Posts Tagged ‘Central bank’

Weekly Update 18th – 22nd October 2010

Most of the world markets rallied in the week gone by on the buzz of further quantitative easing by U.S. Without giving details about the strategies on how the central bank will act its Nov. 2-3 meeting, Federal Reserve Chairman Bernanke said additional monetary stimulus may be warranted because inflation is too low and unemployment is too high.

.

Fed is considering ways for raising inflation expectations to encourage people to believe that prices will start rising at a faster pace so that they would spend more of their money now. Retail sales in U.S.climbed more than forecast as purchases rose 0.6 percent following a 0.7 percent gain in August and manufacturing in the New York region expanded in October at a faster pace than anticipated.

.

China’s Shanghai Composite Index saw gains of 8.5 percent on the anticipation that China’s banks show strong earnings growth this quarter as the lending has beaten the forecast. Moreover the strong exports growth of 25.1 percent in September mirrors the strong underlying economic momentum. The country’s foreign-exchange reserves, the world’s largest, surged by a record to $2.65 trillion at the end of September.

.


India’s wholesale price index rose to rose 8.62 percent in September from a year earlier after an 8.5 percent gain in August. Manufactured product inflation and Food price inflation rose by 0.3 percent and 1.6 percent respectively in September fromthe previous month. RBI Chief Subbarao said that inflation in India is being “quite stubborn,” a sign that controlling prices remains the central bank’s priority.

.

Reserve Bank Deputy Governor Subir Gokarn signaled the central bank may intervene in the currency markets to shield exporters from the strengthening rupee. The capital account showed a surplus of $17.5 billion in the quarter to June 30, compared with a record shortfall of $13.7 billion in its current account.

.

Foreign investors have so far poured approximately $23 billion in stocks and 10 billion indebt this year. Industrial production expanded by 5.6 percent in August after seeingan expansion of 15.2 percent in July.Going next week the main attraction for retail investors would be the primary market with Mega IPO of Coal India slated to open on 18th October. As Infosys has already rung the bell with positive surprise in terms of earning growth, the investors would now look forward to numbers of companies like L&T, HDFC, Bajaj Auto, etc that are scheduled to announce numbers next week.

.

Nifty has support between5870-5950 and Sensex between 19200-19640 levels.With expecting second round of monetary easing, investors dumped dollar and endowed other investment avenues. Commodities extended a rally to the highest intwo years and CRB closed near the mark of 300. The dollar fell to its lowest in 10 months against a basket of currencies and breached the mark of 77. Five week continuous downfall enhanced metals and agricultural commodities.

.

Gold gave heroic performance and made another life time high. It rose more than 25% in 2010.Silver is also trading near 30 year high. However, being prudent investors, one should book profit in gold and silver, considering safe trading. Base metals are expected to trade in a range. Crude oil should trade in range $80-85 in short run on mixed fundamental. OPEC has decided to keep the production quota unchanged in last meeting. Agro commodities should trade with high volatility ahead of expiry of October contract.

.

OUR Websites:  http://www.smcindiaonline.com,http://www.smccapitals.com,
http://www.smctradeonline.comhttp://www.smcwealth.com

.

Share/Bookmark


YUAN …. “KNEE-JERK REACTION”

The Chinese New Year has only just started, and already trade tensions are ratcheting up. The strength of China’s Yuan gave the world a confidence to end the peg & acted as a cushion for reviving from the fears of the global financial crisis, especially with European debt worries in the background.

.

China’s yuan soared at 6.7980, its highest level against the US dollar since its July 2005 revaluation after the central bank signaled it would allow the yuan to continue its rise.

.

REVALUATION OR REVOLUTION???

.

The yuan policy change signaled that the Chinese economy “the world’s third-biggest economy” is on a more solid footing. China has been under intense global pressure, especially from the US, to introduce more flexibility between the yuan and the dollar to encourage the cash-rich Chinese to buy more from the heavily indebted West.

.

Needless to say, a stronger yuan would allow China to lower the cost of its imports, particularly commodities.

.

Even a small rise in the yuan could shave billions off the cost while raising the volume of China’s commodity purchases. China’s economy is still in a cycle towards overheating.

.

China’s inflation accelerated in May to 3.1%, the quickest pace in 19 months, highlighting overheating risks in the fastest-growing major economy. Inflationary pressures may convince China to allow its currency to appreciate. A stronger yuan is in China’s interest to satisfy its appetite for resources.

.

Yuan appreciation should benefit China’s importers of bulk commodities like soybeans, cotton, copper and various mining products including iron ore and other metal ores as these commodities, priced in the dollar, will be cheaper. The appreciation will support commodities prices in dollar terms in global markets as China will be able to accept higher prices in the dollar terms.

.

Following is a list of some likely winners and losers from any yuan appreciation.

.

WINNERS

.

·Foreign resource companies – On hopes China’s move would increase its resource imports.

.

·Foreign heavy machinery makers – The U.S. sells billions of dollars worth of machinery and products to China each year.

.

·Foreign automakers – Foreign automakers that sell cars in the world’s largest vehicle market, should also gain.

.

·U.S. companies such as General Electric Co and Procter & Gamble Co are likely to make currency exchange gains when their China profits are converted into U.S.dollars.

.

·Chinese airlines – China’s three top carriers, Air China China Eastern Airlines and China Southern which borrow in foreign currencies to pay for aircraft, but generate reveyuan, could benefit the most. Airlines also use dollars to buy fuel.

.

·Foreign luxury firms – A firmer yuan would likely boost other Asian currencies as a strong yuan is seen by investors as a pledge of confidence for Asia’s growth. That should help luxury goods makers, whose imported products will be cheaper across the region, just as more Asians benefit from increased wealth.

.

LOSERS

.

·Foreign retailers- Companies signed earlier memorandum of understanding for projects to build, would have to spend more in U.S. dollars to fund investments.

.

·Chinese commodity firms – Companies with dollar-linked prices for their output, but their costs are in yuan, would find their revenues falling while their costs remain steady, if yuan strengthens.

.

In a nut shell, China is not shying away from commodity consumption any time soon.They still have roads to pave, factories to build, and cities to expand. China is thinking ahead in terms of commodity demand. The shift toward a stronger exchange rate may give more purchasing power to its people. Chinese consumers might buy more while their counterparts in the U.S. may have to pay more & cut back on their spending as the cost of goods imported into America rises. This move is a net plus for the world economy.

.

OUR Websites:  http://www.smcindiaonline.com,http://www.smccapitals.com,http://www.smctradeonline.com
,http://www.smcwealth.com

HOW IMPORTANT IS INTEREST RATE?

Essentially, interest is nothing more than the cost someone pays for the use of someone else’s money. In India, an individual willing to purchase a home uses bank’s money (through a mortgage) and in return pays interest to the bank for the privilege or the credit card user borrows money for the short term in order to buy something right away. But the very question that comes to everyone’s mind is how to determine where the rates are heading & what impact will it have?

.

So in order to find where the interest rates are heading all one needs to do is to look at the deposits & loans advances of the banks. If banks credit growth is more than its deposits then banks may raise the deposit rates or may increase the lending rates in order to match the asset & liability mismatch. When the Central Bank (RBI) feels that the credit growth has started picking up & is higher than its target levels, RBI tinkers with its policy rates gives signals to the commercial banks to review the interest rates be it on the deposit front or on the lending front.

.

Effects of the rising interest rates On individuals

.

.

The first indirect effect of an increased rate is that banks increase the rates that they charge their customers to borrow money. Individuals are affected through increases to credit card and mortgage interest rates, especially if they carry a floating interest rate. This has the effect of decreasing the amount of money consumers can spend. After all, people still have to pay their EMI’s, and when these installments become more expensive, households are left with less disposable income.

.

On the Corporates financials

.

Corporates too borrow money from banks to run and expand their operations. When the banks make borrowing more expensive, corporates may  not borrow at all or may not borrow at the same pace that they were doing when the rates were lower. Less business spending can slow down the growth of a company, resulting in decreases in profit.

.

Even businesses are also indirectly affected as a result of the actions of the individual consumers as individuals are left with less disposable income which affects the company’s top & bottom lines (that is, revenue and profits). Apart from having an indirect affect businesses are affected in a more direct way as well.

.

On GDP Growth

.

The government essentially has two weapons in its arsenal to help guide the economy towards a path of stable growth without excessive inflation; monetary policy and fiscal policy. Fiscal policy comes from the government in the form of taxation and federal budgeting policies. While fiscal policy can be very effective in specific cases to spur growth in the economy, most market watchers look to monetary policy to do most of the heavy lifting in keeping the economy in a stable growth pattern. Monetary policy is defined as any action to limit or increase the amount of money that is circulating in the economy. That means the central bank (RBI) can make money easier or harder to come by, thereby encouraging spending to spur the economy and constricting access to capital when growth rates seem to be approaching unsustainable levels.

.

Stock Price Effects

.

Clearly, changes in the rates affect the behavior of consumers and business; hence the stock market is also affected. Remember that one method of valuing a company is to take the sum of all the expected future cash flows from that company discounted back to the present. To arrive at a stock’s price, take the sum of the future discounted cash flow and divide it by the number of shares available. This price fluctuates as a result of the different expectations that people have about the company at different times and are willing to buy or sell shares at different prices. If the company is seen as cutting back on its growth spending or is making less profit – either through higher debt expenses or less revenue from consumers then, the estimated amount of future cash flows will drop. All else being equal, this will lower the price of the company’s stock.

.

Investment Effects

.

With a lowered expectation in the growth and future cash flows of the company, investors will not get as much growth from stock price appreciation, making stock ownership less desirable. Furthermore, investing in stocks can be viewed as too risky as compared to other investments. When the central bank raises its rate, newly offered government securities, such T- bills and bonds, are often viewed as the safest investments and will usually experience a corresponding increase in interest rates. In other words, the “risk-free” rate of return goes up, making these investments more desirable.

.

.

Conclusion

.

We should keep in mind, however, that these factors and results are all interrelated. What we described above are very broad interactions, which can play out in innumerable ways. Interest rates are not the only determinant of stock prices and there are many considerations that go into stock prices and the general trend of the market – an increased interest rate is only one of them. Therefore, one can never say with confidence that an interest rate hike will have an overall negative effect on stock prices.

.

Stay Tuned for More Updates :)

Weekly Update of The Market (1st – 5th February) Part 1

Hello Friends, here, we bring you the weekly overview of the Indian as well as of the Global economy and along with the latest global business and industry updates.

.

Weekly Update of The Market (1st - 5th February) Part 1

.

A bout of volatility was witnessed in the domestic market throughout the week due to

.

1.  F&O expiry,

2.  unfavorable global cues because of gloomy earnings forecast,

3.  anxiety about China‘s monetary tightening,

4.  the deteriorating finances of countries ranging from Greece to Japan and

5.  India’s central bank‘s decision to raise the CRR to 5.75.

.

🙂

.

But on later days of the week, US Federal Reserve’s decision to keep interest rates unchanged boosted sentiments of global markets.

.

Closer home, investors also heaved a sigh of relief as the central bank kept key interest rates unchanged at the quarterly policy review indicating that it would maintain a balance between price stability and growth and raised its GDP growth projection for the current fiscal to 7.5 %.

.

The RBI at its quarterly monetary policy review raised CRR by 75 basis points to suck out excess liquidity from the banking system to the tune of Rs 36000 crore.

.

On the flip side, the challenges that RBI foresees for the economy is fiscal consolidation.

.

The central bank lifted its wholesale price index inflation forecast for the end of the fiscal year in March 2010 to 8.5% from its earlier forecast of 6.5%.

.

RBI also said it expected inflation to moderate starting in July 2010, assuming a normal monsoon and global oil prices holding at current levels.

.

Moreover, US Federal Reserve too maintained interest rates at near zero levels and vowed to do so for an extended period of time.

.

Additionally, it also signaled its intention of unwinding the massive monetary stimulus that it had undertaken during the peak of the crisis.

.

🙂

.

Stay Tuned for More on weekly updates.

.

Note : For More Latest Industry, Stock Market and Economy News and Updates, please click here

RBI’s Move to Modify the ECB Guidelines

India Inc cautiously welcomed the RBI”s move to modify the ECB guidelines and said this also indicates a gradual withdrawal of stimulus measures announced to help the industry tide over the global crisis.

However, Ficci said that the RBI”s step may make availability of funds through ECB route more expensive while the ECB route is frequently used by SMEs for raising funds, which are even otherwise available at a high price from the domestic banking system.

Meanwhile, it also said that the relaxation of certain ECB norms given by the RBI during the liquidity crisis period to India Inc have been gradually withdrawn that is an indicator of a gradual withdrawal of the stimulus package.

Further, CII said that RBI”s steps are an indication of slowly unwinding of the liquidity enhancing measures while these measures should not be seen as a precursor to monetary tightening through a rate hike.

On the other hand, the chamber welcomed the central bank”s decision to allow NBFCs exclusively involved in financing infrastructure projects to avail of ECBs.

RBI Emphasizes on Managing the Economic Recovery, For Now :)

RBI emphasizes more on Managing economic Recovery

 

The Reserve Bank of India, country”s Central bank, has said that managing economic recovery is now its focus area and the first phase of monetary tightening will arrest inflation without hurting growth.

RBI Executive Director Deepak Mohanty was found quoting  that at present, the focus around the world and also in India has shifted from managing the crisis to managing the recovery.

🙂

He said that withdrawing soft monetary policy, which was initiated to weather the financial crisis is the key challenge.

“The key challenge relates to the exit strategy that needs to be designed, considering that the recovery is as yet fragile but there is an uptick in inflation, though largely from the supply side, which could engender inflationary expectations,” he said.

🙂

Besides this, Mohanty said that the first phase of exit has been initiated by RBI in its monetary policy review in October 2009.

That was done mainly by withdrawal of unconventional measures taken during the crisis.

RBI, in its monetary review in October has raised the requirement for banks to hold portion of the deposits in cash, gold and government securities to 25 per cent.

Moreover, it had also done away with special liquidity provision for banks to provide money to mutual funds and others.

🙂

RBI to Assess Affairs of Foreign Banks Operating in India

RBI to Assess Affairs of Foreign Banks Operating in India

RBI to Assess Affairs of Foreign Banks Operating in India

The Reserve Bank of India (RBI) decided to run a detailed assessment of the risk-management capabilities and evaluate the transparency in financial affairs of all foreign banks operating in India with an aim to ensure that they do not pose any systemic risk to the banking sector.

🙂

However, until this process is finished, foreign banks are doubtful to be permitted to open more branches in India while India has committed to allowing 12 new branches to foreign banks in a year, but has been more liberal.


Moreover, this has resulted in a high presence of foreign banks in India as their WTO commitment allows them to deny licenses to foreign banks once their share in the total assets of the banking system exceeds 15%.


Additionally, as it comes in the aftermath of the financial crisis, the audit reflects concerns over an unduly large presence of foreign banks creating risks for Indian financial markets.


Meanwhile, the finance ministry and the central bank had always supported allowing foreign banks to operate in India as they thought that increased presence of foreign banks boosts the efficiency of the domestic banking sector.