MACRO-ECONOMIC CONCERNS

Should Banking Sector be opened up?Eligible conditions:-Diversified OwnershipSound Credentials & IntegritySuccessful track record of 10 years.Initial minimum capital of Rs. 500 Cr.Restrict foreign share holding to 49 %Groups with interests in real estate & capital markets not to be entertained.At least 25 % branches to be rural.Parameters for licencesSound financial position.Financial track record of promoters & the group companies.Deep understanding of financial services.Experience in understanding financial services.Limited exposure to sensitive sectors.Contenders in the frayAditya Birla Group (Aditya Birla Financial services)Tatas (Tata Capital)The Ambanis (Reliance capital)Bajaj (Bajaj Finserve)Mahindras (M & M Financials)L & TSKS Micro FinanceLICInfra Structure Development Corpn.Benefits New licencesBranches in unbanked rural centres.New processes & new technologiesImprove efficiencyEnlarge capital base to meet the credit needs of the economyGenerate huge employment opportunities.Increasing financial inclusion...contdDriving competitionUnbanked rural centres to receive extra attention.35 % of Indian population has bank accounts This will increase.6,50,000 villages does not have a single bank branch which will now get a new bank/branch.Elimination of money lenders.J P Morgan Brief factsJP Morgan is an American Multinational Banking and Services Holding co.Formed in 2000 when Chase Manhattan Corporation merged with JP Morgan Co.Chase brand is used for credit card services,retail banking activities and commercial banking....contdLargest bank in USA in terms of assets in 2012.Ranked second largest (after HSBC) in 2012.As per Forbes magazine, worlds second largest public company on composite ranking.Largest hedge funds in USA.One of the big 4 Banks in US. (BOA, Citi, Wells Fargo)....contd.Corporate Head quarters at Manhattan, New York.Retail & Commercial Bank Head quarters at Chicago.Total Assets (Dec 12) - USD 1.9 TNNet Profit (Dec 12) USD 13.97 BN Exchange Rate USD / INR Influencing factorsMarket sentimentsDuring turbulent markets, investors usually prefer to park their money in safe havens such as US treasuries, Swiss franc, gold and so on to avoid losses to their portfolios. This flight to safety would lead to foreign investors redeeming their investments from India. This could increase the demand for dollar vis--vis Indian rupees.Exchange Rate USD / INR Influencing factorsSpeculationThere are derivative instruments and over-the-counter currency instruments through which one can speculate/ hedge the underlying currency rates. When speculators sense improvements/ deterioration of the sentiments of the markets, they too want to benefit from such rising/ falling dollar. They then start buying/selling dollar which would further change the demand/ supply of the dollar.Exchange Rate USD / INR Influencing factorsRBI InterventionWhen there is too much volatility in the rupee-dollar rates, the RBI prevents the rates from going out of control to protect the domestic economy. The RBI does this by buying dollars when rupee appreciates too much and by selling dollars when the rupee depreciates significantly.Exchange Rate USD / INR Influencing factorsImports and ExportsEver give thought as to why our government is trying to incentivise exports and reduce imports? There are a lot of schemes and incentives for exporters while importers are burdened with many conditions and taxes. This is to protect our economy from high rupee depreciation. Importing foreign goods requires us to make payment in dollars thus strengthening the dollars demand. Exports do the exact reverse.Exchange Rate USD / INR Influencing factorsPublic Debt / Fiscal policyWhenever our Government fails to match expenses with equivalent revenue, there is a shortage of funds. To finance this, the Government at times opts to borrow money from institutions such as the World Bank and the IMF. This debt, accrued interests, and the payments made, also lead to currency fluctuations.Exchange Rate USD / INR Influencing factorsInterest RatesThe prevailing interest rates on the government bonds attract foreign capital to India. If the rates are high enough to cover the foreign market risk and if the foreign investor is comfortable with the fundamentals or credit ratings, money would start pouring into India and thus provide us with a supply of dollars.COMPARATIVE SCENARIOYEARGDP GROWTHWPI INFLATIONFOREX RESERVES IN USD BN.USD / INREXCH. RATE2013 - SEP5.35.9279.2864.582012-135.46.0292.6454.282011-126.27.7294.3947.922010-119.39.7304.8145.572009-108.610.4279.0547.412008-096.71.6251.9845.912007-089.37.7309.7240.24RECENT USD / INR MOVEMENTSDATEEXCHANGE RATE USD/INR13.11.1362.5822.09.1367.2316.08.1361.6507.08.1361.2008.07.1360.7502.07.1359.5426.06.1360.7025.06.1359.6603.06.1356.6603.05.1353.8001.04.1354.28GOLD.. ALL THAT GLITTERS( PRICE MOVEMENTS IN USD PER TROY OUNCE )FACTORS AFFECTING GOLD PRICESDemand and supplyGold prices are essentially determined by the demand and supply of this precious metal.The price of gold is on the rise continually due to its high demand and finite supply. Apart from an investment instrument, it is also used widely for industrial purposes due to its high resistance to corrosion and thermal conductivity. In light of the supply, persistent increase in demand causes the price to go up and vice versa.FACTORS AFFECTING GOLD PRICESDollar strengthAnother factor that influences the gold prices the world over is the strength of the US dollar. If the dollar weakens, investors around the world begin to sell the currency and buy gold for security. This causes a jump in demand and consequently, a rise in gold prices. On the other hand, when the US dollar strengthens, it causes a fall in demand for GOLD.

FACTORS AFFECTING GOLD PRICESCentral banks and mining companiesCentral banks and mining companies usually hold large reserves of gold. They buy and sell this precious metal according to the movements of their currency and the overall economic scenario. Drastic changes in the price of gold are mainly due to frequent transactions by these entities.FACTORS AFFECTING GOLD PRICESEconomyOne of the most crucial factors influencing the gold prices is the state of the global economy. When the economic situation is weak with most investments providing low returns, investors are likely to put their money in gold, as it is known to perform well during crisis situations.Several other factors like trading and speculation, national emergency situations, increase in per capita income, government policies, etc. too play an important role in the process.

Gold ...latest developmentsRBI tightening the norms for import of gold : Gold on consignment basis banned.Import of gold coins banned.Imports permitted only on condition that 20 % is exported.Gold can be sold by Banks/nominated agencies only to Bullion Dealers & jewellers who are into manufacturing jewellery.

Gold..latest developments.Current prices 1 Oz = USD 1290.641 Oz = USD 1350 is the resistence levelRupee depreciation has posed a problem for discouraging imports.Globally, if treasury yields start moving up, gold prices could come down.Headed to 1 Oz = USD 2000 (in the next 2 years)Inflation ... brieflyInflation is a rise in general level of prices of goods and services in an economy over a period of time.In other words, the rate at which general level of prices for goods and services is rising and subsequently, purchasing power is falling.Inflation ...contdInflation could accelerate due to currency depreciation :- rupee 67.90 - 68.80 during Aug-Sept down by 16 % in a year and by 11 % in 4 months.WPI climbed to 5.79 % due to higher food prices and costlier imports.CPI climbed to 9.64 % due to high food prices.Current a/c gap widened to a record high of 4.8 % of the GDP.Inflation .....contdRBI liquidity measures may help moderate inflation :Increase in money market interest rates in an effort to give investors an incentives to keep their money in India.FDI inflows might result in accretion to exchange reserves which will ease the CAD portfolio.Exchange Rates and Oil Prices

US dollar weakness in recent years is frequently cited as one reason for high oil prices. It is very common to see the financial press suggesting that a weak dollar has pushed oil prices higher. Empirically, there is clearly an inverse correlation between oil prices and exchange rates that is, other things being equal, oil prices rise if the dollar falls. An assessment of the dynamic conditional correlation (DCC) and of the one-year rolling average correlation between the daily change in the oil price and the daily change in the nominal effective exchange rate shows that this relationship has been relatively strong in recent years, although the negative correlation has been declining in recent months. What is less clear, though, is the direction of causality. Several econometric techniques suggest that causality may run from the oil price to the exchange rate, rather than the opposite.Exchange Rates and Oil Prices

This finding supports the traditional terms of trade argument on the relationship between exchange rates and oil prices. Terms of trade effects suggest that when the price of an import rises, if the demand for that import is very inelastic, (i.e. quantities demanded hardly fall at all when the price is increased, as is the case for oil) this produces a deterioration in the trade balance, which will decrease the value of the local currency.Exchange Rates and Oil Prices

However, the relationship between the price of oil and the exchange rate might be much more complex than the initial terms of trade impacts would suggest. Reverse causation, i.e. exchange rates influencing oil prices, is possible. Several transmission mechanisms could underpin such reverse causation. First, since oil is denominated in US dollars, a weaker dollar might lead to an increase in the demand for oil in non-dollar economies, which would cause the oil price to rise. Second, if oil producing countries have a target export revenue in their currencies to finance their government budget deficit, then with a weaker dollar they might reduce the supply of oil in order to drive up the price to achieve their targeted export revenue. Third, investors would likely increase their demand for commodities as a hedge against inflation when the dollar falls. This might put upward pressure on the price of oil. However, there is limited, if any, empirical evidence supporting these effects.Exchange Rates and Oil Prices

Apart from reverse causation, it is further argued that both the exchange rate and oil prices might be reacting to some other common factor. One such factor might be monetary policy. Since oil is a storable commodity, it reacts not only to current but also expected future monetary policy. Likewise, the exchange rate is also determined by current and expected monetary policy. Therefore, we should expect to see both oil prices and exchange rates as jointly determined.Exchange Rates and Oil Prices

The interactions between the exchange rate and oil prices are more complex than traditional economic theory predicts. However, those believing in strong reverse causation from exchange rates to oil prices are effectively acknowledging the likelihood of a self-perpetuating cycle in which a weaker dollar drives crude higher which in turn sends the dollar even lower. The lack of clear evidence for such a spiral, so far, along with our own econometric findings, suggests that the more likely causation runs from oil prices to the exchange rate instead.The future of the Euro A Reality checkBOND markets have scorned the 85 billion($113 billion) bail-out offered to Ireland.Yields have risen not just forIreland but for Portugal, Spain, Italy and evenBelgium. The euro has fallenagain. As onebotched rescue follows another, solemn vowsfrom European Union leaders that a break-up ofthe single currency is unthinkable and impossiblehave lost their power to convince. And that isleading many to question whether the euro cansurvive.The future of the Euro A Reality checkThe case against it is that European citizens can no longer live under its yoke. In Europe'speriphery some are yearning to be spared the years of grinding austerity that may be needed for wages and prices to become competitive. In the German-dominated core they are fed up with paying for other countries' fecklessness and they fear that, as creditors, they will suffer if the European Central Bank (ECB) inflates away the laggards' debts. Deep down lurks the sullen suspicion that this is a drama that the euro zone may be condemned to relive time and again. So why not get out now?

The future of the Euro A Reality checkFinancial history is littered with events that turned from the unthinkable to the inevitable with breathtaking speed: - Britain left the gold standard in 1931, - Argentina abandoned its dollar peg in January 2002. But a collapse of the euro would bring with it unprecedented technical, economic and political costsThe future of the Euro A Reality checkA break-up might happen in one of two ways. One or more weak members (Greece, Ireland, Portugal, perhaps Spain) might leave, presumably to devalue their new currency. Or a fed-up Germany, possibly joined by the Netherlands and Austria, could decide to junk the euro and restore the D-mark, which would then appreciate.

The future of the Euro A Reality checkIn either case, the costs would be enormous. For a start, the technical difficulties of reintroducing a national currency, reprogramming computers and vending machines, minting coins and printing notes are huge (three years' preparation was needed for the euro). Any hint that a weak country was about to leave would lead to runs on deposits, further weakening troubled banks. That would result in capital controls and perhaps limits on bank withdrawals, which in turn would strangle commerce. Leavers would be cut off from foreign finance, perhaps for years, further starving their economies of funds.The future of the Euro A Reality checkIf the economics of pulling apart the euro look dubious, the politics risks detonating a chain reaction that would threaten the fabric of the single market and the EU itself. The EU and the euro have been Germany's post-war anchors. If it abandoned the currency, at huge cost, and left the rest of the euro zone to fend for itself, its commitment to the EU would be in serious doubt.If a weaker country left, risking not just European banks but also the currency, it would become a pariah exporting its pain to its neighbours.The future of the Euro A Reality checkEurope's leaders have been slow and timid in response to market pressures. Greece and now Ireland have forced them, reluctantly, into bail-outs. Only belatedly have they recognised that some countries are not just in need of bridging loans to tide them over, but may be unable to repay their debts. That means that some pain will have to be inflicted on bondholders.

The future of the Euro A Reality checkThe euro-zone governments have agreed that sovereign-debt issues after 2013 should contain collective-action clauses, which stop hold-out investors blocking deals.The crisis should also have brought home to weak deficit countries the high cost of their failure to make the reforms to labour and product markets, and to welfare systems, necessary to restore their lost competitiveness.Reform would be easier if surplus countries (ie, Germany) did more to boost their own domestic demand.The future of the Euro A Reality checkIf the euro is to survive, creditor countries need to give more aid to deficit countries. They could do this directly, or the ECB could provide liquidity to banks or buy up government bonds before they fall too far. The ECB has indicated it may start doing the latter again. Germany hates the idea of more aid to debtor countries - hence its slowness to accept bail-outs and its determination to penalise bondholders. Its unwillingness to subsidise the weak and profligate is understandable; but the alternative is worse.Breaking up the euro is not unthinkable, just very costly. Because they refuse to face up to thepossibility that it might happen, Europe's leaders are failing to take the measures necessary to avert it.Current Account Deficit in India The current account deficit of the country is "peaking but is likely to hover around 4 % level until 2015, says a Bank of America Merrill Lynch report. "India's current account deficit is likely peaking at elevated levels. We expect it to abate from 4.8 % of GDP in FY2013 to 4.3 % in FY2014 and 3.7 per cent in FY2015,Current Account Deficit in IndiaCAD, which is the difference between the outflow and inflow of foreign currency, is likely to remain above the "sustainable" level of 2.4 percent of GDP until 2015.According to the reports the factors that are largely responsible for the elevated levels of CAD include low growth, which hurts exports, and high G-3 liquidity, which pumps up the oil import bill, that will likely last until 2015.Moreover, a high current account deficit is expected to limit the accumulation of forex reserves in the normal course

Current Account Deficit in IndiaDuring 2012-13 CAD hit a record high of 4.7 percent of GDP or USD 88 billion.The good news: the CAD is likely peaking. The bad news: it will persist at around 4 percent of GDP until 2015, above our sustainable 2.4 percent estimate. This will limit FX accumulation.Twin- deficits and their impactThe recent global financial crisis has led to graver imbalances in both the external and the internal deficits of several countries including India. It is necessary to understand the causal linkages between the government budget deficit and the current account deficit for India, within a multi-dimensional system with the exchange and interest rates acting as the interlinking variables. The causal chain of such linkages is important as different results lead to very different policy recommendations regarding the target variable for controlling the twin deficits.Twin- deficits and their impactThe conventional hypothesis of causation running from the fiscal deficit to interest rates to exchange rates and then to the external deficit is only partially borne out by data.In fact, the reverse causation is also seen to be very strong.Bringing in oil prices helps complete the chain of reverse causation in the twin deficit hypothesis for India, as the direction of causation is unambiguously seen to run from oil prices to the external deficit to the fiscal deficit.Twin- deficits and their impactRecent discussions on international macroeconomic policy have centred on the large current account imbalances accompanied by fiscal deficits experienced by a number of countries. The implications of fiscal adjustments for current account developments generated further interest in the context of restoring strong, sustainable and balanced growth in the global economy as the effects of the 200708 crisis gradually abated. Indias twin deficits too have again become a matter of concern in the aftermath of the recent financial crisis which disrupted global trade and financial flows as also Indias progress towards fiscal consolidation.Twin- deficits and their impactThe fiscal deficit had been trending higher since the mid-1990s till 200405, when the government started to significantly reduce its budget deficit by implementing the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. The current account deficit, on the other hand, had been trending lower (the current account balance improving) since the mid-1990s till 200405, when it was again driven up by escalating global oil prices, as oil prices moved from US$29 perbarrel to US$124 per barrel between Q2 of 200304 and Q2 of 200708.

Twin- deficits and their impactThough both the deficits are seen to have their own short-run spikes, they have been on a particularly high trajectory during the past few years after the advent of the global crisis. The crisis not only led to a deterioration in the current account balance as Indias exports declined more than imports, it adversely affected the fiscal deficit as well because of the necessity to provide effective fiscal stimulus during the peak crisis period.

Twin- deficits and their impactHigh oil prices can adversely affect external accounts directly while indirectly affecting all economic variables such as growth and employment and the fiscal positions of governments. Further, these prices are known to have an asymmetric effect.Increases in oil prices are far more important for GDP growth than decreases in oil price. By not fully passing on the world oil price rise to domestic consumers, governments risk incurring large fiscal costs to compensate oil producing or refining companies as selling below costs increases the fiscal burden further.Twin- deficits and their impactIndias growing dependence on oil imports (accounting for almost one-third of the countrys total imports) makes the import bill and trade balance sensitive to movements in world oil pricesThe fiscal deficit is not a fully controlled policy (exogenous) variable, and for India, and policymakers cannot ignore the budgetary implications of exogenous changes in the current account, much of which is confirmed to operate through global oil prices. Because of the policies taken over time we find that in the Indian context it is the external deficit that plays a definite role in aggravating the governments budget deficit. This calls for sustainable measures to curb the external deficit; particularly given further expected weakening of global income and demand.