The words that sprang into our lexicon this year: Some neologisms, and some old ones dusted off and made new.
Vampire Squid
Possibly the most-quoted sentence of the year in business journalism by Matt Taibbi of Rolling Stone: “The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
Delicious. How many, bar the marine biologists (who must be very, very grateful), knew of this creature before that?
Hactivism
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Karambir Kang: The Stoic
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7 must-see movies
A portmanteau word; ‘activism’ taking digital forms, like ‘hacking’ Websites. It is also frequently spelled ‘hacktivism’. For instance, Anonymous Iran (iran.whyweprotest.net) serves up what is practically a Hactivism 101, with loads of advice and resources. Or the army (and one uses that word advisedly) of Chinese hackers angry about the “biased” reporting on the Olympic Torch Relay messing with the CNN Website. Or the Website defacements by both sides involved in the Israeli invasion of Gaza.
And of course, closer to home, we have ‘patriotic’ Indians and Pakistanis, each attempting to cause embarrassment by defacing the other country’s official sites.
Slacktivism
Another portmanteau word, possibly inspired by the previous one. It refers, with a sneer, to activism that doesn’t call for very much action. Not even the tech knowledge that hacking requires.
Rather than go out in marches, or trudge from door-to-door canvassing for donations or signatures, slacktivists find it much easier to sign an online petition, forward an e-mail or light a virtual candle.
Sexting
Sending of sexually explicit text messages and pictures via cellphones. Some studies came out this year on the number of young (even under-age) couples engaging in sexting, and several lawsuits are still pending on sexting gone wrong. (Reminds us of the old line: If you can’t come, call.) There’s this to be said though: It’s not unprotected sex.
Unfriend
Following from the verbing of “friend”, thanks to the adoption of the term by social networking sites; it means to remove someone as a friend. It’s the Oxford dictionary’s word of the year. It has brought up debates on who is the self a person shows online, the danger of online relationships, and the ease with which the internet encourages deception.
Zombie Bank
A bank that is, by all definitions, dead, but has been kept afloat by government support. A bank with economic net worth less than zero. First Republic Bank and Citibank are well-known zombies.
Staycation
Taking a vacation from work, but not travelling anywhere, for economic reasons. Instead, one explores one’s hometown. Far less money and stress. Even Fodor’s now writes about good staycations.
Tuesday, December 29, 2009
Wednesday, February 27, 2008
Is equity investment risky
An Excellent article on equity risk on Moneycontrol.com
http://www.moneycontrol.com/india/news/mf-experts/is-equity-investing-really-risky/16/59/327825
Many a times when individuals say that they want to refrain from investing in equity because it is risky, it seems little amusing. These are the same individuals who ride two wheelers without a helmet or drive a car without the seat belts. What is more risky - investing into equity or riding a two-wheeler without a helmet?
Firstly it is important to note that all forms of investment have inherent risk. The reason we get returns on our investment is because we take the risk of parting with our money. There are some risks, which are transparent while there are few which we do not see.
Equity investing seems risky because the risk is transparent. Investor in equity can see the gain and/or loss made by them based on movement of stock price on the stock exchange. If an investor had purchased stock of Tata Steel at Rs 568 and if the price falls to Rs 523, he/she can see and calculate the loss. This is unlike an investor of fixed deposit who does not see his gain in interest and also does not see the loss he has suffered due to rise in inflation. Simply because fixed deposits are not traded on any exchange and its price movement is not transparent, they seem to feel safer.
Another reason people find equity investing risky is because returns from equity are not linear. Suppose we have invested in bonds yielding 8% p.a., our bonds would generate a fixed 8% returns year on year. In case of equity, it does not work like that. Here, the returns could be 40%, 33%, -3%, 17%, -10% and 2% year on year. Since the returns are not linear it is difficult to predict them and because it is difficult to predict, we find equity investing risky.
Usually we are fairly certain about events that are likely to take place in our lives in near term. We know what we will be doing in next one minute, one hour, one day etc. We also have a good estimate of our activity schedule for the next week or so. However as time horizon increases, our certainty about events in our life decreases e.g. most likely we do not know what will happen in our life after one year. In business it is reverse. Ask a corporate how much goods they will sell in next one minute and they are clueless. Give them an hour and still the same reply. They even cannot guess their daily sales. However ask them to guesstimate their yearly turnover and they would be able to predict almost accurately. As human beings we seek near term certainty. Since that is difficult to come by in equity investing, we find it difficult to absorb the reverse behavior.
Each asset class has different behavioral pattern of return and risk. There isn’t anything like risk-free investing. Just because in equity measurement of risk is transparent, returns are not linear, and it is difficult to predict in short run, it should not be construed as risky.
Lastly, there is a famous line, which says ‘Rome was not built in a day.’ It takes years to build a business. Sometimes, even after the business is built and settled, it can face turbulence. Unfortunately we are not willing to wait for long to earn our returns. In many cases people are not even willing to wait for 2/3 years to get returns. Here I would like to quote legendary investor Warren Buffet who once said “If you aren’t willing to own a share for ten years, then don’t own it for ten minutes.”
If your financial goal is more than 7/9 years away always give consideration to equity as well.
http://www.moneycontrol.com/india/news/mf-experts/is-equity-investing-really-risky/16/59/327825
Many a times when individuals say that they want to refrain from investing in equity because it is risky, it seems little amusing. These are the same individuals who ride two wheelers without a helmet or drive a car without the seat belts. What is more risky - investing into equity or riding a two-wheeler without a helmet?
Firstly it is important to note that all forms of investment have inherent risk. The reason we get returns on our investment is because we take the risk of parting with our money. There are some risks, which are transparent while there are few which we do not see.
Equity investing seems risky because the risk is transparent. Investor in equity can see the gain and/or loss made by them based on movement of stock price on the stock exchange. If an investor had purchased stock of Tata Steel at Rs 568 and if the price falls to Rs 523, he/she can see and calculate the loss. This is unlike an investor of fixed deposit who does not see his gain in interest and also does not see the loss he has suffered due to rise in inflation. Simply because fixed deposits are not traded on any exchange and its price movement is not transparent, they seem to feel safer.
Another reason people find equity investing risky is because returns from equity are not linear. Suppose we have invested in bonds yielding 8% p.a., our bonds would generate a fixed 8% returns year on year. In case of equity, it does not work like that. Here, the returns could be 40%, 33%, -3%, 17%, -10% and 2% year on year. Since the returns are not linear it is difficult to predict them and because it is difficult to predict, we find equity investing risky.
Usually we are fairly certain about events that are likely to take place in our lives in near term. We know what we will be doing in next one minute, one hour, one day etc. We also have a good estimate of our activity schedule for the next week or so. However as time horizon increases, our certainty about events in our life decreases e.g. most likely we do not know what will happen in our life after one year. In business it is reverse. Ask a corporate how much goods they will sell in next one minute and they are clueless. Give them an hour and still the same reply. They even cannot guess their daily sales. However ask them to guesstimate their yearly turnover and they would be able to predict almost accurately. As human beings we seek near term certainty. Since that is difficult to come by in equity investing, we find it difficult to absorb the reverse behavior.
Each asset class has different behavioral pattern of return and risk. There isn’t anything like risk-free investing. Just because in equity measurement of risk is transparent, returns are not linear, and it is difficult to predict in short run, it should not be construed as risky.
Lastly, there is a famous line, which says ‘Rome was not built in a day.’ It takes years to build a business. Sometimes, even after the business is built and settled, it can face turbulence. Unfortunately we are not willing to wait for long to earn our returns. In many cases people are not even willing to wait for 2/3 years to get returns. Here I would like to quote legendary investor Warren Buffet who once said “If you aren’t willing to own a share for ten years, then don’t own it for ten minutes.”
If your financial goal is more than 7/9 years away always give consideration to equity as well.
Friday, February 01, 2008
Indian Financial Budget 2008
It should be an election budget. So, expect higher exemption limits for income tax, cuts in corporate tax and customs duty, selective cuts in excise duty, and big spending on welfare and social schemes in the coming budget.
Expect huge provisions for higher government salaries in anticipation of the next Pay Commission award. And expect a continuation of gargantuan off-budget subsidies for oil (and possibly, fertilisers and food), in an attempt to obscure the sad fact that the fiscal and revenue deficits are way above the limits ordained by the Fiscal Responsibility and Budget Management Act.
Finance ministers are politicians first and economists only second or third. The next general election is due in May 2009, so Mr Chidabaram will not be able to present a regular budget in 2009. Hence his 2008 budget will be his last. It will come too long before the next election to really have a significant electoral impact. Yet it is politically necessary for him to satisfy Madam that he has done his bit to get her re-elected.
Mr Chidambaram is blessed to have revenue pouring out of his ears. Four years of 8-9% GDP growth have yielded a cascade of tax revenue, with direct tax collections rising by over 40% for two years running. This gives him the flexibility rarely available to finance ministers. He will be able to provide for a stiff increase in government salaries (after the Pay Commission award) without creating a huge fiscal hole.
India’s corporate tax rate, including surcharge and cess, is 33.9%, over and above which companies pay dividend tax. The corporate tax rate is much lower in Malaysia (27%), Taiwan (25%), Singapore (18%) and Hong Kong (17.5%). However, finance ministry officials are quick to point out that, because of many exemptions, the effective corporate tax rate is only 19% or so. So Mr Chidambaram may opt for a lower tax rate — possibly by abolishing the surcharge — combined with a pruning of exemptions.
India’s income tax rate is not high by Asian or global standards. But the exemption limits are very low. So, expect a significant rise in the exemption limit, from Rs 1.1 lakh for individuals, Rs 1.45 lakh for women, and Rs 1.95 lakh for senior citizens above 65 years. Technically, raising the exemption limit after years of inflation simply corrects for “bracket creep” without really reducing the tax burden in real terms. But on budget day this always looks like manna from above, and so this looks certain to be on the agenda.
Back in his dream budget of 1997, Mr Chidambaram said he would aim to reduce customs duty to ASEAN rates. The average ASEAN rate is around 8% , and he is likely to reduce the rate on many items to this level, and declare that a visionary goal has been reached. For this he will get much-merited applause.
He will extend the service tax to new areas, and make preparations for its integration into a Goods and Services Tax by 2010, another major milestone in tax reform. With luck, he may still be finance minister on that date. Mr Chidambaram has long claimed to be on track on reducing the fiscal deficit to 3% and revenue budget to zero by 2009.
Indeed, given revenue buoyancy, he may claim that he has already achieved the fiscal deficit target this year, and will hit the revenue deficit target next year. But these claims are based on smoke and mirrors. Because of political difficulties in raising the price of petroleum products, fertilisers or grains in the public distribution system, the public sector entities involved have suffered huge shortfalls of 2% or more of GDP, which are being financed by the government.
But instead of showing these are explicit subsidies, Mr Chidambaram has been showing them as off-budget bond issues. His budgets provide only for the interest payable on the bonds, not the value of bonds themselves. Such creative accounting is exactly what led to the collapse of Enron in 2001. Governments, unlike corporations, do not go bust. But the fact is that the bond issues make a mockery of FRBM targets. It is a major blemish on his otherwise outstanding record as finance minister
Expect huge provisions for higher government salaries in anticipation of the next Pay Commission award. And expect a continuation of gargantuan off-budget subsidies for oil (and possibly, fertilisers and food), in an attempt to obscure the sad fact that the fiscal and revenue deficits are way above the limits ordained by the Fiscal Responsibility and Budget Management Act.
Finance ministers are politicians first and economists only second or third. The next general election is due in May 2009, so Mr Chidabaram will not be able to present a regular budget in 2009. Hence his 2008 budget will be his last. It will come too long before the next election to really have a significant electoral impact. Yet it is politically necessary for him to satisfy Madam that he has done his bit to get her re-elected.
Mr Chidambaram is blessed to have revenue pouring out of his ears. Four years of 8-9% GDP growth have yielded a cascade of tax revenue, with direct tax collections rising by over 40% for two years running. This gives him the flexibility rarely available to finance ministers. He will be able to provide for a stiff increase in government salaries (after the Pay Commission award) without creating a huge fiscal hole.
India’s corporate tax rate, including surcharge and cess, is 33.9%, over and above which companies pay dividend tax. The corporate tax rate is much lower in Malaysia (27%), Taiwan (25%), Singapore (18%) and Hong Kong (17.5%). However, finance ministry officials are quick to point out that, because of many exemptions, the effective corporate tax rate is only 19% or so. So Mr Chidambaram may opt for a lower tax rate — possibly by abolishing the surcharge — combined with a pruning of exemptions.
India’s income tax rate is not high by Asian or global standards. But the exemption limits are very low. So, expect a significant rise in the exemption limit, from Rs 1.1 lakh for individuals, Rs 1.45 lakh for women, and Rs 1.95 lakh for senior citizens above 65 years. Technically, raising the exemption limit after years of inflation simply corrects for “bracket creep” without really reducing the tax burden in real terms. But on budget day this always looks like manna from above, and so this looks certain to be on the agenda.
Back in his dream budget of 1997, Mr Chidambaram said he would aim to reduce customs duty to ASEAN rates. The average ASEAN rate is around 8% , and he is likely to reduce the rate on many items to this level, and declare that a visionary goal has been reached. For this he will get much-merited applause.
He will extend the service tax to new areas, and make preparations for its integration into a Goods and Services Tax by 2010, another major milestone in tax reform. With luck, he may still be finance minister on that date. Mr Chidambaram has long claimed to be on track on reducing the fiscal deficit to 3% and revenue budget to zero by 2009.
Indeed, given revenue buoyancy, he may claim that he has already achieved the fiscal deficit target this year, and will hit the revenue deficit target next year. But these claims are based on smoke and mirrors. Because of political difficulties in raising the price of petroleum products, fertilisers or grains in the public distribution system, the public sector entities involved have suffered huge shortfalls of 2% or more of GDP, which are being financed by the government.
But instead of showing these are explicit subsidies, Mr Chidambaram has been showing them as off-budget bond issues. His budgets provide only for the interest payable on the bonds, not the value of bonds themselves. Such creative accounting is exactly what led to the collapse of Enron in 2001. Governments, unlike corporations, do not go bust. But the fact is that the bond issues make a mockery of FRBM targets. It is a major blemish on his otherwise outstanding record as finance minister
Buzz, Boos and Bomb as 'Pup' leads a rout
There's still two days to go for the action to kick off in Arizona but Australia's version of the Superbowl was one mad evening. There was noise, fireworks, boos, cheers, flags, and Mexican waves in a gigantic arena where Andy G and Hank led a rout. Batsmen constantly hesitated with the quick single and fielders collided. No-one could hear much out there. The G went bananas; Oh G.
There was a buzz around the ground from 4pm in the evening. England were playing Australia and the ground was filling up [the women were playing and the crowd were coming in for the men]. Simon Taufel's might have never walked out to a Mexican wave before and Gilchrist, while batting, said, "If anyone is making their debut out here, it's going to be quite a boring career ahead".
This was a mighty din. Rogue Traders blared out their funky pop mixes in the half-time. There were rumours doing the rounds about the Indian team being welcomed with 'Leaving on a Jet Plane' but the batting performance that followed suggested that a chartered flight was somewhere in sight. There's no limit to the regions for scoring in Twenty20 but India's three fours were all behind the wicket. Dinesh Karthik's top-edged pull appeared like a lucky escape but when Rohit Sharma followed it was clear that this was a clear plan. Get them in edges.
Michael 'Pup' Clarke got things going with a sensational direct hit before Brett Lee tore into the tension like some cricketing Chuck Yeager. So quick was the ball that crashed into Karthik's stumps, it must have broken the sound barrier. So adrenalin-fuelled was the atmosphere that Nathan Bracken - nicknamed Andy G because of his resemblance to the Australian Idol television host - realised slower balls would work best. India's batsmen were half-way through their shots before the ball came out.
Adam Voges, Australia's latest left-arm spinner, will remember this night. Not only did he pick up two wickets in as many balls but was probably the first bowler to have eight fielders around the batsman in a Twenty20. The chase was a formality, especially when Gilchrist walked out with the squash ball and Clarke with his bat. Harbhajan Singh and Irfan Pathan couldn't hear each other when Clarke skied one and the show was over with the light barely on.
Harbhajan was trying his best to smile but it must hurt when you're booed for every move. Gilchirst, for his part, was enjoying cult status. "Now I know what it feels to be Sachin Tendulkar in India."
Sreesanth started with an appeal but was soon looking over his head, when Clarke waited for a slower ball and howitzered it over long-off. By the end of the game he wasn't surprised or elated. "Just speechless". Australia unveiled yet another Hussey, though he wasn't required to bat. He took a wicket and pouched a catch but the best news was he had an alternative nickname, Bomber. Little Mr Cricket appears more suited to a nursery rhyme
There was a buzz around the ground from 4pm in the evening. England were playing Australia and the ground was filling up [the women were playing and the crowd were coming in for the men]. Simon Taufel's might have never walked out to a Mexican wave before and Gilchrist, while batting, said, "If anyone is making their debut out here, it's going to be quite a boring career ahead".
This was a mighty din. Rogue Traders blared out their funky pop mixes in the half-time. There were rumours doing the rounds about the Indian team being welcomed with 'Leaving on a Jet Plane' but the batting performance that followed suggested that a chartered flight was somewhere in sight. There's no limit to the regions for scoring in Twenty20 but India's three fours were all behind the wicket. Dinesh Karthik's top-edged pull appeared like a lucky escape but when Rohit Sharma followed it was clear that this was a clear plan. Get them in edges.
Michael 'Pup' Clarke got things going with a sensational direct hit before Brett Lee tore into the tension like some cricketing Chuck Yeager. So quick was the ball that crashed into Karthik's stumps, it must have broken the sound barrier. So adrenalin-fuelled was the atmosphere that Nathan Bracken - nicknamed Andy G because of his resemblance to the Australian Idol television host - realised slower balls would work best. India's batsmen were half-way through their shots before the ball came out.
Adam Voges, Australia's latest left-arm spinner, will remember this night. Not only did he pick up two wickets in as many balls but was probably the first bowler to have eight fielders around the batsman in a Twenty20. The chase was a formality, especially when Gilchrist walked out with the squash ball and Clarke with his bat. Harbhajan Singh and Irfan Pathan couldn't hear each other when Clarke skied one and the show was over with the light barely on.
Harbhajan was trying his best to smile but it must hurt when you're booed for every move. Gilchirst, for his part, was enjoying cult status. "Now I know what it feels to be Sachin Tendulkar in India."
Sreesanth started with an appeal but was soon looking over his head, when Clarke waited for a slower ball and howitzered it over long-off. By the end of the game he wasn't surprised or elated. "Just speechless". Australia unveiled yet another Hussey, though he wasn't required to bat. He took a wicket and pouched a catch but the best news was he had an alternative nickname, Bomber. Little Mr Cricket appears more suited to a nursery rhyme
Tuesday, January 29, 2008
RBI keeps all policy rates intact
RBI has not changed any of the key policy rates. All the rates including the Reverse Repo remain the same. The cash reserve ratio (CRR) has also been left untouched by the RBI.
RBI Policy Snapshots:
RBI keeps bank rate, repo rate, reverse repo rate unchanged
RBI keeps key policy rates unchanged
RBI keeps repo rate unchanged at 7.75%
RBI keeps reverse repo rate unchanged at 6%
RBI keeps CRR unchanged at 7.50%
There is no change in any of the rates. The much awaited repo rate has not been cut, it remains at 7.75%. The argument is what all of us expected: Elevated asset prices, expansionary monetary and liquidity conditions - basically pointing to the fact that money supply is at 23% against a target of 17-17.5%.
The big culprit, of course, being the accretion of Forex reserves and consequently higher than projected deposit growth. So, basically too much money in the system can always ignite inflation, and therefore a caution on that area.
Also the RBI Governor refers to elevated asset prices in a couple of places, and the potential rise in food and fuel prices globally. This combination is what seems to have won the day today, and kept the RBI from cutting any of the operational rates. The RBI goes on to point out that there is some moderation in industrial activity. But it says that in the months to come, you are going to see a modest figure because the base is high. It points to arguments that export slowdown and high fuel prices can all impact, but doesn’t seem to be entirely convinced of that argument. In fact, Dr Reddy, the Governor, meanders into smaller areas like they have to look at exploring the slowdown very carefully. It is probably because of sector specific reasons. It wonders why there is a slowdown in private consumption expenditure. I am myself wondering why the RBI should be wondering.
You have to call the stance as neutral. The document itself of the last policy was a bit hawkish. This time the document is not sounding so hawkish, except for pointing out to these inflation threats. The tone is overall definitely not as harsh as it was last quarter. But the policy stance itself is completely confusing. Most of the words are towards what we saw in the previous policy stance - the number of paragraphs has been crunched from four to three. But it doesn’t really give you an idea whether the RBI’s stance has changed. It seems to be in complete neutrality in terms of the policy stance. The moderation in industry that the RBI has noted in several parts is perhaps one idea of dovishness. But otherwise, there is no explicit dovishness. Using the word ‘dovishness’ is a bit difficult. I would just say that it is more neutral than what it was in the previous quarter. You cannot call it a hawkish document for sure.
One of the peculiar paragraphs in this monetary policy stance seemed to be almost an admonishing by the RBI Governor to the banks, pointing out if there is an expansionary liquidity conditions.
As the Governor points out - why haven’t deposit and lending rates fallen? He is asking, at some point time deposit rates are even higher than the repo rates and he is wondering why they have not fallen. He also goes on to say that if there is so much surplus liquidity; which there is - after all deposits have expanded above the projected trajectory - both aggregate deposits and M3 being high, why have banks not increased the credit offtake?
This is a little peculiar since on the previous occasion, he had said that he is uncomfortable with that kind of credit growth. This sentence is - despite comfortable liquidity conditions; banks have not expanded credit proportionately. Instead, banks have proposed to make excess investments in SLRs including MSS issuance. The other sentence is, effective interest rates on time deposits at the margin are currently ruling above the last repo rates. Apparently there has been little or no adverse impact on bank margins.
He goes on to wonder - expansionary liquidity conditions engineered by capital flows have not prompted banks to reduce deposit and lending rates, which have been maintained at elevated levels. So, this is a veiled attempt at asking banks to lower deposit and lending rates and perhaps left to themselves - bankers will be doing it when their high cost deposits decline. But this is peculiar; he has not cut rates but is wondering why banks have not cut rates.
RBI says:
Headline inflation picked up since December 2007
Liquidity management to be priority for policy
Inflation to go up even if fuel prices remain unchanged
Upside risks to inflation to increase going ahead
Flexibility to change reverse repo, repo rates
CRR unchanged on preview of current liquidity situation
Financial markets warrant careful monitoring on large fx flows
Emphasis on price stability, anchoring inflation
Retain inflation aim of 4-4.5% for FY08, 3% in medium-term
To maintain GDP growth target of 8.5% for FY08
Can't exclude likely Forex flows reversal on global sentiment
RBI Policy Snapshots:
RBI keeps bank rate, repo rate, reverse repo rate unchanged
RBI keeps key policy rates unchanged
RBI keeps repo rate unchanged at 7.75%
RBI keeps reverse repo rate unchanged at 6%
RBI keeps CRR unchanged at 7.50%
There is no change in any of the rates. The much awaited repo rate has not been cut, it remains at 7.75%. The argument is what all of us expected: Elevated asset prices, expansionary monetary and liquidity conditions - basically pointing to the fact that money supply is at 23% against a target of 17-17.5%.
The big culprit, of course, being the accretion of Forex reserves and consequently higher than projected deposit growth. So, basically too much money in the system can always ignite inflation, and therefore a caution on that area.
Also the RBI Governor refers to elevated asset prices in a couple of places, and the potential rise in food and fuel prices globally. This combination is what seems to have won the day today, and kept the RBI from cutting any of the operational rates. The RBI goes on to point out that there is some moderation in industrial activity. But it says that in the months to come, you are going to see a modest figure because the base is high. It points to arguments that export slowdown and high fuel prices can all impact, but doesn’t seem to be entirely convinced of that argument. In fact, Dr Reddy, the Governor, meanders into smaller areas like they have to look at exploring the slowdown very carefully. It is probably because of sector specific reasons. It wonders why there is a slowdown in private consumption expenditure. I am myself wondering why the RBI should be wondering.
You have to call the stance as neutral. The document itself of the last policy was a bit hawkish. This time the document is not sounding so hawkish, except for pointing out to these inflation threats. The tone is overall definitely not as harsh as it was last quarter. But the policy stance itself is completely confusing. Most of the words are towards what we saw in the previous policy stance - the number of paragraphs has been crunched from four to three. But it doesn’t really give you an idea whether the RBI’s stance has changed. It seems to be in complete neutrality in terms of the policy stance. The moderation in industry that the RBI has noted in several parts is perhaps one idea of dovishness. But otherwise, there is no explicit dovishness. Using the word ‘dovishness’ is a bit difficult. I would just say that it is more neutral than what it was in the previous quarter. You cannot call it a hawkish document for sure.
One of the peculiar paragraphs in this monetary policy stance seemed to be almost an admonishing by the RBI Governor to the banks, pointing out if there is an expansionary liquidity conditions.
As the Governor points out - why haven’t deposit and lending rates fallen? He is asking, at some point time deposit rates are even higher than the repo rates and he is wondering why they have not fallen. He also goes on to say that if there is so much surplus liquidity; which there is - after all deposits have expanded above the projected trajectory - both aggregate deposits and M3 being high, why have banks not increased the credit offtake?
This is a little peculiar since on the previous occasion, he had said that he is uncomfortable with that kind of credit growth. This sentence is - despite comfortable liquidity conditions; banks have not expanded credit proportionately. Instead, banks have proposed to make excess investments in SLRs including MSS issuance. The other sentence is, effective interest rates on time deposits at the margin are currently ruling above the last repo rates. Apparently there has been little or no adverse impact on bank margins.
He goes on to wonder - expansionary liquidity conditions engineered by capital flows have not prompted banks to reduce deposit and lending rates, which have been maintained at elevated levels. So, this is a veiled attempt at asking banks to lower deposit and lending rates and perhaps left to themselves - bankers will be doing it when their high cost deposits decline. But this is peculiar; he has not cut rates but is wondering why banks have not cut rates.
RBI says:
Headline inflation picked up since December 2007
Liquidity management to be priority for policy
Inflation to go up even if fuel prices remain unchanged
Upside risks to inflation to increase going ahead
Flexibility to change reverse repo, repo rates
CRR unchanged on preview of current liquidity situation
Financial markets warrant careful monitoring on large fx flows
Emphasis on price stability, anchoring inflation
Retain inflation aim of 4-4.5% for FY08, 3% in medium-term
To maintain GDP growth target of 8.5% for FY08
Can't exclude likely Forex flows reversal on global sentiment
Sunday, January 27, 2008
Repo, Reverse Repo and RBI
CRR is cash reserve ratio which is portion of the deposits mobilised in a fortnight to be kept with RBI as a statutory requirement.
Repo is the rate at which RBI infuses liquidity through purchase of government securities while reverse repo is the process of absorption of liquidity from the system through sale of government papers . These are tools for open market operations.
Reserve Bank of India may keep interest rates unchanged in the monetary policy to be announced on Tuesday.
Inflation concerns and high money supply will remain the primary concern of the central bank, sources close to the development said.
According to the sources, inflation concerns and high money supply will remain the primary concern of RBI for at least a couple of months more. This means the central bank will wait at least till the next policy review in April before adopting a softer stance on rates.
However, they added that the cash reserve ratio (CRR) may be increased 25 basis points to curb liquidity following the rising interest rate differential between the US and India after the 75 basis point cut in the US Federal Reserve rate.
Sources close to the development said there was an internal view within RBI that the time is perhaps ripe for a 25 basis point cut in the repo rate, since the corridor between the repo and reverse repo has been quite high at 175 basis points as against the conventional 100 basis points.
This can be accompanied by a 25 basis point hike in CRR. This, a section within RBI felt, will help tighten liquidity without the cost of issuing market stabilisation bonds and treasury bills. At the same time it would signal a softer stance on interest rate.
With the cut in the US Federal Reserve rate and expectations of another 25-50 basis point reduction in the January 30 Open market committee meeting, this section felt that a repo rate cut is necessary to stem the deluge of foreign exchange inflows due to the interest rate arbitrage.
However, RBI is veering to the view that a status quo is necessary as inflation concerns still remain high.
Besides, Indian economy growth may not be as high as last year; and the forex inflows will be more evenly distributed across all Asian countries. Moreover, if the liquidity management becomes a problem, RBI has all the instruments at its disposal to step in whenever necessary.
There is in fact a liquidity surplus in the system with no substantial increase in credit pick-up and money supply is already ruling much higher at 21-22 per cent above RBI’s forecast of 17-17.5 per cent.
Currently, CRR is maintained at 7.5 per cent after six tranches of hikes since April 2007.
Repo is the rate at which RBI infuses liquidity through purchase of government securities while reverse repo is the process of absorption of liquidity from the system through sale of government papers . These are tools for open market operations.
Reserve Bank of India may keep interest rates unchanged in the monetary policy to be announced on Tuesday.
Inflation concerns and high money supply will remain the primary concern of the central bank, sources close to the development said.
According to the sources, inflation concerns and high money supply will remain the primary concern of RBI for at least a couple of months more. This means the central bank will wait at least till the next policy review in April before adopting a softer stance on rates.
However, they added that the cash reserve ratio (CRR) may be increased 25 basis points to curb liquidity following the rising interest rate differential between the US and India after the 75 basis point cut in the US Federal Reserve rate.
Sources close to the development said there was an internal view within RBI that the time is perhaps ripe for a 25 basis point cut in the repo rate, since the corridor between the repo and reverse repo has been quite high at 175 basis points as against the conventional 100 basis points.
This can be accompanied by a 25 basis point hike in CRR. This, a section within RBI felt, will help tighten liquidity without the cost of issuing market stabilisation bonds and treasury bills. At the same time it would signal a softer stance on interest rate.
With the cut in the US Federal Reserve rate and expectations of another 25-50 basis point reduction in the January 30 Open market committee meeting, this section felt that a repo rate cut is necessary to stem the deluge of foreign exchange inflows due to the interest rate arbitrage.
However, RBI is veering to the view that a status quo is necessary as inflation concerns still remain high.
Besides, Indian economy growth may not be as high as last year; and the forex inflows will be more evenly distributed across all Asian countries. Moreover, if the liquidity management becomes a problem, RBI has all the instruments at its disposal to step in whenever necessary.
There is in fact a liquidity surplus in the system with no substantial increase in credit pick-up and money supply is already ruling much higher at 21-22 per cent above RBI’s forecast of 17-17.5 per cent.
Currently, CRR is maintained at 7.5 per cent after six tranches of hikes since April 2007.
Monkey and Symonds
It seems that the "monkey" has come back to haunt India-Australian cricketing ties yet again.
An intruder, an Australian wearing a black monkey mask not only evaded so-called strict security surveillance on the ground but managed to reach the pitch before he was brought down by the security staff.
It happened in the post tea session when Andrew Symonds was batting on 30 with Brad Hogg in company. It came at the same time when Australia levelled India’s first innings total. Irfan Pathan was the bowler.
When the Indian left-arm seamer was asked about the intrusion, he joked about it saying, "I don’t know whether t was due to a bet or just a joke. It was a bit funny," he said.
Indian crowds and Team India, especially Harbhajan Singh, has been pilloried by Australian press and the team over the "monkey" issue. The press had picked on monkey chants when Australia toured India last October for the One-Day series.
The matter was turned into an issue by the Australian team with much help from touring reporters from Down Under, saying that it was racist and targetted at Andrew Symonds who is the only player of Afro-Caribbean origin.
Indian team manager Chetan Chauhan gave a measured response to the incident saying that, "it seems just as Indians back home treat it like a joke, so do Australians."
Channel Nine, the official broadcaster here, did not show images of the intruder. Interestingly, Australian reporters in the post match conference did not raise the issue with Pathan either.
Meanwhile, sources in the Indian team management say that they will bring this issue up during Harbhajan Singh’s appeal hearing scheduled for January 29. Judge Paul Hansen of New Zealand has arrived in Adelaide for the appeal hearing.
The Australian team had brought up incidents of monkey chants and racist abuse during the last tour when they went to India, especially the incidents during the Baroda and Mumbai One-Dayers
An intruder, an Australian wearing a black monkey mask not only evaded so-called strict security surveillance on the ground but managed to reach the pitch before he was brought down by the security staff.
It happened in the post tea session when Andrew Symonds was batting on 30 with Brad Hogg in company. It came at the same time when Australia levelled India’s first innings total. Irfan Pathan was the bowler.
When the Indian left-arm seamer was asked about the intrusion, he joked about it saying, "I don’t know whether t was due to a bet or just a joke. It was a bit funny," he said.
Indian crowds and Team India, especially Harbhajan Singh, has been pilloried by Australian press and the team over the "monkey" issue. The press had picked on monkey chants when Australia toured India last October for the One-Day series.
The matter was turned into an issue by the Australian team with much help from touring reporters from Down Under, saying that it was racist and targetted at Andrew Symonds who is the only player of Afro-Caribbean origin.
Indian team manager Chetan Chauhan gave a measured response to the incident saying that, "it seems just as Indians back home treat it like a joke, so do Australians."
Channel Nine, the official broadcaster here, did not show images of the intruder. Interestingly, Australian reporters in the post match conference did not raise the issue with Pathan either.
Meanwhile, sources in the Indian team management say that they will bring this issue up during Harbhajan Singh’s appeal hearing scheduled for January 29. Judge Paul Hansen of New Zealand has arrived in Adelaide for the appeal hearing.
The Australian team had brought up incidents of monkey chants and racist abuse during the last tour when they went to India, especially the incidents during the Baroda and Mumbai One-Dayers
Saturday, January 26, 2008
Stock Market Crash: Jan 2008...Important lessons learnt
A very goood post from Moneycontrol by none other than Udyan Mukherjee
"The thing about life is that one makes mistakes. Many mistakes were made in the second half of 2007 and those sins have to be washed away by blood, such is the way of financial markets. Some participants will go down under and never be able to get back to the market again but most will survive. The pain will linger for many months, maybe years but lessons have to be learnt. Every such debacle has lessons for us and the sooner we forget them the more we suffer.
The first lesson is not to let stock price performance become the sole reason for buying, a mistake which was made in abundance in the last 3 months. What couldn't be explained by fundamentals was credited to liquidity. The present lost all relevance as people chose to focus on the distant future, perhaps simply because the present could never justify those ticker prices; only a hazy dream of the future could. Traders and investors had no time for fundamental analysts, in many cases they were labelled "cribbing fools". Chartists became the most celebrated tribe on the street as only they could see and predict the one way run to glory for many of the hot stocks even as fundamental watchers cringed at valuations....till the music stopped. Don't get me wrong, charts do work in trending markets but once stock prices veer away completely from fundamental value, people need to get careful. But they never are. Now that the blinkers are off, people should ask themselves why stocks like RNRL, Ispat, RPL, Essar oil and Nagarjuna fertilisers have lost 50-70% of their value. It is simply because their stock prices had snapped all connection with underlying business fundamentals, earnings and value. Their stock prices became the only reasons for buying them which works for a while but not forever.
The other big lesson, one which should have been driven in earlier in May 2006, is the danger of overextending oneself in the futures market. The lure of stock futures is easy to understand. Put in some margin, take a big exposure on a fast moving stock, make a killing when prices shoot up. Repeat exercise. Just that people forgot that prices may also come down and at a pace which noone can even imagine, maybe their friendly stockbrokers forgot to tell them that part of the story. The result : unbridled speculation that ran into lakhs of crores, excesses that we are paying for today. Even this fall will not cure investors of their love for futures speculation but if at least some amount of caution is injected it would have been a worthwhile learning. Futures are not toys for amateurs, they are time bombs in the hands of inexpert and inexperienced traders, it's only a matter of when the fuse runs out.
The other learning which I hope will play out in the future, as it has in the past, is that it pays to be brave in times of panic such as these. If I was allowed to invest myself , which I am not, I would have no hesitation in deploying serious money into the market today, knowing fully well that prices may fall more tomorrow. And I would be standing there tomorrow to buy more of the same, till my money ran out. India is going to be a terrific stock market story for many years to come, even an intermediate bearish patch cannot shake that conviction of mine. At best, one will have to wait a bit for the returns to follow. That's alright. You are happy to put money in a bank FD and then wait for one full year to collect that measly 8%, aren't you? Then why does the stock market need to give you 20% every month? In the last one year, I haven't seen so many good stocks trade at such mouth watering levels. Forget trading, avoid the duds which were fuelled up by operators, just go out and buy those bluechips. They will deliver, even if there is a global market meltdown for a while, and if you are a bit patient you will be rewarded. But do remember January 2008, as history will repeat itself again in the future. Just that our memories tend to be too short and our greed too much"
"The thing about life is that one makes mistakes. Many mistakes were made in the second half of 2007 and those sins have to be washed away by blood, such is the way of financial markets. Some participants will go down under and never be able to get back to the market again but most will survive. The pain will linger for many months, maybe years but lessons have to be learnt. Every such debacle has lessons for us and the sooner we forget them the more we suffer.
The first lesson is not to let stock price performance become the sole reason for buying, a mistake which was made in abundance in the last 3 months. What couldn't be explained by fundamentals was credited to liquidity. The present lost all relevance as people chose to focus on the distant future, perhaps simply because the present could never justify those ticker prices; only a hazy dream of the future could. Traders and investors had no time for fundamental analysts, in many cases they were labelled "cribbing fools". Chartists became the most celebrated tribe on the street as only they could see and predict the one way run to glory for many of the hot stocks even as fundamental watchers cringed at valuations....till the music stopped. Don't get me wrong, charts do work in trending markets but once stock prices veer away completely from fundamental value, people need to get careful. But they never are. Now that the blinkers are off, people should ask themselves why stocks like RNRL, Ispat, RPL, Essar oil and Nagarjuna fertilisers have lost 50-70% of their value. It is simply because their stock prices had snapped all connection with underlying business fundamentals, earnings and value. Their stock prices became the only reasons for buying them which works for a while but not forever.
The other big lesson, one which should have been driven in earlier in May 2006, is the danger of overextending oneself in the futures market. The lure of stock futures is easy to understand. Put in some margin, take a big exposure on a fast moving stock, make a killing when prices shoot up. Repeat exercise. Just that people forgot that prices may also come down and at a pace which noone can even imagine, maybe their friendly stockbrokers forgot to tell them that part of the story. The result : unbridled speculation that ran into lakhs of crores, excesses that we are paying for today. Even this fall will not cure investors of their love for futures speculation but if at least some amount of caution is injected it would have been a worthwhile learning. Futures are not toys for amateurs, they are time bombs in the hands of inexpert and inexperienced traders, it's only a matter of when the fuse runs out.
The other learning which I hope will play out in the future, as it has in the past, is that it pays to be brave in times of panic such as these. If I was allowed to invest myself , which I am not, I would have no hesitation in deploying serious money into the market today, knowing fully well that prices may fall more tomorrow. And I would be standing there tomorrow to buy more of the same, till my money ran out. India is going to be a terrific stock market story for many years to come, even an intermediate bearish patch cannot shake that conviction of mine. At best, one will have to wait a bit for the returns to follow. That's alright. You are happy to put money in a bank FD and then wait for one full year to collect that measly 8%, aren't you? Then why does the stock market need to give you 20% every month? In the last one year, I haven't seen so many good stocks trade at such mouth watering levels. Forget trading, avoid the duds which were fuelled up by operators, just go out and buy those bluechips. They will deliver, even if there is a global market meltdown for a while, and if you are a bit patient you will be rewarded. But do remember January 2008, as history will repeat itself again in the future. Just that our memories tend to be too short and our greed too much"
Monday, January 21, 2008
Stock Market Crash and Me
It was a Chilly morning.Wifey asked me to hurry up and drop her 4 her training. My thoughts were fixed on how would i recover the 26000 loss in the stock market on friday..."Jaldi Karo"....and i was shaken...
I hurriedly got up and got ready...
Reached office in a hurry to beat the parking rush...reached just in time to get a parking...
Heard a few ppl discussing the reliance power IPO subsrciption levels in the lift..had avery good feeling that i applied in time....
reached my seat...powered my laptop...n the there it was....the losses had increased to 34000..could not muster the courage to sell....discussed it with a frnd...said forget it...n then there it was....i was having ..n news flashed that Sensex had dropped a whopping 1200 points....a sense of fear ran through my spine...and the constant question...how much i must be losing now..and i sense of regret..why did i not selll it earlier...
by the time markets closed...i was lsoing 60000...
A bad day @ office indeed!!!
I hurriedly got up and got ready...
Reached office in a hurry to beat the parking rush...reached just in time to get a parking...
Heard a few ppl discussing the reliance power IPO subsrciption levels in the lift..had avery good feeling that i applied in time....
reached my seat...powered my laptop...n the there it was....the losses had increased to 34000..could not muster the courage to sell....discussed it with a frnd...said forget it...n then there it was....i was having ..n news flashed that Sensex had dropped a whopping 1200 points....a sense of fear ran through my spine...and the constant question...how much i must be losing now..and i sense of regret..why did i not selll it earlier...
by the time markets closed...i was lsoing 60000...
A bad day @ office indeed!!!
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