Wednesday, September 4, 2013

I love the Guv and here's what he proposed...

"Any entrant to the central bank governorship probably starts at the height of their popularity. Some of the actions I take will not be popular. The Governorship of the Central Bank is not meant to win one votes or Facebook “likes”. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism. Rudyard Kipling put it better when he mused about the requirements of an ideal central banker in his poem “If” - If you can trust yourself when all men doubt you, But make allowance for their doubting too"

Those were the closing lines of statement of Dr. Raghuram Rajan on taking over office today.  He looks promising, bold, raring to go and take the country along.  Excerpts from his speech:

  • two additional traditions of RBI will be transparency and predictability, through regular communication to public on the broad direction and how RBI's policy actions fit into that direction / framework
  • RBI's mandate from RBI Act to be followed in spirit and a precursor to what is to be expected on Sep 20, his first monetary policy presentation - “to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage;”
  • a) well run scheduled commercial banks to get complete free hand on branch banking, b) decision on new bank licences to be announced around Jan 2014, c) qualifying foreign banks in India to be encouraged to move to becoming wholly owned subsidiary structure where they can enjoy near national treatment, d) proposal to reduce the requirement for banks to invest in government securities in a calibrated way, to what is strictly needed from a prudential perspective and e) priority sector lending mandate to adjust to the needs of the economy. Dr Nachiket Mor to head a committee that will assess every aspect of RBI's approach to financial inclusion and to suggest the way forward.    
  • In order to create depth, some amount of position taking or mandating trading is necessary.  If domestically we ban investment which is an act of faith and risk taking, investors would stop providing depth and profits to our economy and take it to foreign shores. It is important to liberalise our markets and as a symbolic down payment the following measures are being announced: (a) exporters will be allowed to rebook cancelled forward contracts to the extent of 50% (up from existing 25%) and importers will now be allowed to the extent of 25% and (b) cash settled 10 year interest rate futures contract to be introduced
  • Rupee internationalization and capital inflows (whoa, we haven't heard the term capital account convertibility in a while!). International trade settlements in rupee, opening up financial markets to invest rupee back in - will be facilitated in good time.
  • a special concessional window to banks to swap the fresh FCNR (B) dollar funds, mobilised for a minimum tenor of three years and over, at a fixed rate of 3.5 per cent per annum for the tenor of the deposit.
  • the current overseas borrowing limit of 50 per cent of the unimpaired Tier I capital will be raised to 100 per cent and that the borrowings mobilised under this provision can be swapped with Reserve Bank of India at the option of the bank at a concessional rate of 100 basis points below the ongoing swap rate prevailing in the market. 
  • Loan recovery by banks will be focused on efficiency and fairness – preserving the value of underlying valuable assets and jobs where possible.  However promoters will not have the luxury or a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor will they have the right to use the banking system to recapitalize their failed ventures. Most immediately, RBI will accelerate the working of Debt Recovery Tribunals and Asset Reconstruction Companies.
  • emphasis on the use of the unique ID, Aadhaar for building credit histories, Government to issue inflation indexed Savings Certificates (linked to CPI) for retail investors, Bill payment system (giro based) to bring to reality anywhere anytime payments, mobile based payments, payments using Aadhaar based identification are all on the timetable of RBI

Impressive for the first day, isn't it? I wanted to write a love song for you Guv, but thought your words would be better music to my readers. Welcome and be the change that we so desperately need!

Wednesday, April 3, 2013

all that glitters...

Glamorous gold never loses its sheen.  Be it in the form of an ornament or investment, uptrend or down - gold never goes out of fashion. Wars have been fought for it, love is still expressed with it and the fact that it is precious and finite, makes it alluring.  

Almost 60% of gold goes into jewellery. India and China attach cultural importance to gold and holds major share of world's jewellery. In 2012, consumer demand in India for gold fell 12% in volume terms (in terms of weight); given the sharp increase in gold price and import duty structure and decline in rupee value, Indian consumers ended up spending 6% more money (in value terms) buying gold last year.  

Internationally gold price has been declining for last six months after a sharp rise in August / September last year.  Encouraging economic and employment data from the US has been forcing investors to review their asset allocation and reduce gold holdings albeit slightly.  Hedge funds look poised to further liquidate gold positions, however a lot depends on Fed's monetary stance; if it continues to pump in liquidity, some of it would find it's way to gold (buying).

So will gold go up or down?  Difficult to say.  What looks likely is, increased gold volatility.

World Gold Council for India expects gold consumption to grow this financial year.  This in itself is good news for domestic jewellery industry.  However increased volatility in gold price combined with foreign exchange fluctuation and ever increasing import duty is likely to make the job of protecting profitability even more difficult.  

Retail jewellers buy gold in bulk and sell (to retail customers) on a daily basis.  This creates maturity mismatch. In a volatile market, impact of maturity mismatch (or any risk) could be more pronounced.  It is important to align timing or quantity (or both) of sales and purchase of gold.  One could use forwards, futures or a combination of both to mitigate risk.  Key is to study purchase and sales pattern and arrive at a hedging strategy that (1) minimises risk (2) is operationally less cumbersome.   

Happy to help!

Tuesday, January 1, 2013

Prediction and performance - 2012

Early last year we played a prediction game on this space.  It's the time of the year to do reality check:
  • Indian equities have done well and it sure feels good to have gotten that one right.  However RBI has not done any serious monetary policy easing.  Our prediction seems to have been a year too early (hopefully not more) on that!
  • Rupee disappointed us.  All that tightening by RBI (in FX markets) only caused Rupee to rebel more and go from bad to worse? However volatility in rupee was as expected and it has recovered well from the historic low it reached in 2012
  • Euro Zone stayed in tact indeed; but will it in 2013?  
  • US is showing stability and growth as expected.  Unemployment has been coming down gradually and fiscal cliff is overcome, well almost
  • China's desire to replace dollar with it's own yuan, remained just a desire.  We haven't heard more on that yet
  • Gold did well but didn't match our expectation
  • Libor rigging completely missed our radar and that was quite a miss!

(Check;  watch this space for predictions for 2013)

Following table is a quick comparison of prices of select financial assets at the start and end of 2012:

28 Dec 2011
DXY (Dollar index)
NY Gold
10 Y IND T
1 yr OIS (In)
5 yr OIS (In)

Wishing you and your loved ones a wonderful year ahead! May this year be filled with opportunities, success and celebrations!!