RBI's move post Union Budget. What Next? will it support the Govt to meet its Fiscal need.

RBI's move post Union Budget. What Next? will it support the Govt to meet its Fiscal need.

The RBI has been buying dollars by the truckload. Forex reserves have been going up substantially. Since Feb 2015 it has been consistently above 325 Billion dollars and has even touched record high of 355 Billion as well; this is the highest ever Forex reserve India has ever held.

The government has been holding a high cash balance with RBI, which is seen as one of key reasons for liquidity tightness in the system. It was as high as Rs 1.40 lakh crore a few weeks ago and is still hovering at around Rs 1 lakh crore. The expected excess supply is leading to yield spikes, which can be offset by buybacks.

So far this financial year, RBI has conducted open market operations (purchase) to the tune of Rs 10,000 crore net of OMO sales versus Rs 35,380 crore bought back by the government directly. 

Infect, corporate's like to raise funds via sale of bonds, which are priced in proportion to sovereign yields. While corporate borrowing costs are going up inch by inch, the government is also paying higher costs at the expense of tax payers money in a supposedly low interest rate regime set by RBI governor Raghuram Rajan. 

Thus the government's buybacks will result in those securities ceasing to exist on the issuer's books, creating a replacement demand for bonds, besides softening yield prices, especially for long-maturity bonds. In simplicity, the move is likely to help bring down borrowing costs for corporate as bond yields are hovering at high levels seen at the beginning of last year, despite the central bank slashing borrowing costs by 125 basis points cumulatively in the past 14 months. 

Besides G-Secs, UDAY bonds (a bailout scheme for state power distribution companies) and state government bonds together are expected to add around Rs 3.20 lakh crore collectively till March-end. Next year it could be Rs 3.30 lakh crore. 

Bottom line is although this can generate replacement demand for bonds, the money will again go back to where it was (once the government starts borrowing in the new fiscal year).

Hence its imperative for the Government to stick to 3.9% or lower fiscal deficit projections. Thus can we expect a interest rate cut from RBI's governor Raghuram Rajan as early as March 2016.

Stay Tuned...

Is Helicopter Money Drop the next armor for Economists to defend the economy

What Is Helicopter Money Drop (HMD) Scenario?
A helicopter money drop is a monetary policy reform which is used by any Central Bank where by they can print money and distribute it directly to households and end user -consumers. The main purpose or aim of helicopter money is to boost nominal GDP, overcome continuous deflation and significantly reduce unemployment in the system.

Under any normal circumstances printing money will be inflationary, hence most of the Economists in past have usually suggest that helicopter money in continuous period of deflation with pre-conditions or even expiry date. For eg. you will have to spend it in coming 6 months or lose it. This expiry date will thus prevent people from just saving it.

In general, an Economist's basic purpose to use Helicopter Money Drop reforms will be keeping the following in mind:-
- To Increase short term money supply in the system.
- To target higher inflation (counter measures for Deflation).
- To boost overall aggregate demand in the economy when conventional monetary policy has failed. (e.g. in liquidity trap with zero or nominal interest rates)

Quantitative Easing (QE) generally aids money creation thus empowering the Central Bank, which in turn creates money in the system and buys government bonds. Quantitative easing is usually reversible, which means Central Bank could later sell government bonds. Therefore the main differences between the two are:
i) Helicopter money goes direct to consumers and households – rather than banks and financial institutions who sell bonds to the Central Bank.
ii) Helicopter money is non-reversible. Most of the occasions, once the money is created, it is harder for Central Bank to reverse decision.

Advantages derived using Helicopter Money Drop (HMD) reforms:
1) HMD has a greater impact on boosting direct spending and aggregate demand than quantitative easing. QE has been relatively ineffective in a balance sheet recession scenarios as the banking sector is unwilling to lend because it needs to improve its own balance sheet and increase bank reserves; On the flip side the private sector is focused on paying down debt and unwilling to borrow and spend (despite zero interest rates).
2) Can target higher inflation, which helps to avoid problems related to lingering deflation and debt deflation witnessed in the economy.
3) Better distribution. One of the biggest criticism of QE is that it has predominantly favored and benefited banks more than anyone else, and given the role of banks in the any financial crisis, this is considered unfair. The recession and fiscal austerity has hurt lower income group earners, hence the helicopter drop would help overall income redistribution.

Problems of Helicopter Money
1) Inflation could suddenly increase more than expected in short run.
2) Central Bank could loose ‘inflation credibility’ as short run in inflation could not be sustained in long run

Fiscal Policy and Helicopter Money
Helicopter money is a way to create direct spending in the economy. However, this could also be achieved through expansionary fiscal policy financed by quantitative easing. Fiscal policy enables spending on infrastructure rather than just consumer spending. The impact should be similar because expansionary fiscal policy will ensure the extra money is spent rather than languishing in banks.

Would Helicopter Money have been better than Quantitative Easing?
Given the poor performance of the UK economy since 2008, would we have been better off with helicopter money rather than quantitative easing? Quite possibly. With helicopter money, we might have seen a quicker economic recovery.

So is the Future ahead ... turning from Quantitative Easing into Helicopter Money reforms?

Lets us see which country starts with HMD reforms and thus who is likely to receive the first drop, and finally who will be the ultimate winners and losers.

Stay tuned...

Learn N Earn Team
J2k

http://in.investing.com/analysis/is-helicopter-money-drop-the-next-armor-for-economists-to-defend-economy-200118785

RBI Policy "Status Quo" but followed with "Hawkish or Dovish" comment from Superman Rajan

Most of the analyst/ Investment guru's across the world are able to gauge the future of financial market by just analysis on US FED governor Yellen's statement; especially the terms like "HAWKISH" and "DOVISH" have caused enough trigger in past and plenty of evidence of the same.

It's time, we in India also understood RBI Policy and made sure that "Status Quo" is not enough but we need to follow the comment from "Superman" Rajan to understand  whether his view/stance will be "Hawkish or Dovish" and more towards Short term or Medium term economic stability views.

Just to re-iterate this let's take few example on the RBI Policy outcome today:-

1) RBI policy no change; Superman makes a dovish statement with short term view for inflation and further rate cuts...without too much of enforcement on banks to pass on the rate cut, market will not react much and we can see a positive close for Nifty and Bank Nifty today.

2) RBI Policy no change; Superman makes a hawkish statement especially enforcing the banks to pass the rate cut and also hints on medium term economic stability on how he plans to make the banking sector more healthy in the long run and reduce the bad loans or even some kind of clean-up process (hinting on bankruptcy laws or waiting for cues on fiscal consolidation)  ... we can see the Nifty and Bank nifty correct heavily today but pull back to happen very shortly as well due to budgetary expectation .

3) RBI Policy Rate cut done; Superman enforcing banks; Bank Nifty will close on a higher positive note.

Please note the magnitude of the Hawkish and Dovish statement also depends on which other topics which will be brushed upon in the superman Rajan's speech followed by RBI policy on Repo rate and CRR. As in Past especially FY 2014-15 Rajan was known for his Hawkish action and dovish guidelines.

So lets hope you have got enough clues to decipher the RBI policy to be announced today during market hours....Enjoy Trading.

Learn N Earn Team.

Start Ups in India are flourishing

Start Ups in India are flourishing and it's just matter of time before we shall see big giants companies here in India itself.

I just stumbled upon a superb article presented in ET Bureau Jan 1, 2016, 06.58AM IST.

It speaks about "16 startup founders to watch out for in 2016", Please find below a link for that article.

India will be the next (+)ive buzz ... we just have to BELIEVE IN IT !!!

Learn N Earn Team

5 Things to Watch on the Global Economic Calendar This Week

Start of the Feb 2016 Series will be critical for the Financial Markets, we have following major global economic events in focus this week 

Central bank meetings in the U.K. and Australia will also be in focus.

1. China manufacturing PMIs

The China Federation of Logistics and Purchasing is to release data on January manufacturing sector activity at 1:00GMT on Monday (6:30am IST) followed by the Caixin manufacturing index at 1:45GMT (7:15am IST)

The official China's manufacturing purchasing managers' index is forecast to inch down 0.1 points to a three-year of 49.6 in January, while the Caixin survey is expected to dip to 48.0 from 48.2 in the preceding month.

A reading below 50.0 indicates industry contraction.

2. U.S. ISM PMI surveys

The U.S. Institute of Supply Management is to release data on January manufacturing activity at 15:00GMT on Monday (8:30pm IST). The gauge is expected to ease down 0.2 points to 48.0, which would be the lowest reading since July 2009.

Meanwhile, the ISM is to report on January service sector activity on Wednesday, amid expectations for a modest decline. Service sector activity in the U.S. grew at the slowest pace in almost two years in December.

3. Reserve Bank of Australia policy meeting

The RBA's latest interest rate decision is due on Tuesday at 3:30GMT. Most economists expect no policy change, while some believe the central bank can surprise with a 25 basis point rate cut in an effort to boost inflation and spur economic activity.

4. Bank of England "Super Thursday"

The Bank of England will release its rate decision and minutes of its Monetary Policy Committee meeting at 12:00GMT on Thursday.

Last month, the Monetary Policy Committee voted 8-1 to keep rates on hold at a record low 0.5%. Most market players expect the BOE to begin slowly raising interest rates in mid-2016.

Expectations for a rate hike by the Bank of England have been pushed back to late-2016 due to a recent spate of weaker than expected data and amid uncertainty over a referendum on whether or not Britain should stay in the European Union.

5. U.S. nonfarm payrolls report

The U.S. Labor Department will release its highly-anticipated report on January nonfarm payrolls at 13:30GMT on Friday.

The consensus forecast is that the data will show jobs growth of 190,000 last month, following an increase of 292,000 in December, while the unemployment rate is forecast to hold steady at 5.0%.

Monthly jobs gains above 200,000 are seen by economists as consistent with strong employment growth.