Showing posts with label Indian Economy. Show all posts
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August 31, 2021

 

The $1 trillion digital loan sector in India is the next fight for internet behemoths.

India’s digital loan market is becoming a battleground for companies from Facebook Inc. to Xiaomi Corp.

Companies ranging from Facebook Inc. to Xiaomi Corp. are vying for a piece of India's digital lending market, which is expected to be worth $1 trillion by 2020.

This month, Facebook said that India would be the first country to implement its small business lending programme, which will provide loans to companies that advertise on its platform through a partner. The loans will be available in amounts ranging from 500,000 rupees ($6,720) to 5 million rupees, with interest rates ranging from 17 percent to 20 percent with no collateral required.

The social media giant's entry into India coincides with Xiaomi's plans to offer loans, credit cards, and insurance products in partnership with some of the country's biggest banks and startup digital lenders, according to the Press Trust of India, citing local head Manu Jain. Xiaomi is a Chinese manufacturer of everything from rice cookers to gaming monitors.

This month, Amazon.com made its first investment in the country's wealth management business, investing in a $40 million round led by fintech firm Smallcase Technologies Pvt.

Google, owned by Alphabet Inc., is likewise stepping up its game. After launching wealth management products such as digital gold and mutual funds on its famous Google Pay platform, it has now partnered with local Indian lenders to give users time deposits.

After online transactions soared during the pandemic and traditional lenders became wary due to a rise in bad debt, India's digital payments business has piqued the interest of some of the world's top IT companies. According to Boston Consulting Group predictions, digital financing will triple to $350 billion by 2023 and reach a total of $1 trillion in the five years after 2019.

“The payment sector earns very little money, but lending makes a lot of money,” says the expert "BCG's financial institutions practise managing director and senior partner Saurabh Tripathi remarked. “Indian consumers are looking for better-designed digital experiences, and many companies are taking advantage of this potential."

While India's lending industry has a lot of potential, it also has a lot of hazards. For the second year in a row, the country's bad loan ratio is predicted to grow to 11.3 percent by March, making it the poorest performance among big economies.

The Reserve Bank of India plans to supervise internet lenders, which include more than 300 startups, in addition to dealing with debt collections by digital enterprises.

 

 


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August 28, 2013

What is National Food Security Bill (NFSB)

The much-awaited and much-debated Food Security Billultimately got passed in the Loksabha (Lower House) a day before yesterday. This bill is supposed to entitle around 67% (or 80.4 crore) of Indian population to subsidized food- each eligible individual shall get 5 kg of rice, wheat and coarse grains at Rs. 3,2,1, respectively.This programme shall cover 75% and 50 % of the rural and urban population respectively.
Under this scheme, every year around 62 million tonne (6.2 crore tonne) of food-grain shall be distributed among 80 crore people of India.
The government estimates an outlay of Rs. 1,30,000 crore per year towards this scheme but as per a Reuters columnist the actual cost for the same will be around Rs. 1,60,000 crore per year.
Though opposition questioned the timing of this bill and termed it as a measure to garner votes in the oncoming general election but this bill got passed quite effortlessly.

The Impact of NFSB

The cost incurred for NFSB will be more than 10% of all government receipts (the total revenue that government earns through taxes excluding the borrowed money).
This additional burden shall increase India’s Fiscal Deficit (the difference between expenditure and income of the government) and this deficit shall be plugged by higher borrowing.
When government borrows more, already heightened interest rates shall soar further and already ailing Indian economy shall be negatively pressurized and the GDP growth rate shall further decelerate. Debt-ridden companies shall reach on the verge of being bust.When interest rates start going up overall inflation increases and economy starts decelerating.
Since long Indian corporate have been waiting for a policy rate cut and even a slightest increase in the same shall be a big morale dampener for corporate India and overseas investors.When an economy is struggling, overseas investors start pulling their money out and as a result local currency depreciates eventually. increasing the current account deficit (CAD) as imports become more expensive.All these outcomes getting All these parameters when aggravated are sufficient to drag Indian economy into a negative spiral. 
Simply put, NFSB will be a big burden on the already ailing Indianeconomy.

How Fruitful this Programme is?

In India, tobacco consumption is very common and a pack of bidi costs Rs.4- is there any sense in providing 1 kg of rice cheaper than a pack of bidi? (A bidi user easily consumes at least 1 packet a day)
Even if, it is considered ok, then is there any sense in entitling 70 % of the population eligible for it, when only 33 % of population is leaving below poverty line?
Roti, chapati or rice is eaten with either vegetables or pulses and cooking oil is required to make vegetables and lentils too need to be fried. Under NFSB, pulses or cooking oil will not be provide and when vegetable and edible oil prices are sky-rocketing, how many of eligible beneficiaries  shall afford to mange a full course of meal? Rising food inflation only has so for prevented a cut in interest rates.
We should not forget that a subsidy increases fiscal deficit  which ultimately translates into  higher inflation so NFSB benefits are nothing but a zero-sum game for beneficiaries.
Indian government is already going slow on financial reforms and this is why deficits are widening.
If Indian economy shall not perform well, even domestic investors shall start buying gold as they shall no longer have faith in the local fiat currency.
Indian government can restrict its citizens from investing in US treasury products but it will not be able to stop them from buying gold. Rising demand for gold coupled with higher import duty shall artificially boost domestic gold prices and gold smuggling shall again surface up and parallel economy shall get a boost just the way during the Indira regime.
Simply put, NFSB is like putting some goodies in one pocket and clandestinely taking out goodies (of same monetary value if not more) from other pockets but without letting the subject realizing it.

What is more perturbing  is- what if government shall fail to meet the quantity of grains to be distributed by domestic supply? Then India shall have no option but to import grains.
While the FM is striving hard to narrow the trade deficit by curbing gold imports, can India afford to have an additional item added to its import list especially when India's trade deficit is wideningand Indian rupee is depreciating?

What is grass-root level reality?

A lady who works as a domestic help told me that they get the ration but half the quantity is husk and grit. Consumable quantity of rice comes out to be so low that this lady has no option but to add that small quantity of rice to wheat and the same is grinded to  flour to make chapattis. 
Does this serve the purpose of providing subsidized rice?

Middlemen shall be selling quite a chunk of distributable grains in the open market and shall be adding husk and grit to compensate the quantity loss and poor people shall then be losing interest in buying these grains (as it shall take a hell lot of time to sort and clean grains and they shall not be able to afford this time sacrificing their working hours) and thus middlemen only will be benefited.
Even the official advert of NFSB portrays a PDS outlet owner denying grains to eligible people and only after getting admonished by an activist, agrees to comply.
Shall every time when an eligible person will be denied, an activist shall pop up?

Has government any solution to these impediments?

How market Reacted to it?

The benchmark Nifty closed 189 points or 3.45 % down. The rupee tumbled to 66.5 levels against the USA dollar. FIIs were net sellers to the tune of Rs. 1375 crore in the equity market.
Interestingly but not surprisingly gold price soared.
The money outlay under NFSB means, rupee shall further weaken and CAD shall worsen and Indian economy shall continue to remain pressurized.
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August 04, 2013

What so far prevented the fall of Indian Rupee?


Having written previous two posts on the fall of Indian currency earlier (1 & 2), I shall now capture salient reasons responsible for the Indian rupee’s recent steep fall.

First, we should know that earlier rupee was not depreciating against the US dollar because US dollar itself was falling due to continuous bouts of Quantitative Easing or QE.


Why US Fed Reserve cutting down on QE?

QE is supposed to boost an economy and when the US economy started recovering this QE was supposed to be shunned. This means no new dollar will be printing.
Not only that, but if US economy further improves then the printed money too shall be destroyed electronically.

Simply put, to boost the US economy, US Federal Reserve was printing dollars. Thus more dollars ensured that Indian rupee did not fall significantly against the US dollar.
But things started to change when US Federal Reserve chairman Ben Bernanke hinted on discontinuing the QE and discontinuing QE means USA will no more injecting the money into the financial system by buying its treasury products.
So, no more fresh inflow of dollars and as per the Demand & Supply rule Rupee started facing the downward pressure.

The Indian Rupee’s steep depreciation against the US Dollar started since May 2013
But US Dollar has not consolidated in this period!!!




The US dollar-index chart shows that there was no significant strengthening in the US dollar since May 2013.
Under the QE programme US Federal Reserve was injecting $ 85 billion of liquidity per month into the financial system by buying back its treasury products and this inflow of dollar was holding the Indian Rupee as a part of it was coming to India. 


Why Indian Rupee is Depreciating?

(1)   Rising CAD: The main reason for the weakening of the currency of a nation is the Current account deficit CAD. Simply put, when a nation imports more than what it exports CAD gets generated due to negative BOP.
India predominantly imports crude oil, gold and coal. To run its economy India needs to import crude oil and coal but the import of gold is not at all a productive one.
As dollar being the reserve currency, higher imports mean higher spending of dollar and as a result rupee keeps on weakening.
Great demand of dollars from importers especially OMCs pressurized the rupee.


(2)   Higher demand for gold: Rising corruption In India and generation of huge black money ensured the flow of funds into the real estate and gold.
This is why import of gold kept on increasing and it inflated the CAD. And to tame this, Indian government came up with hiking the import duty on gold and silver.
Rising gold prices and the weakening of a few major global economies made gold as a safe haven and Indians started hoarding gold in the anticipation of lucrative returns.

(3)   The Negative Spiral: When Indian economy was growing at higher levels, foreign money was flowing in and due to this inflow, Indian rupee was strengthening but when Indian economy started to struggle owing to higher interest rates, this foreign money started fleeing resulting in weaker rupee.

Not only funds from the equity market are being withdrawn but foreign investors have also started selling Indian debt instruments and this is why 10 year benchmark bond’s yield has started increasing. The yield of a bond increases when the price of that bond starts decreasing (due to the selling pressure).

The catch 22 situation:  Indian Economy shall grow when interest rates shall come down along with headline inflation falling to RBIs comfort level but the already fallen rupee prevents the RBI to cut policy rates and reserve ratios fearing further beating of the Rupee (Explained in detail here).

Simply put, a fall in policy rates reduces the price of bonds carrying higher coupon rates and this situation makes foreign investors to redeem their debt instruments fearing value erosion in their debt portfolio. Such redemptions take the dollars out of India and as a result rupee starts depreciating.
This was the reason despite inflation being tamed,no rates cut took place. 

(4)   Preventive Measures Going Awry

RBI not only retained the current policy rates but it also raised the short term lending rates to prevent  Indian commercial banks  from using this money to buy dollars as dollar buying weakens the Indian rupee. 
This was the RBIs way of curbing speculation in the currency market by the liquidity tightening.
RBI increased the MSF (Marginal Standing Facility) rate by 200 basis points to 10.25 %. At MSF rates banks can borrow up to 1 % of their Net Demand and Time Liabilities. Banks use this facility to meet their emergency liquidity needs.
RBI also capped bank borrowing limit from its Repo window to Rs. 750 billion.
But these moves deteriorated the sentiment in the market as this move was supposed to raise the fund cost for businesses and as a result economy could be further pressurized eventually resulting in further lowering of the GDP growth rate.
This move resulted in heavy selling in banking stocks by FIIs and with this departure of foreign money Indian Rupee continued its southern journey.


(5)   Infrastructural Growth:  For a growing economy, infrastructure growth is a must. But for this infrastructure growth a significant amount of imports are necessary.
Telecom and other equipments, various machineries etc demand for a substantial dollar outlay. Rising power demand in India translates into more and more dependence on the imported coal and natural gas and higher imports means higher trade deficit and weakening currency.

(6)   FDI Policy Paralysis:  To hold the rupee, foreign money that too FDI is a requisite but lack of timely FDI reforms hindered the inflow of foreign money in the country.
Now government is mulling to further liberalise the FDI policy but the fruits of this FDI easing shall come only in medium to long period. For the time being such move can only improve the market sentiment.

(7)   Money Outflow from the Capital Markets: In the month of June and July FIIs were net sellers worth around $ 2.83 billion. This outflow of dollars came heavily on the Indian rupee. 

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June 18, 2013


The common man too was waiting for this day as India’s central bank RBI was supposed to come up with its mid-quarter review of the monetary policy for the June quarter. (Q1).
What he wanted from the RBI governor was a reduction in Policy Rates and ReserveRatios so that his EMIs (Equated Monthly Instalment) on home and other loans would have slashed.

Unfortunately, RBI governor did not reduce the Policy Rates or Reserve Ratios.

The main policy rate is the Repo Rate- the rate at which RBI lends to commercial banks. Commercial banks often borrow money from the reserve bank and when this rate is lowered commercial banks can reduce their lending rates. The RBI governor kept this rate unaltered at 7.25 %.

The other ratio which was expected to be reduced was the CRR or Cash Reserve Ratio- the percentage of total deposits that commercial banks are supposed to park with the reserve bank.
As, no interest is payable on CRR, commercial banks expect this obligation to be minimum.

When CRR is reduced, a significant amount of the deposit gets unlocked and the same can be used for lending. When there is a scarcity of lendable capital, interest rates tend to soar and the vice-versa. The CRR too stands unaltered at 4%.

So, when the Repo Rate and CRR are high, in order to reduce lending rates banks need to reduce deposit rates i.e. the reduction in the interest payable on time deposits like FDs, RDs etc.

Then why banks are not reducing the deposit rates?

This move is not possible as investors are not readily depositing money in banks and instead investing in gold and real estate where they have seen a significant appreciation in the past several years.
If deposit rates are reduced then investors shall be withdrawing money from banks to invest in other asset classes where returns are higher.
Presently, CPI (Consumer Price Index) based inflation is 9.3 % while the maximum interest rate on bank deposits is in the range of 8.75 %-9 %, and therefore the Real Interest Rate (the difference between payable Interest rate on an instrument and the prevailing inflation rate) is -.3 %.
This means investors are not making money from bank deposits but they are in fact losing a little fraction of it.
If banks shall reduce the deposit rates then this RIR shall fall further and investors shall be withdrawing more money from the already liquidity-starved banks to aggravate the liquidity.

Why RBI did not slash rates?

(1)    As CPI inflation is much above the RBI’s comfort zone of under 6%, RBI hesitated to cut the rates. By reducing rates money supply in the economy increases and inflation shoots up.

(2)    Other problem was posed by the weaker rupee. Had RBI reduced the policy rates, bond prices would have shot up reducing the bond yield. A reduction in the bond yield makes foreign investors sell Indian bonds and take their dollar funds back. And this departure of the dollar would have further weakened the rupee.

(3)    Weaker currency increases the CAD (Current AccountDeficit) and India’s is already having a high Trade Deficit too and these higher deficits often drive rating agencies to downgrade the credit rating. A lower credit rating means newer foreign debt at higher interest rates and higher interest outlay increases the CAD further leading the Indian economy into a negative spiral.
RBI took the right decision and desisted from cutting rates. Higher deficits are due to India’s faltered and populist fiscal policy and this is why RBI adopts a hawkish monetary policy to protect the economy.
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May 12, 2013


Amid the global financial turmoil Indian economy too is reeling under pressure and the main reason being attributed for the same is higher borrowing cost arising due to higher prevailing interest rates.
Higher interest rates are badly affecting the profitability of Indian companies and forcing them to defer the capacity expansion which is a must for the growth of the economy.
Besides oversees recession, higher interest rates are responsible for the slowing of the Indian economy which is being reflected by falling GDP numbers.

Image source: tradingeconomics

RBI or Reserve Bank of India-the Indian central bank, controls the interest rates in the country by its monetary tools viz. Policy Rates and ReserveRatios.
One of the major constituent of policy rates is the Repo Rate – the rate at which the RBI lends to commercial banks. Reverse Repo Rate –the rate at which commercial banks park their excess capital with the RBI- has been fixed at 100 basis points lower than the repo rate.
1 basis point is equal to .01 percent.
Recently on May 3, 2013, RBI governor slashed the repo rate by 25 basis points to 7.25 % and thus Reverse Repo Rate got automatically calibrated to 6.25 %.
Banks are not only demanding for the further slashing of repo rate but they want CRR to be slashed as well.
CRR or Cash Reserve Ratio is the fraction of deposits that banks need to park with the RBI and no interest is payable on it. CRR too is expressed as a percentage.
The current CRR rate is 4 % that means all banks shall necessarily have to park 4 % of their deposits with the RBI and as there is no interest payable on it, it acts as an idle capital for banks.
Banks want RBI to slash the CRR along with the repo rate so that they can reduce the lending rates.
The other option available with banks is reducing the deposit rates and as banks are already short of the capital this option is not viable.
The reason for the shortage of the capital was due to the fabulous returns that Goldand real estate market generated in past several years pulling investors’ money from the banks and deprived banks of the capital. This is the reason responsible for the higher deposit rates of banks –a measure to attract the deposits.

Now the question is why RBI is not slashing the CRR and Repo Rate?

And the answer is -the fear of raging inflation. The RBI governor is very cautious about it and this is why he is not slashing the rates liberally.
The Indian economy is already under pressure due to the twin deficit- Fiscal Deficit and Current Account Defict (CAD). Higher CAD results in weaker currency and weaker currency further boosts the inflation. When CAD rises beyond a limit, credit-rating agencies downgrade the economy. Lower credit rating means newer debt at higher cost and this is how economy goes into a negative spiral.

Is there any silver line?

The recent fall in Gold was a great solace for the Indian economy as the same helped to tame the increasing twin deficit. In coming years, with more and more power plants adding capacities more imported coal shall be required which might aggravate the deficits.
Indian government needs to decontrol the diesel prices fully and major subsidies (oil, fuel & fertilizer) should be transferred directly into the Aadhar linked bank accounts of beneficiaries so that only genuine and needy people get benefited.
Government should also cut down on its expenses in the name of populist measures. Higher government spending increases the CAD and is responsible for higher interest rates in the economy as it renders lesser borrowable money in the system for the businesses.
The oncoming food security bill is supposed to give food security to 65-70% of the population while only 33 % of people in India live below the poverty line and only these people should be given benefits of this scheme.  In the backdrop of employment guarantee schemes there was no need of extending the benefits to 65-70% of people and unnecessarily strain the economy.
To bring back the Indian economy back on the track a lot of reforms need to be done but having a look at the present political scenario it seems difficult.

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April 01, 2013


Indians are highly perturbed with high interest rates prevailing in the country. From corporates to individual loan subscribers, all are feeling the heat of high interest rates.
Earlier all eyes were on the RBI to cut policy rates but even after it slashing the repo rate by 50 basis points (or .5 %) in this calendar year banks and other financial institutions were unable to cut the lending rates significantly. Higher interest rates are resulting in piling NPAs (Non Performing Asset or bad debt) besides lower NIMs (Net Interest Margin).

Why banks are not slashing interest rates significantly?

Mere RBI slashing policy rates shall not enable banks to drop interest rates significantly but for that deposit rates too need to be slashed. Deposit rates refer to the interest payable on the deposits of the customers- time deposits (FD, RD etc) or demand deposits (saving account etc).

Now the question becomes- why banks are not reducing the deposit rates?

And the answer is-Sluggish growth in bank-deposits prevents banks from cutting deposit rates.
Rising gold and appreciating real estate in the past few years made investors to pull funds from banks to invest in gold and real-estate.Investments in the aforementioned assets being long term created the scarcity of funds for banks and this scarcity of funds prevented banks from cutting deposit rates.
With retail inflation rate hovering above 10 %, Real-Interest Rate from debt instruments (any instrument on which interest is payable like FD, RD etc) turned negative.

Real interest rate is nothing but the interest rate adjusted for inflation.For example, if your FD pays you 9 % interest per annum and inflation rate is 10% per annum, then your real interest return is – 1%.
This means you are not gaining from your investment but losing money on it due to higher inflation.

Why Gold and real estate gave fantastic returns?

Gold being the best hedge against the inflation, investors started hoarding it. Global economic activities like US quantitative easing and similar money printing measures by European and Japanese economies resulted in ample liquidity which when flew into real estate resulted in sky-rocketing prices.  


Is there any remedy?

This scenario shall not change until inflation becomes benign i.e. lower CPI inflation orretail inflation. Besides this, there should be an improvement in bank deposits, and this shall be possible when gold and real estate shall cease to deliver lucrative returns.
Indian government too needs to do the needful to curb the spiralling inflation in India.
When inflation shall be tamed, RBI too shall proactively reduce the policy rates and thus lending rates shall be reduced.
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February 28, 2013



Mr. Chidambaram started narrating the budget on the note of falling global economy and its languishing impact on our domestic economy,  then profusely started doling money for the social sector.
Social-sector allocations (for Scheduled and backward classes, old people, minorities etc ) were expected in perspective of the oncoming 2014 general election.
To fare well in the elections sops were necessary but sinking economy was another concern. Rising inflation and twin deficits along with the fear of the downgrade by rating agencies constrained the FM from delivering a populist budget and as a result a insipid budget got delivered which is supposed to boost the economy in coming future.

Economy

FM expects India has got a potential to become a $ 5 trillion economy by 2025.Fiscal deficit and revenue deficit target for FY 14 has been set up at 4.8 % and 3.3% respectively. An amount of Rs. 14,000 crore shall be infused in PSU banks.

Taxation
·         There has been no change in the tax slab  for FY 2014. However, a tax credit (rebate) of Rs. 2000 shall be given for the tax payers falling in the Rs. 2-5 lakh income range.
·         For those who earn more than Rs. 1 crore shall be levied a surcharge of 10 %. This attempt was attributed as a step towards enhancing the Tax-to-GDP Ratio.
·         Inflation indexed bonds have been introduced in this budget to desist the people who have been investing in gold as a hedge against the inflation.
·         First time home loan buyers shall now avail an additional deduction for a housing loan up to Rs. 25 lakh. So now for the qualified home loan buyers total deduction will be Rs. 2.5 lakh.
·         TDS @ 1% on the property transactions above Rs. 50 lakh has been introduced

Capital markets

·         STT (Security Transaction Tax)on equity futures reduced to .01 % (earlier .017 %). Reducing STT was a long term demand from the capital market players.
·         CTT (Commodity Transaction Tax) has been introduced on on non-agro futures introduced at .01 %
·         FII can now trade in ETFs.
·         FII-FDI distinction shall bring more money into the markets

Rajeev Gandhi Equity Saving Schemehas been liberalized, Now  people with up to Rs. 12 lakh gross income can invest in this scheme earlier this was capped at Rs.10 lakh.
Now, first time investors shall be allowed to invest in this scheme for successive 3 years- i.e. 2 more years. Under RGESS, qualified investors can invest up to Rs. 50,000 in designated shares and MF schemes to become entitled for a deduction of Rs. 25,000.

 Entertainment
·         Set top boxes shall cost u more as custom duty has been increased. DTH experience becomes expensive

For our youth

·         Mobile above Rs. 2,000 shall become more expensive due to hike in the import duty from 1% to 6% ,
·         Dining out in AC restaurants shall now cost more as the same shall now attract the service tax. So be prepared to shell out more money at Domino’s and McDonald’s.
·         Custom duty on imported luxury bike has been increased to 75 % from earlier 60 %.
·         Excise duty on non-taxi SUVs hiked to 30 % from 27 %.
·         SED (special excise duty) on cigarettes hiked to 18 %

Foreign Travelers
·         Duty free gold import limit hiked  – Rs. 50,000 for male and Rs. 1,00,000 for females

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October 05, 2012

CRR and SLR are reserve ratios.

CRR: CRR stands for Cash Reserve Ratio. CRR is the amount of deposits that all Indian Scheduled Commercial Banks (SCB) need to keep with the RBI (Reserve Bank of India)-India’s central bank. CRR is expressed in percentage and any change in CRR is declared in basis-points. 
100 basis points are equivalent to a per cent.
There is no floor or ceiling  for CRR.

Example: A CRR of 5 % means, every scheduled commercial bank has to park 5 % of its deposit with the RBI and a reduction of 50 basis-points (or .5 %) in CRR shall result in new CRR rate as 4.5 %.

Demand deposits and time deposits are collectively called as DTL (Demand and Time Liability) - as deposits with banks are liabilities for banks.

Point to be noted is CRR is expressed as a percentage of total DTL.
The term deposit means all Demand and Time deposits. FDs and RDs are the most common forms of Time Deposit while current account deposits and savings account deposits fall under Demand Deposits. 
Presently no interest is paid on CRR deposits.

SLR: SLR stands or ‘Statutory Liquidity Ratio’ is the ratio of liquid assets to net DTL (Demand and Time Liability) which every Indian bank has to maintained on the ‘end of day’ basis.
Simply put, every Indian bank need to put a fixed proportion of its net DTL(Demand and Time Liability) in liquid assets like cash, gold and non-encumbered approved securities.
Treasury bills of GOI are a commonly used security for SLR requirement.
Point to be noted is that CRR is expressed as a percentage of total DTL (Demand and Time Liability) while SLR is calculated on net DTL.
Besides CRR, banks need to comply with the SLR obligation.
RBI can raise this ratio up to 40 % at the most.
Non-maintenance of SLR by a bank makes it liable for the penalty at the rate equal to Bank rate + 3% p.a.
By this date, CRR is 4.5 % and SLR is 23 %. This means banks can’t lend 27.5 % of their deposits which remains stuck in reserve ratio requirements.

Implications of Reserve Ratio changes:

The very purpose of Reserve Ratios is to keep banks liquid at any point of time.
A reduction in CRR releases money in the financial system and more money could reduce the prevailing interest rates. Lower interest rates are good for businesses and the banking sector.
To suck the excess liquidity (which generally results in higher inflation) out of the financial system, RBI often raises Reserve Ratios.
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October 03, 2012

Repo Rate and Reverse Repo Rate are key policy rates.

Repo Rate: Repo Rate is the annualized interest rate at which central bank lends to other commercial banks.
Reserve Bank of India (RBI) is the central bank of India. This should not be confused with the CBI (Central Bank of India) - which is just a commercial bank and not a central bank. Central bank acts as banker’s bank.
When commercial banks need funds they have an option to borrow from the central bank at the Repo Rate.
One thing to note is -this lending is done against collaterals. This means commercial banks have to deposit government dated securities, corporate bonds, money market securities, treasury bills or equity (shares) as collateral (as security).

In the USA, commercial banks borrow from the Federal Reserve (The name of USA’s central bank) at Federal Discount Rate (similar to repo rate of India).

Central banks use repo rate to control the supply of money in the system. Repo rate influences overall interest rates in a country and the consequent inflation.
To lower the supply of money in the financial system, Central banks hike the repo rate as it makes borrowing expensive  for commercial banks and as a result banks keep their lending rates high that discourages businesses and individuals to borrow and thus money supply in the system is constrained.
To curb rising inflation central banks often raise the Repo Rate. Higher Repo rate results in higher short term lending rates while lower Repo Rate translates into lower short term lending rates.

Reverse Repo Rate: Banks park excess money with the central bank and  central bank pays interest on it. This annualized rate of interest is called Reverse Repo Rate.
In Indian context, Reverse Repo Rate is the rate at which RBI borrows money from commercial banks of India.Reverse Repo Rate is also termed as a mirror image of the Repo Rate.

One basis point is .01 %. This means 100 basis point is 1 %.
Central banks use Reverse Repo Rate to absorb the liquidity from the financial system.
When banks park money with the RBI, they get collaterals (government dated securities, money market securities, treasury bills etc) in return.
Earlier RBI would  Reverse Repo Rate to suck the excess liquidity from the system (and the vice versa.) but now Reverse Repo Rate should be necessarily 100 basis points lower than the Repo Rate.
This means Reverse Repo Rate now moves in tandem with the Repo Rate.

Present rates as on 3/10/2012
Repo Rate
8%
Reverse Repo Rate
7%
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October 01, 2012


Indian Rupee (INR) today managed to close at 52.5 levels against the US dollar, which is 5-month high. Earlier I had discussed reasons for the rupee depreciation against the USA dollar.

Now let’s have a look into various factors that helped rupee to appreciate –

     (1)    Weakness in Dollar: Recently US Federal Reserve came out with its third round of the quantitative easing under which $ 40 billion of bonds shall be purchased every month until job situation improves.
Simply put, Federal Reserve increased the dollar in the financial system and as per the demand-supply rule, dollar depreciated against other global currencies. This weakness is also reflected by the dollar-index chart.

Weak dollar helped Indian rupee to appreciate against it.

      (2)    Increased capital flows in India: Indian government once accused of policy paralysis came up with a slew of economic reforms which restored the global investors’ confidence in India-story and foreign capital started flowing in aggressively . Dollar funds inflow fortified the Indian rupee (again according to demand and supply rule).

     (3)    Heavy dollar selling by exporters: Surging rupee spooked exporters and other dollar hoarders and they oozed out dollars fearing value erosion.As rupee gets stronger rupee-value of dollar-fund diminishes and due to this dollar-hoarders sell it.

   (4)    Falling crude prices: Diminishing crude prices ensured reduced dollar outflow and lower current account deficit resulting in stronger rupee.

   (5)    Due to Past Government measures: Imports of Gold, silver and crude expend lots of dollars. To curb the outflow of dollars, Government had hiked the import duty on gold and silver. Higher import duty discouraged the imports to some extent and helped rupee to strengthen.
Besides this RBI had curbed the currency speculation by withdrawing the facility to cancel and re-book the forward contracts by residents and foreign investors.
These earlier steps too seem to be showing their effects.
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