,000 crore from the system
10. Is it a Myth that Bank stocks decline in a rising interest rate environment? Bank of Baroda made a fresh 52 week high on day of CRR hike
11. L&T led the Capital markets index decline but power related stocks are making a strong comeback. BHEL, Siemens and Crompton Greaves continue with strength
12. No takers for Real Estate stocks. It is one of the most oversold sectors in the market. Will institutions support the sector?
13. Fitch negative on India real estate Sector : “Outlook for Indian real estate sector in 2010 is –ve, with a slight stable bias." The commercial segment and rentals will continue to remain under pressure
14. Consumption is making a comeback. Keep an eye on stocks like Titan and Shoppers stock. Both trading strong despite negative pressure on market.
15. Railway Budget Plays: Kalindee Rail Nirman, Kernex Microsystems and Titagorh Wagons
16. ADAG group stocks are losing the way. Most of the ADAG group stocks are trading in bearish territory i.e. below 200 DMA(Day moving average)
17. Auto monthly numbers once again surprise on the upside. There is very strong business momentum, but stocks have stopped reacting to good news. Reason - Over ownership and market has priced in the good news
18. Market does not care what we think. Market does what it has to do. It does not intentionally harm any individual. Market is always fair to everyone
19. Lesson: Market is not against us - it is our emotions that let us down.
20. It always pays to listen to the market objectively. The best way is to follow Charts, as Charts don't lie and are not made up. It represents facts.
2. S&P 500 - US benchmark index lost 3.7%. MSCI Emerging market index lost 5% in January.
3. Since 1950, the S&P has matched its January performance more than 70% of the time. There is strong belief that January sets the tone for the rest of the year at least for US markets. Since, financial markets are highly correlated now-a-days - does that mean 2010 will be down year for Indian markets? [Remember, in 2009 - this trend did not work]
4. In bearish market environment - Good news = Bad News. US GDP data came at 5.7% on Friday but market still tanked.
5. Who says Trees don't go to skies? The Budget Deficit in US seems to be going that way. The US Budget Deficit is estimated to be USD 1.56 trillion in 2010.
6. Feb = Budget Month. The market will keep a close eye on Budget Deficit here in India which is expected to throw a positive surprise thanks to aggressive Disinvestment and robust tax collections. It will be interesting to watch market reaction on good news.
7. It is always difficult to trade a choppy-cum-bearish market. This time seems no different. After two days of gains on Friday and Monday, the market seems to be losing the momentum.
8. Two stocks that are holding the market up - ITC and Reliance. They have not cracked below their critical support levels.
9. Reserve Bank of India's Monetary Policy inline with expectations - Has hiked the Cash Reserve Ratio (CRR) by 75 basis points (bps) to 5.75 per cent, repo and reverse repo rates remain unchanged - CRR to be raised in 2 phases - 50 bps w.e.f Feb 13, 2010 and 25 bps w.e.f Feb 27, 2010. This will drain out Rs 36,000 crore from the system
10. Is it a Myth that Bank stocks decline in a rising interest rate environment? Bank of Baroda made a fresh 52 week high on day of CRR hike
11. L&T led the Capital markets index decline but power related stocks are making a strong comeback. BHEL, Siemens and Crompton Greaves continue with strength
12. No takers for Real Estate stocks. It is one of the most oversold sectors in the market. Will institutions support the sector?
13. Fitch negative on India real estate Sector : “Outlook for Indian real estate sector in 2010 is –ve, with a slight stable bias." The commercial segment and rentals will continue to remain under pressure
14. Consumption is making a comeback. Keep an eye on stocks like Titan and Shoppers stock. Both trading strong despite negative pressure on market.
15. Railway Budget Plays: Kalindee Rail Nirman, Kernex Microsystems and Titagorh Wagons
16. ADAG group stocks are losing the way. Most of the ADAG group stocks are trading in bearish territory i.e. below 200 DMA(Day moving average)
17. Auto monthly numbers once again surprise on the upside. There is very strong business momentum, but stocks have stopped reacting to good news. Reason - Over ownership and market has priced in the good news
18. Market does not care what we think. Market does what it has to do. It does not intentionally harm any individual. Market is always fair to everyone
19. Lesson: Market is not against us - it is our emotions that let us down.
20. It always pays to listen to the market objectively. The best way is to follow Charts, as Charts don't lie and are not made up. It represents facts.
January 29, 2010
RBI Monetary Policy 29 Jan 2010
Before we embark on understanding the nuances of the monetary policy review, we try to briefly understand the terminologies and jargon related to the same.
What is Monetary Policy?
The regulation of the money supply and interest rates by a central bank, such as the RBI in India, in order to control inflation and stabilize currency. Monetary policy is one the two ways the government can impact the economy. By impacting the effective cost of money, the RBI can affect the amount of money that is spent by consumers and businesses.
Monetary Vs. Fiscal Policy
Monetary Policy Tools & their relevance in impacting liquidity
CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, actually Banks don’t hold these as cash with themselves, but deposit with RBI / currency chests. Thus, when a bank’s deposits increase by Rs100, and if the CRR is 9%, the banks will have to hold additional Rs.9 with RBI and Bank will be able to use only Rs. 91 for investments and lending / credit purpose. Therefore, higher the ratio (i.e. CRR), the lower is the amount that banks will be able to use for lending and investments. It is an instrument in the hands of central bank through which it can either drain excess liquidity or release funds needed for the economy from time to time.
Bank Rate: This is the rate at which RBI lends money to other banks or financial institutions. If the bank rate goes up, long-term interest rates also tend to move up, and vice-versa. Thus, it can be said that in case bank rate is hiked, in all likelihood banks will hikes their own lending rates to ensure and they continue to make a profit.
SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved to liabilities (deposits). SLR regulates the credit growth in India.
Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI
A Policy review statement has typically 4 sections
• Section I - Overview of global and domestic macroeconomic developments
• Section II – Provides outlook and projections for growth, inflation, money and credit aggregates
• Section III - Stance of monetary policy
• Section IV - Specifies the monetary measures
Key Highlights of Monetary Review Policy
• CRR hiked by 75 bps to 5.75%, increase to be conducted in 2 phases – 50 bps w.e.f Feb 13, 2010 and 25 bps w.e.f Feb 27, 2010. Eventually, this will drain out Rs 36,000 crore from the system.
• RBI kept the reverse repo rate unchanged at 3.25% and repo rate at 4.75%
• Projected the GDP growth for financial year 2009-10 at 7.5% from 6% last year; Inflation to be at 8.5% in March
The CRR hike comes on the back of spiraling inflation. Food inflation touched 17.4 per cent, fuel price index rose to 5.7 per cent while primary articles price index touched 14.66 per cent for the week ended 16 January 2010. The WPI-based inflation, rose from sub-zero level last year to 7.3 per cent in December.
Impact Analysis
Markets tanked momentarily as a knee jerk reaction, however, regained stance. The CRR hike was inline with the expectation of the market and hence, it was pre-dominantly factored in earlier. This was the first of the initiatives to reverse the stimuli which has been in the market since Oct 2008. Reduction of liquidity will help anchor inflationary expectations. Taking a cue from RBI's monetary policy stance, banks might not hike their auto, home and education loans in the near term. Increases in CRR could push bond yields up, and weigh on shares of banks as well as sectors such as auto and property on concerns loan demand may slow.
The markets turned positive towards closing bell, the markets are likely to be choppy taking cues from global data.
What is Monetary Policy?
The regulation of the money supply and interest rates by a central bank, such as the RBI in India, in order to control inflation and stabilize currency. Monetary policy is one the two ways the government can impact the economy. By impacting the effective cost of money, the RBI can affect the amount of money that is spent by consumers and businesses.
Monetary Vs. Fiscal Policy
Monetary Policy Tools & their relevance in impacting liquidity
CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, actually Banks don’t hold these as cash with themselves, but deposit with RBI / currency chests. Thus, when a bank’s deposits increase by Rs100, and if the CRR is 9%, the banks will have to hold additional Rs.9 with RBI and Bank will be able to use only Rs. 91 for investments and lending / credit purpose. Therefore, higher the ratio (i.e. CRR), the lower is the amount that banks will be able to use for lending and investments. It is an instrument in the hands of central bank through which it can either drain excess liquidity or release funds needed for the economy from time to time.
Bank Rate: This is the rate at which RBI lends money to other banks or financial institutions. If the bank rate goes up, long-term interest rates also tend to move up, and vice-versa. Thus, it can be said that in case bank rate is hiked, in all likelihood banks will hikes their own lending rates to ensure and they continue to make a profit.
SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved to liabilities (deposits). SLR regulates the credit growth in India.
Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI
A Policy review statement has typically 4 sections
• Section I - Overview of global and domestic macroeconomic developments
• Section II – Provides outlook and projections for growth, inflation, money and credit aggregates
• Section III - Stance of monetary policy
• Section IV - Specifies the monetary measures
Key Highlights of Monetary Review Policy
• CRR hiked by 75 bps to 5.75%, increase to be conducted in 2 phases – 50 bps w.e.f Feb 13, 2010 and 25 bps w.e.f Feb 27, 2010. Eventually, this will drain out Rs 36,000 crore from the system.
• RBI kept the reverse repo rate unchanged at 3.25% and repo rate at 4.75%
• Projected the GDP growth for financial year 2009-10 at 7.5% from 6% last year; Inflation to be at 8.5% in March
The CRR hike comes on the back of spiraling inflation. Food inflation touched 17.4 per cent, fuel price index rose to 5.7 per cent while primary articles price index touched 14.66 per cent for the week ended 16 January 2010. The WPI-based inflation, rose from sub-zero level last year to 7.3 per cent in December.
Impact Analysis
Markets tanked momentarily as a knee jerk reaction, however, regained stance. The CRR hike was inline with the expectation of the market and hence, it was pre-dominantly factored in earlier. This was the first of the initiatives to reverse the stimuli which has been in the market since Oct 2008. Reduction of liquidity will help anchor inflationary expectations. Taking a cue from RBI's monetary policy stance, banks might not hike their auto, home and education loans in the near term. Increases in CRR could push bond yields up, and weigh on shares of banks as well as sectors such as auto and property on concerns loan demand may slow.
The markets turned positive towards closing bell, the markets are likely to be choppy taking cues from global data.
January 28, 2010
Global Cues 28th Jan 2010
Your peek into important global cues for this week. Please follow the link.. Global Cues Jan 2010
January 04, 2010
Year Gone by..2009
A wrap up story on the year gone by. Please find the complete story at the link Year Gone by..2009
December 24, 2009
NFOs: Think before you leap!
Many people believe that investing in a new fund would be more profitable than investing in old funds. The reason, as they say, is that the new fund would be issued at a price lesser than old funds in similar category and therefore the percentage increase one could expect in the fund growth would be more. This is one of the biggest myth in mutual fund investments.
The point to note is, NAV is not an indicator of the potential of fund. In fact a fund with good track history is more likely to yield better returns with adjusted risk-return, than the tumultuous new fund in the market.
Read our article on diversifying your investments in mutual funds -
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