ECB opposes furthur bailout but Greece has other plans

Greek Finance Minister Yanis Varoufakis heads to Frankfurt Wednesday for talks with European Central Bank officials as he seeks to build support for a renegotiation of Athens`s 240 billion euro ($270 billion) bailout.

The visit is the latest stop on a diplomatic charm offensive that has seen Varoufakis take his case to London and Rome and comes as Prime Minister Alexis Tsipras visits Brussels to put the plan to European Commission president Jean-Claude Juncker.

Varoufakis`s visit to Frankfurt is seen as especially important as the ECB is reported to be opposed to a pivotal part of his plan: a request for bridging finance needed to keep Greece solvent until June.

According to the Financial Times, the ECB`s opposition could lead to Athens running out of cash at the end of February -- a suggestion that may spook the markets.

In its Wednesday edition, the FT cited officials involved in deliberations as saying the ECB will refuse Varoufakis`s suggestion of raising 10 billion euros in short-term Treasury bills because it refuses to raise an existing cap of 15 billion euros on such debt issuance to 25 billion.

The Greek minister will have another tricky encounter on Thursday, when he meets German counterpart Wolfgang Schaeuble in Berlin in what will be a key test of whether his proposals have any chance of being accepted by the EU`s leading powers.

The challenge he faces in Frankfurt stands in stark contrast to his visit to Rome on Tuesday, where Athens` debt plan was welcomed by Italian Prime Minister Matteo Renzi, sparking a rally on international markets.

Renzi told his Greek counterpart Tsipras, who was accompanying Varoufakis, he believed an accord on the debt terms was possible, and promised the visiting leader of Italy`s support in trying to achieve it.

"There has to be change in Europe," Tsipras said. "We have to put social cohesion and growth before the policies of poverty and insecurity."

Renzi echoed the call for more growth-orientated policies but pointedly steered clear of any comment on the detail of Greece`s proposals, which he said would be discussed by EU leaders next week.

"The world is calling on Europe to invest in growth, not austerity," Renzi said, before joking that the election of Tsipras was a "blessing" because it ensured he was no longer Europe`s number one "dangerous lefty".Varoufakis, the Greek finance minister, is pushing the idea of debt swaps that would avoid the need for creditors to accept `haircuts` on the country`s 315-billion-euro foreign debt, while easing the monthly financing burden on the Athens government.

He said Greece`s ideas would be put to eurozone finance ministers next week ahead of the summit of EU leaders.

The Greek initiative was interpreted by markets as reducing the likelihood of any unilateral debt cancellation, which would entail a risk of reigniting the kind of financial turmoil that has severely damaged leading economies since 2007.

Led by the Athens bourse, which closed up more than 11 percent, stock markets across Europe rose on the news, as did Wall Street and Asia in turn, while the euro was sharply higher.

"After a week of trading insults and threats it looks like the eurozone paymasters and the new Greek government are finally ready to compromise," said Kathleen Brooks, research director at trading site Forex.com.

The Greek government denied the debt swaps proposal represented a climbdown from election promises to force a renegotiation of its debt terms.

German Chancellor Angela Merkel was non-committal about the Greek proposals. "It is clear the Greek government is still establishing its position," she said. "We await their proposals and there will be time enough to discuss them."

Privately, German officials said there was "little room for manoeuvre" on the debt conditions.

Greece`s debt is worth 1.75 times the country`s entire annual economic output. Because of severe spending cuts, the government now raises substantially more in taxes than it pays to fund services, but that surplus is more than wiped out by the cost of servicing the debt.

US President Barack Obama on Sunday appeared to side with Greece by warning of the dangers of "squeezing" an economy in the grip of recession.

Tsipras has dismissed the "troika" system monitoring Greece`s economy -- the International Monetary Fund, European Commission and ECB -- as lacking legal status.

But he also says Greece has no intention of not meeting its outstanding obligations to the bailout creditors.

After visiting Brussels on Wednesday, Tsipras will visit Paris in search of support from France, the eurozone`s second-biggest economy and, like Italy, a critic of EU "austerity".

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Future looks bright as India remains upbeat

Decoupling as an investment theme shot to prominence in 2010 when investment managers were hunting for an oasis of economic development after the 2008 credit crisis parched the developed world.
China and India were stripped of the BRICs moniker and known as the 'growth engines' that would pull the world economy out of a rut. They did, for a year or so, but they too soon fell into a morass for different reasons.

Over the past two years, questions have arisen on China's ability sustain growth levels amid a looming banking crisis due to over investment, and the collapse of growth rates in India induced by the government's policy paralysis.
Now that the Western developed world, which grew its economies with similar policies and collapsed due to the same excesses is decoupling, India may benefit from the tailwinds. This may be the time when India could 'decouple' convincingly from the possibly sluggish growth the world over and when most emerging markets suffer the so- called QE unwinding by the US Federal Reserve.
For the first time in two decades, the developed nations on both sides of the Atlantic may be decoupling on interest rates. The US, the supplier of cheap money across the world, is poised to make the dollar more expensive, while the European Central Bank and the Bank of Japan have promised to run their printing presses for an indefinite period.
Many fear that the scenario may be bad for India and foreign investments would taper. The theory goes that investors borrowing cheap dollar funds may hold back, and that Indian borrowing overseas may become expensive. But the flip side of this is that many factors are turning favourable for India.
Signs that administration is being cranked up, collapsing commodity prices — crude oil, iron ore, coal, gold — improving government finances, stronger currency, a determined monetary policy to cap inflation at 4%, bottoming out of bad loan accumulation are the aligning of stars for revival. But here's the disclaimer: Prime Minister Narendra Modi must deliver on economic reforms.

"India's transformation has been remarkable,'' says Morgan Stanley. "India may just turn out to be more fortunate and hence more resilient in implementing reforms and raising growth.'' This is being on the opposite pole of where India was last year when the talk of taper by the US Fed turned India into a basket case. The rupee became the worst performing currency in the world, foreigners fled the shores, and Indian entrepreneurs turned gloomy.
But inflation is easing with it as measured by the Consumer Price Index falling to 6.46% in September, from a high of 10.7% a year back. Economic growth is forecast at 5.3% in fiscal 2015, up from a decade low of 4.5% in FY2013. Corporate earnings are set to climb 8% in the second quarter , forecasts Citigroup.
"For a net commodity importer like India, lower commodity prices in general, and oil prices in particular, are tantamount to a positive terms of trade shock,'' says Sonal Varma, economist at Nomura Securities. "It should result in lower inflation, improvement in fiscal and current account balances and higher growth.''
The RBI under Rajan had navigated the first round of tapering well. The rupee remained largely rangebound in 2014 on the back of sustained capital inflows and better macroeconomic fundamentals. In a comparative sense in Q2 of 2014-15, the local currency depreciated 2.72% against the US greenback while the Russian rouble depreciated about 13%, the Brazilian real by 10%, and the South African rand by 5.5%.
There have been continuous foreign portfolio investment inflows to the domestic equity markets as well as into debt market since December 2013, except in April 2014 when there was a net outflow. In 2014, foreign institutional investment inflows to debt and equity markets have been around $34 billion with a larger part going to debt segments.
But won't the rising interest rates in the US affect flows when rates are forecast to fall next year? Yes, it could reduce the flow from overseas Indians, who poured in funds to exploit the huge differential last year. "This segment cannot be compensated by equity flows and we cannot afford to increase debt inflows," says Care Ratings chief economist Madan Sabnavis.
"The timing can be challenging as the RBI may start lowering rates when US increases it as our decision is based on domestic inflation. Therefore, there will be pressure on the rupee once this happens."
But some believe that even if the US raises rates next year, the flood of liquidity due to ECB's quantitative easing could see India through. Even if dollar funds turn more expensive, companies could chase euro funds. Besides, funding through the Japanese yen could be an option.

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WPI hits zero mark

According to the latest data released ,WPI has hit zero – which means prices this November are almost the same as last November – marking a key milestone in the killing of the inflation monster. We have to thank falling global oil prices and slowing manufacturing – and Raghuram Rajan’s high interest rate regime – for this development.
With the Consumer Prices Index (CPI) for November already below 5 percent (it clocked in at 4.38 percent), the monetary policy target set for achievement in January 2016 (6 percent) has essentially been over-achieved more than a year in advance, thanks to good luck and some degree of good policy-making (more of the former).
However, there is a reason why Rajan is still sitting on his hands. The base effect (where the current year’s index is higher or lower depending on whether the index base of last year was higher or lower) will dissipate from December 2015. Rajan is hesitating to declare inflation dead because he wants to see how both the CPI and WPI fare once the base effect disappears in December, January and so on.
The November WPI hit zero based on negative growth (-0.98 percent) in primary articles, due mainly to the fall in fuel and power (-4.91 percent), with petrol leading the decline by -9.96 percent and diesel by -2.97 percent. Food prices rose by a piffling 0.63 percent.
To be sure, the decline would have been sharper, with WPI possibly turning negative in November, if the government had not raised taxes on fuel to reduce its fiscal deficit. The tax increase was thus beautifully timed and a good example of counter-factual policy-making that does not do inflationary damage.
In November, manufacturing inflation was still at 2.04 percent – which means that core inflation (which excludes food and fuel, including the food products part of manufacturing) is still positive. Manufacturing accounts for nearly 65 percent of the total weight of the WPI. But even core inflation has fallen in November from 2.5 percent to 2.21 percent.
What this suggests is that inflation is being tamed, if not dead. We only need the confirmatory signals from December and January to know if it is going to lie low or rear its ugly head again.
With the world facing deflation rather than inflation (the US, Europe, Japan and China are all trying to boost inflation, but failing), the fall in global oil prices is actually pointing towards further deflation ahead – which the world may try to counter with more money printing and quantitative easing. Japan has already done it, China has cut interest rates, and Europe may follow suit in early 2015.
Only the US is talking the possibility of raising rates, but it’s some time in the distant future. It may hold its hand if the rest of the world is reflating to keep growth hopes afloat.
India is the lone country (barring a few smaller economies) still trying to fight inflationary demons rather than deflation. By early next year, we will probably be reflating by cutting rates.
The signals for a rate cut are slowly turning green all over

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Rupee slides as RBI prepares for battle

Raghuram Rajan came into office in September 2013 just when the rupee was fighting one of its toughest battles.
The currency had sunk to a lifetime low of 68 to the US dollar, when it was trading at 54 five months back. The new RBI chief had then waded straight into the battle: bringing about several financial reforms right off the bat as well as taking innovative steps to attract US dollars from abroad.
Within a few months, the rupee came and stabilized at around 60-61 levels where it has hovered since – and the RBI chief then got busy fighting another battle, this time with prices.
But having largely put the inflation genie back into the battle, it appears Rajan will again have to shift his focus back to the rupee, after the currency fell to a 10-month low in trade to 62.33.
Unlike the story back then, when at least partially the rupee fall could be attributed to local macro economic factors – weak economic growth, ballooning deficits and high inflation – this time it appears the story is of US dollar strength rather than rupee weakness.
This has been driven by a resurgent US economy, which has led to the Fed start to unwind its ultraloose monetary policy, and overall weakness in other developed countries, as well as in China.
The US dollar index, which tracks the greenback’s strength against a basket of six major currencies, has risen about 13.5 percent since bottoming out in May this year but the rupee has fallen only 7.3 percent in that time.
The rupee’s relative strength has been because of dollar inflows into the country, thanks to the fact that global investors are again looking at India as a great place to invest, Jamal Mecklai of Mecklai Financial Services told CNBC-TV18 yesterday.
So while inflows are currently blunting the broad dollar strength, it appears the RBI is busy preparing for a rainy day.
"If we are faced with a globally strengthening dollar, then I do not really think the RBI will be putting in too much ammunition in defending the rupee,” LIC Nomura MF debt fund manager Killol Pandya told the Economic Times recently. “It probably let the currency slide a little more before it draws a fresh defence line for the currency.”
And drawing a fresh defence line it is, since March this year, the RBI has been busy buying US dollars from the open market in billions. In July, for instance, it purchased as much as $ 5.45 billion, while most other months too, it has been a net purchaser. The central bank’s foreign exchange reserves are near an all-time high of $318 billion.
The most RBI has done is come into the market to sell US dollars when it was seeing volatility rise, such as yesterday. In short, it is saving up on its bullets.
The larger plan is obvious here.As long as the rupee slides gradually and without much volatility, the RBI will not mind it, and it would also help exporters , Federal Bank treasury president Ashutosh Khajuria told the Business Standard.
Time and again, the RBI chief has warned of a steep reversal in flows should the US start to reverse its monetary policy stance in a big way. The resultant currency volatility could seriously harm emerging economies.
In fact, it was this very point – that the Fed should be mindful of the effect its policies may have on emerging economies – that saw Rajan get into a minor war of words with former Federal Reserve chief Ben Bernanke (who was sitting in the audience during a discussion among top central bankers around the world). Bernanke, along with a former colleague in the Fed, essentially responded by saying the Fed’s prerogative lied with the US economy and other nations are on their own.
It appears, that on his own, Rajan is preparing for a big fight in 2015.

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What are the US-EU sanctions on Russia?

The EU sanctions announced on 12 September targeted Russia's state finances, energy and arms sectors. These are sectors managed by the powerful elite around President Vladimir Putin.
Russian state banks are now excluded from raising long-term loans in the EU, exports of dual-use equipment for military use in Russia are banned, future EU-Russia arms deals are banned and the EU will not export a wide range of oil industry technology.
Three major state oil firms are targeted: Rosneft, Transneft and Gazprom Neft, the oil unit of gas giant Gazprom.
But the gas industry, space technology and nuclear energy are excluded from sanctions.
Dozens of senior Russian officials and separatist leaders are now subject to Western asset freezes and travel bans.
The targets are those considered "materially or financially supporting actions undermining or threatening Ukraine's sovereignty, territorial integrity and independence".
The EU has also followed the US lead in targeting more individuals in President Putin's inner circle, as well as some major companies.
An important target is Bank Rossiya, described as the "personal bank" for senior Russian officials. Its biggest shareholders - Yuri Kovalchuk and Nikolai Shamalov - are blacklisted. They were also co-founders of the mysterious Ozero Dacha Co-operative, a housing community on the shore of Lake Komsomolsk founded in 1996, whose members accumulated massive fortunes under Mr Putin.
An asset freeze affects not only bank accounts and shares but also economic resources such as property. So those on the list are not allowed to buy or sell their assets in the EU, once the freeze is in force.
The travel ban means being prevented from entering an EU country, even if a person is in transit. They would be placed on a visa blacklist
Germany has appeared especially reluctant to ratchet up sanctions. That is not surprising, as German exports to Russia totalled 38bn euros (£30bn; $51bn) in 2013 - the highest in the EU.
More importantly, Germany gets more than 30% of its oil and gas from Russia. Italy is also highly dependent on Russian energy and some of Russia's former Soviet bloc neighbours rely 100% on its gas deliveries.
The EU's trade with Russia - worth nearly 270bn euros in 2012 - dwarfs US-Russia trade.
Food exporters are already facing losses after Russia announced an immediate embargo on a wide range of food imported from the EU, US, Norway, Canada and Australia. It was announced as a response to the Western sanctions.
Fresh fruit and vegetables, meat, dairy produce and various other foods are affected by the Russian ban, which will last at least a year.

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Are Recession and Depression the same?

A recession is a contraction phase of the business cycle,when GDP declines for two consecutive quarters is usually called a recession. The U.S. based National Bureau of Economic Research (NBER) defines a recession more broadly as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." American newspapers often quote the rule of thumb that a recession occurs when real gross domestic product (GDP) growth is negative for two or more consecutive quarters. This measure fails to
register several official (NBER defined) US recessions.
A depression refers to a sustained downturn in one or more national economies. A severe recession with a 10% decline in GDP is usually called a depression. It is more severe than a recession (which is seen as a normal downturn in the business cycle). There is no official definition for a depression, even though some have been proposed. In the United States the National Bureau of Economic Research determines contractions and expansions in the business cycle, but does not declare depressions. A GDP decline of such magnitude has not happened in the United States since the 1930s.

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Balance of Payments , Current Account Deficit and Trade Deficit

Balance of Payments
The balance of payments (BOP) is the place where countries record their monetary transactions with the rest of the world. Transactions are either marked as a credit or a debit. Within the BOP there are three separate categories under which different transactions are categorized: the current account, the capital account and the financial account. In the current account, goods, services, income and current transfers are recorded. In the capital account, physical assets such as a building or a factory are recorded. And in the financial account, assets pertaining to international monetary flows of, for example, business or portfolio investments, are noted. In this article, we will focus on analyzing the current account and how it reflects an economy's overall position.
The Current Account
The balance of the current account tells us if a country has a deficit or a surplus. If there is a deficit, does that mean the economy is weak? Does a surplus automatically mean that the economy is strong? Not necessarily. But to understand the significance of this part of the BOP, we should start by looking at the components of the current account: goods, services, income and current transfers.
1. Goods - These are movable and physical in nature, and in order for a transaction to be recorded under "goods", a change of ownership from/to a resident (of the local country) to/from a non-resident (in a foreign country) has to take place. Movable goods include general merchandise, goods used for processing other goods, and non-monetary gold. An export is marked as a credit (money coming in) and an import is noted as a debit (money going out).
2. Services - These transactions result from an intangible action such as transportation, business services, tourism, royalties or licensing. If money is being paid for a service it is recorded like an import (a debit), and if money is received it is recorded like an export (credit).
3. Income - Income is money going in (credit) or out (debit) of a country from salaries, portfolio investments (in the form of dividends, for example), direct investments or any other type of investment. Together, goods, services and income provide an economy with fuel to function. This means that items under these categories are actual resources that are transferred to and from a country for economic production.
4. Current Transfers - Current transfers are unilateral transfers with nothing received in return. These include workers' remittances, donations, aids and grants, official assistance and pensions. Due to their nature, current transfers are not considered real resources that affect economic production.
Now that we have covered the four basic components, we need to look at the mathematical equation that allows us to determine whether the current account is in deficit or surplus (whether it has more credit or debit). This will help us understand where any discrepancies may stem from, and how resources may be restructured in order to allow for a better functioning economy.

Current Account Deficit
A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services it exports. The current account also includes net income, such as interest and dividends, as well as transfers, such as foreign aid, though these components tend to make up a smaller percentage of the current account than exports and imports. The current account is a calculation of a country’s foreign transactions, and along with the capital account is a component of a country’s balance of payment.
A current account deficit represents a negative net sales abroad. Developed countries, such as the United States, often run current account deficits, while emerging economies often run current account surpluses. Countries that are very poor tend to run current account deficits.
A country can reduce its current account deficit by increasing the value of its exports relative to the value of imports. It can place restrictions on imports, such as tariffs or quotas, or it can emphasize policies that promote exports, such as import substitution industrialization or policies that improve domestic companies' global competitiveness. The country can also use monetary policy to improve the domestic currency’s valuation relative to other currencies through devaluation, since this makes a country’s exports less expensive.
While a current account deficit can be considered akin to a country living “outside of its means," having a current account deficit is not inherently bad. If a country uses external debt to finance investments that have a higher return than the interest rate on the debt, it can remain solvent while running a current account deficit. If a country is unlikely to cover current debt levels with future revenue streams, it may become insolvent

Trade Deficit
Trade deficit - Let's say there are 2 nations in the world: nation A and nation B. If nation A sells 100 dollars worth of stuff to nation B, but buys 110 dollars worth of stuff from nation B at the same time, then nation A is said to have a trade deficit of 10 dollars: it's buying more goods and services from abroad than it is selling.
Current account deficit - this is a deficit in the current account. The current account is a broader measure than the trade deficit. It's one of the components of the balance of payments <------ balance of payments just shows all financial transactions between one country and the rest of the world. The current account deficit is equal to the trade balance (whether it's a surplus or deficit) + factor income (this is simply earnings on foreign investments by the citizens of the country subtracted from payments going to foreigners who have investments in the country) + cash transfers (like remittances from workers in the country to their families abroad).
So the difference is that the trade deficit (or surplus) is a component of the current account. The current account is a much broader measure. When the current account is in deficit, it simply means that a country's total import of goods and services, payments to foreigners on investments they hold in the country, and cash transfers from workers in the country is GREATER than its exports, factor income, and inflows of cash from abroad.

 

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Rupee depreciation - How? Why? When?

Why Rupee is going down?
What exactly does the term Rupee Depreciation mean?
In simple terms, Rupee depreciation means that the rupee has become less valuable with respect to US dollar and other countries can buy more from Indian markets by spending the same amount of dollars, which in turn means that our exports are more lucrative to foreign countries.(Since all the business transactions are carried out in US dollars).
Major Causes of Rupee Depreciation
1) Demand Supply Rule:
Why does rupee fluctuate?
The value of a currency, like any traded goods or services, depends on demand and supply. If there is more demand of dollars in the currency market and is not adequately matched by the supply, other things remaining equal, the rupee price of dollar will go up or the rupee will depreciate. Conversely, if the supply of dollar is higher than the demand, the rupee will appreciate. We are referring to dollar as it is the most preferred hard currency for cross-border transactions.
What affects demand and supply?
The supply of dollars depends on two factors—exports and investments. When goods or services are exported, the exporter gets the payment in dollars which is converted into rupees in India, boosting the supply of dollars. On the other hand, if individuals or companies buy goods and services from abroad, they need dollars to settle the bills, leading to an increased demand of dollars.
If a country exports more than it imports, the currency will tend to appreciate and vice-versa.
Now, every country has an external account to keep a track of the cross-border transactions being carried out. This external account has two components:
Current Account: Cross-border transactions in the goods and services market is recorded in the current account .
Capital Account: This records cross-border flow of investment and debt.
Why is rupee depreciating?
India runs a current account deficit, which gets compensated by the inflow on the capital account (foreigners investing in India, including direct and portfolio investments).
In recent times, our current account deficit has widened and capital flows are not being able to bridge the gap. In the quarter ending June, the deficit expanded to 6.7% of the gross domestic product compared with 4.3% in the same quarter last year. As a result, the demand for dollars is high, while the supply remains low. Hence, the rupee is falling.

2) Dollar gaining strength against the other currencies:
The Reserve Banks of Eurozone and Japan are printing excessive money due to which their currency is being devalued. On the other hand, US Fed has shown signs to end their stimulus (Stimulus is a plan devised by the central banks to counter a weak economy by jump starting it. During stimulus a government takes unprecedented actions such as lowering interest rates, increasing government spending and quantitative easingso as to put some life in the struggling economy. The side effect includes weakening of currency) .
Hence, making the US dollar stronger against the other currencies including the Indian rupee, at least in the short term.
3) Oil prices:
It is another factor that puts stress on the Indian Rupee. India is in the unhappy situation where it has to import a bulk of its oil requirements to satisfy local demand, which is rising year-on-year. The domestic demand for oil increases which causes the price of oil to increase in the international market. The demand for dollar also increases to pay our suppliers from whom we import oil. The effect is cumulative like an Avalanche breakdown. This increase in demand for dollar weakens the rupee further.
As suggested by Quora User,the main reason why government is directly responsible on this front is because of it's policy paralysis. The Indian government's present policies on Oil & Gas subsidy is why the prices are going high.Much remains to be done by the government on this aspect.
55% of India's oil imports are used for transportation of goods and people. And 50% of that or 27% of the total is used for transporting the 1.8% Indians who own cars from A to B in cars that weigh at least 15 times the weight of the owners (the Maruti Alto weighs 1156kg and an average Indian less than 70kg). This private transport is subsidized explicitly (if the car is diesel powered) while Indian Railways and rail travelers are forced to pay un subsidized market prices for diesel. Who Benefits From India's Diesel Subsidy? By S.G.Vombatkere
So 1.8% of the car owning public is majorly responsible for the oil demand and oil imports and the Rupee depreciation thanks to the policies of our allegedly "pro-poor" government.
4) Volatile domestic equity market:
Our equity market has been volatile for some time now. Equity is nothing but the investments in Indian companies made by Foreign Institutional Investors(FIIs). Some examples of Private equities investing in India are Blackstone, IFC, Berkshire Hathaway etc.
So, the FII’s are in a dilemma whether to invest in India or not(because of the lack of overall confidence in the Indian economy as explained later in my answer). Even though they have brought in record inflows of dollar to the country this year, chances are they may be thinking of taking their money out of the equity market,which might again results in less inflow of dollars in India. Therefore, decrease in supply and increase in demand of dollars results in the weakening of the rupee against the dollar.
Repercussions of falling Rupee
Significant depreciation affects the overall confidence in the economy and policy making becomes difficult. Importers have to shell out more rupees for the same amount of goods in dollars leading to inflation. For example, suppose an Indian buyer pays Rs 50 for an article priced at $1. If the currency depreciates to Rs 60, the buyer will have to pay Rs 10 extra for the same article, still priced at $1.
It hurts foreign investors as they get fewer dollars for the same amount of rupees realized. It also increases the liability of companies having dollar debt as they need to earn more rupees to repay the same debt. It, however, benefits exporters as goods become cheaper in dollar terms.



1) When Sub-prime crisis hit the world, India and China were the leaders in terms of growth. When US and Euro zone started quantitative easing (QE), there was easy money available for investment funds and it flew to fast growing economies - India and China. (Remember, Rupee went as high as Rs. 39/ Dollar during this time)
2) When Supreme Court questioned 2G/3G scams and prevalent policies, officers following those policies were also brought under investigation and they were questioned as well as officers who broke those policies. Same happened in Coal scam as well. Now, this created confusion in the mind of bureaucracy. Officers stopped signing files. This led to environment of Policy Paralysis. Opposition also helped it by disrupting parliament.
3) Fast growth in economy led to increased income and explosion in demand, which in turn led to supply side led inflation. RBI hit hard to control Inflation, which led to increased interest rates. Investment became costlier for companies, which further increased demand-supply gap.
4) Prolonged recession caused decrease in exports, specially towards US and Euro zone. Higher imports of Oil and Gold led to increase in Current Account Deficit (CAD).
5) Almost a month back, US treasury head made a statement of stopping QE, money started flowing back to US. All currencies dropped compared to US Dollar. However, Rupee fall is drastic because of high CAD and higher flow of dollar from the country (remember India and China got major share of dollars during QE, and China currency is controlled. US funds needed Dollars which increased its demand).
6) When Rupee started going down, exporters held on to dollars they earned by selling products in hope of earning more if Rupee fell more. This increased demand - supply gap for dollar. This led to downfall of Rupee.
Now, as far as controlling this downfall is concerned, RBI first hit the exporter's practice of holding on to dollars. Then Government tried to get more dollars from NRIs. Now, Government is trying to control imports. (Oil import cannot be reduced because of energy requirement, however gold import can be, as well as other non essential items). Govt. also opened up many sectors for FDI (However, I don't think it will help because we have elections next year and no company will make long term investment in a political uncertain environment. That is why no retail company is making investment even after opening this sector).

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How GOLD affects an economy

Gold is one of the most widely discussed metals due to its prominent role in both the investment and consumer world. Even though gold is no longer used as a primary form of currency in developed nations, it continues to have a strong impact on the value of those currencies. Moreover, there is a strong correlation between its value and the strength of currencies trading on foreign exchanges.
To help illustrate this relationship between gold and foreign exchange trading, consider these five important aspects:
1. Gold was once used to back up fiat currencies.
As early as the Byzantine Empire, gold was used to support fiat currencies, or the various currencies considered legal tender in their nation of origin. Gold was also used as the world reserve currency up through most of the 20th century; the United States used the gold standard until 1971 when President Nixon discontinued it.
One of the reasons for its use is that it limited the amount of money nations were allowed to print. This is because, then as now, countries had limited gold supplies on hand. Until the gold standard was abandoned, countries couldn't simply print their fiat currencies ad nauseum unless they possessed an equal amount of gold. Although the gold standard is no longer used in the developed world, some economists feel we should return to it due to the volatility of the U.S. dollar and other currencies.
2. Gold is used to hedge against inflation.
Investors typically buy large quantities of gold when their country is experiencing high levels of inflation. The demand for gold increases during inflationary times due to its inherent value and limited supply. As it cannot be diluted, gold is able to retain value much better than other forms of currency. For example, in April 2011, investors feared declining values of fiat currency and the price of gold was driven to a staggering $1,500 an ounce. This indicates there was little confidence in the currencies on the world market and that expectations of future economic stability were grim.
3. The price of gold affects countries that import and export it.
The value of a nation's currency is strongly tied to the value of its imports and exports. When a country imports more than it exports, the value of its currency will decline. On the other hand, the value of its currency will increase when a country is a net exporter. Thus, a country that exports gold or has access to gold reserves will see an increase in the strength of its currency when gold prices increase, since this increases the value of the country's total exports.                                            In other words, an increase in the price of gold can create a trade surplus or help offset a trade deficit. Conversely, countries that are large importers of gold will inevitably end up having a weaker currency when the price of gold rises. For example, countries that specialize in producing products made with gold, but lack their own gold reserves, will be large importers of gold. Thus, they will be particularly susceptible to increases in the price of gold.
4. Gold purchases tend to reduce the value of the currency used to purchase it.
When central banks purchase gold, it affects the supply and demand of the domestic currency and may result in inflation. This is largely due to the fact that banks rely on printing more money to buy gold, and thereby create an excess supply of the fiat currency. (This metal's rich history stems from its ability to maintain value over the long term. For more, see 8 Reasons To Own Gold.)
5. Gold prices are often used to measure the value of a local currency, but there are exceptions.
Many people mistakenly use gold as a definitive proxy for valuing a country's currency. Although there is undoubtedly a relationship between gold prices and the value of a fiat currency, it is not always an inverse relationship as many people assume.
For example, if there is high demand from an industry that requires gold for production, this will cause gold prices to rise. But this will say nothing about the local currency, which may very well be highly valued at the same time. Thus, while the price of gold can often be used as a reflection of the value of the U.S. dollar, conditions need to be analyzed to determine if an inverse relationship is indeed appropriate.
The Bottom Line
Gold has a profound impact on the value of world currencies. Even though the gold standard has been abandoned, gold as a commodity can act as a substitute for fiat currencies and be used as an effective hedge against inflation. There is no doubt that gold will continue to play an integral role in the foreign exchange markets. Therefore, it is an important metal to follow and analyze for its unique ability to represent the health of both local and international economies. (This article explores the past, present and future of gold.
 

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eBAY planning for PayPal spin-off

EBay announced Tuesday that it planned to spin off PayPal, the digital payment system that it bought in 2002 that now accounts for about half of the Silicon Valley giant’s revenue.
EBay said that in today’s climate of fast-moving innovation in e-commerce and new competition in the online payments space, it no longer believes it’s an advantage to have the two businesses tethered together.
“EBay and PayPal will be sharper and stronger, and more focused and competitive as leading, stand-alone companies in their respective markets,” chief executive John Donahoe said in a statement. “As independent companies, eBay and PayPal will enjoy added flexibility to pursue new market and partnership opportunities.”
The spinoff, set to occur late next year, will create two separate, publicly traded companies.
Tuesday’s announcement is something of a U-turn for eBay: When activist investor Carl Icahn pushed months ago for a spinoff of PayPal, eBay opposed the effort. In January, Donahoe told investors on a conference call: “Based on what we see today, we continue to believe that the company, our customers and our shareholders are best served by keeping PayPal and eBay together.”
The split comes as the online payments world is being shaken up by a host of new entrants, most notably Apple, which announced its new Apple Pay program in September. Apple has partnered with major retailers, such as Walgreens, McDonald’s and Staples, on the program that allows iPhone users to make purchases with their mobile devices, which will be linked to a consumer’s credit card.
Other companies, such as Alipay, the digital payment affiliate of Chinese e-commerce giant Alibaba, are also competitors with PayPal.
Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods, said PayPal has a strong foothold in digital payments that could allow it to thrive even if Apple’s system might outdo it on convenience. “What PayPal has to do is determine which direction they want to go and how they want to differentiate themselves,” Sakhrani said.
PayPal will have to make decisions about where to invest its resources at a time when mobile payment businesses are still in their infancy. “Compared to the potential and expectation, the traction is low [for mobile payments] because it has been unclear that there’s any extra benefits to the consumers,” said Rajesh Kandaswamy, an analyst at technology research firm Gartner.
The eBay-PayPal split will be led by Donohoe and Bob Swan, the company’s chief financial officer. After its completion, Devin Wenig will take the helm of the new eBay company. Wenig currently serves as the president of eBay Marketplaces.
The new PayPal company will be led by Dan Schulman, an executive who has served in leadership roles at American Express, AT&T and Priceline. Schulman will join the company as president of PayPal immediately and will assume the title of chief executive after the split.
EBay’s stock rose about 8 percent on the news, to $57 per share, by late afternoon Tuesday.
PayPal has a large share of the digital payments business, with 152 million active accounts. It facilitated $203 billion in payments over the last 12 months, a 26 percent increase from 2013.
When eBay purchased PayPal more than a decade ago for $1.5 billion, the merger was widely considered a natural fit for two companies whose businesses were so interdependent. At the time, eBay was offering a competing service, BillPoint, but found that a large share of its shoppers preferred to use PayPal instead.
Now, more than a decade later, “we’re at that point in time in the investment cycle where decisions had to be made about whether or not they were working,” Sakhrani said. Ultimately, eBay leaders decided the best opportunity for growth was to unwind the complementary businesses, a move they hope will allow each to achieve a finer strategic focus.

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International Dollars and PPP

The Geary–Khamis dollar, more commonly known as the international dollar, is a hypothetical unit of currency that has the same purchasing power parity that the U.S. dollar had in the United States at a given point in time. It is widely used in economics. The years 1990 or 2000 are often used as a benchmark year for comparisons that run through time. The unit is often abbreviated e.g. 2000 US dollar (if the benchmark year is 2000) or 2000 Int$.
It is based on the twin concepts of purchasing power parities (PPP) of currencies and the international average prices of commodities. It shows how much a local currency unit is worth within the country's borders. It is used to make comparisons both between countries and over time. For example, comparing per capita gross domestic product (GDP) of various countries in international dollars, rather than based simply on exchange rates, provides a more valid measure to compare standards of living. It was proposed by Roy C. Geary in 1958 and developed by Salem Hanna Khamis between 1970 and 1972.
Figures expressed in international dollars cannot be converted to another country's currency using current market exchange rates; instead they must be converted using the country's PPP exchange rate used in the study.

Currencies are commonly quoted relative to each other in the foreign exchange (“forex”) market. For example, a 1.2500 quote for the EUR/USD currency pair means that one euro is exchangeable for 1.2500 U.S. dollars. The problem with using exchange rates is that they aren’t adjusted to reflect purchasing power parity (“PPP”) or average commodity prices within each country.
Roy C. Geary created the Geary-Khamis dollar, or international dollar, in 1958 to reflect the current year’s exchange rate with current PPP adjustments. Since its introduction, the international dollar has become the metric of choice for international organizations like the International Monetary Fund (“IMF”) or World Bank for comparing wealth and earnings between countries.
What is Purchasing Power Parity?
Purchasing power parity was developed in the 16th century to determine the relative value of different currencies and set exchange rates. In theory, identical goods would have the same price in different markets when prices are expressed in the same currency absent of transaction costs and trade barriers. Similarly, any differences in inflation are equal to the changes in currency exchange rates.
Of course, transaction costs and trade barriers exist in real life since exchange rates aren’t always equal to one. Economists must therefore recalculate currency exchange rates accounting for purchasing power parity differences caused by these transaction costs and trade barriers. These calculations are ultimately what are known as Geary-Khamis dollars or “international dollars”.
Converting to International Dollars
Currency conversions to international dollars are accomplished by dividing the amount of national currency by the PPP exchange rate to arrive at the international dollar value. For example, 500,000 ISK (Icelandic Krona) divided by a 121.91 PPP exchange rate yields I$ 4,101.38. PPP exchange rates are provided by a number of different international organizations including the IMF and World Bank.
The PPP exchange rate, or PPP conversion factor, is the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as a U.S. dollar would buy in the United States. Basically, these figures help investors compare the cost of goods that make up gross domestic product (“GDP”) across many different countries relative to the United States.
Importance of International Dollars
International dollars have become extremely important in a world where currency exchange rates are commonly manipulated. For example, the World Bank estimated in 2005 that one international dollar was equal to about 1.8 Chinese yuan, which was considerably off from its nominal exchange rate. A failure to account for these changes could lead to a dramatically different perception of China’s economy.
Purchasing power parity differences can also be quite extreme when it comes to GDP per capita or other measures. For example, India’s nominal GDP per capita was $1,491 in 2012 while its PPP GDP per capita was $3,829. Developing countries tend to have higher PPP while developed countries tend to have higher nominal values, but nominal and PPP values are the same in the U.S. since it’s the benchmark.
Key Takeaway Points
• Purchasing Power Parity determines the relative value between different currencies by comparing their relative purchasing power internationally using the U.S. dollar as a standard benchmark.
• Geary-Khamis or international dollars factor in purchasing power parity and are calculated by dividing a given quantity of a country’s currency by the PPP exchange rate.
• International dollars have become extremely important in investment and economic circles as some countries have experienced large disparities between nominal and PPP economic figures.

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PM divestment plan

Prime Minister Narendra Modi's ambitious programme of disinvestment in big state-run companies started on Friday. The government is selling 5 per cent stake in state-run SAIL, India's second largest steel manufacturer by market value, to meet its disinvestment target for the 2014-15 fiscal year. The proceeds of the share sale will help the government meet its fiscal deficit target for the year.
Here is your ten-point cheat sheet on this story:
1) The disinvestment target for the year is Rs 58,425 crore out of which Rs 43,425 crore will come via share sale in PSUs. The government is likely to raise Rs 1,700 crore if the share sale in SAIL goes through at Rs 83 per share. The amount is just 4 per cent to the government's total disinvestment target of Rs 43,425 crore via share sale in PSUs.
2) The response to Friday's share sale in SAIL will be crucial for the government to gauge investor appetite ahead of the planned sale of a 10 per cent stake in Coal India and a 5 per cent stake in Oil and Natural Gas Corp. Stake sales in NHPC, Power Finance Corp and Rural Electrification Corp are also in the pipeline.
3) The bigger Coal India and ONGC stake sales should help the government raise a combined Rs 38,000 crore, as per the current market prices.
4) The government is likely to miss its disinvestment target for the year, analysts say. "The target that the government has set is a tall target," said Deven Choksey, managing director at Mumbai-based brokerage KR Choksey Securities.
5) There is no real excitement for state-run companies like SAIL among investors, analysts told NDTV. Most state-run companies have underperformed the broader markets despite a record rally this year. SAIL shares have risen just 18 per cent this year, lagging a near 36 per cent rise in the Sensex.
6) According to domestic brokerage Kotak, the government needs to come out with a long-term plan to improve performance of state-run companies. "In our view, the government may want to review its very ownership of PSU companies with a far bolder program of privatization," it said in a note last month.
7) Market expert Ambareesh Baliga told NDTV that long-term investors, with a 2-3 year horizon, should buy SAIL. "India cannot grow at 8 per cent without growth in infrastructure and steel is an important part of infra sector," he said.
8) The government is selling 20.65 crore shares in the company. Post the share sale, the government's stake will come down from 80 per cent to 75 per cent.
9) The share sale in SAIL is taking place through the Offer for Sale route, which helps promoters of listed companies to sell or dilute their shareholdings through an exchange based bidding platform.
10) The floor price or the minimum bid price for SAIL has been fixed at Rs 83, which is at a discount to Thursday's close price of Rs 85.35 on the Bombay Stock Exchange. Retail investors will get a 5 per cent discount

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What is meant by RBI interest rates

Key policy rates used by RBI to influence interest rates

The key policy or 'signalling' rates include bank rate, the repo rate, the reverse repo rate, cash reserve ratio and statutory liquidity ratio.

RBI increases its key policy rates when there is greater volume of money in the economy. In other words, when too much money is chasing the same or lesser quantity of goods and services.

Conversely, when there is a liquidity crunch or recession, RBI would lower its key policy rates to inject more money into economic system.


What is repo rate?
Repo rate, or repurchase rate, is the rate at which RBI lends to banks for short periods. This is done by RBI buying government bonds from banks with an agreement to sell them back at a fixed rate.

If the RBI wants to make it more expensive for banks to borrow money, it increases the repo rate.

Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
The current repo rate is 5.50%.


What is reverse repo rate?
Reverse repo rate is the rate of interest at which the RBI borrows funds from other banks in the short term.
Like the repo, this is done by RBI selling government bonds to banks with the commitment to buy them back at a future date.

The banks use the reverse repo facility to deposit their short-term excess funds with the RBI and earn interest on it.

RBI can reduce liquidity in the banking system by increasing the rate at which it borrows from banks. Hiking the repo and reverse repo rate ends up reducing the liquidity and pushes up interest rates.


What is Cash Reserve ratio (CRR)?
Cash reserve Ratio (CRR) is the amount of funds that banks have to park with RBI. If RBI decides to increase the cash reserve ratio, the available amount with banks would reduce. The bank increases CRR to impound surplus liquidity.

CRR serves two purposes: One, it ensures that a portion of bank deposits are always available to meet withdrawal demand, and secondly, it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money.
The current CRR is 6%.


What is SLR? (Statutory Liquidity Ratio)
Apart from keeping a portion of deposits with RBI as cash, banks are also required to maintain a minimum percentage of deposits with them at the end of every business day, in the form of gold, cash, government bonds or other approved securities. This minimum percentage is called Statutory Liquidity Ratio.
In times of high growth, an increase in SLR requirement reduces lendable resources of banks and pushes up interest rates.
The current SLR is 25%.


What is the bank rate?
Unlike other policy rates, the bank rate is purely a signalling rate and most interest rates are de-linked from the bank rate. Also, the bank rate is the indicative rate at which RBI lends money to other banks (or financial institutions) the bank rate signals the central bank's long-term outlook on interest rates.

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Everything about "Gold Standard"

Definition of the Gold StandardMy normally extensive Economics Glossary does not have an entry on the gold standard, so we'll have to look elsewhere for a definition. An extensive essay on the gold standard on The Encyclopedia of Economics and Liberty defines the gold standard as "a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price." A county under the gold standard would set a price for gold, say $100 an ounce and would buy and sell gold at that price. This effectively sets a value for the currency; in our fictional example $1 would be worth 1/100th of an ounce of gold. Other precious metals could be used to set a monetary standard; silver standards were common in the 1800s. A combination of the gold and silver standard is known as bimetallism.
A Very Brief History of the Gold Standard
If you would like to learn about the history of money in detail, there is an excellent site called A Comparative Chronology of Money which details the important places and dates in monetary history. During most of the 1800s the United States was had a bimetallic system of money, however it was essentially on a gold standard as very little silver was traded. A true gold standard came to fruition in 1900 with the passage of the Gold Standard Act. The gold standard effectively came to an end in 1933 when President Franklin D. Roosevelt outlawed private gold ownership (except for the purposes of jewelery). The Bretton Woods System , enacted in 1946 created a system of fixed exchange rates that allowed governments to sell their gold to the United States treasury at the price of $35/ounce. "The Bretton Woods system ended on August 15, 1971, when President Richard Nixon ended trading of gold at the fixed price of $35/ounce. At that point for the first time in history, formal links between the major world currencies and real commodities were severed". The gold standard has not been used in any major economy since that time.
The Benefits and Costs of a Gold Standard
The main benefit of a gold standard is that it insures a relatively low level of inflation. In articles such as " What is the Demand for Money? " we've seen that inflation is caused by a combination of four factors:
1.    The supply of money goes up.
2.    The supply of goods goes down.
3.    Demand for money goes down.
4.    Demand for goods goes up.
So long as the supply of gold does not change too quickly, then the supply of money will stay relatively stable. The gold standard prevents a country from printing too much money. If the supply of money rises too fast, then people will exchange money (which has become less scarce) for gold (which has not). If this goes on too long, then the treasury will eventually run out of gold. A gold standard restricts the Federal Reserve from enacting policies which significantly alter the growth of the money supply which in turn limits the inflation rate of a country. The gold standard also changes the face of the foreign exchange market . If Canada is on the gold standard and has set the price of gold at $100 an ounce, and Mexico is also on the gold standard and set the price of gold at 5000 pesos an ounce, then 1 Canadian Dollar must be worth 50 pesos. The extensive use of gold standards implies a system of fixed exchange rates. If all countries are on a gold standard, there is then only one real currency, gold, from which all others derive their value. The stability the gold standard cause in the foreign exchange market is often cited as one of the benefits of the system.
The stability caused by the gold standard is also the biggest drawback in having one. Exchange rates are not allowed to respond to changing circumstances in countries. A gold standard severely limits the stabilization policies the Federal Reserve can use. Because of these factors, countries with gold standards tend to have severe economic shocks. Economist Michael D. Bordo explains:
"Because economies under the gold standard were so vulnerable to real and monetary shocks, prices were highly unstable in the short run. A measure of short-term price instability is the coefficient of variation, which is the ratio of the standard deviation of annual percentage changes in the price level to the average annual percentage change.
The higher the coefficient of variation, the greater the short-term instability. For the United States between 1879 and 1913, the coefficient was 17.0, which is quite high. Between 1946 and 1990 it was only 0.8.
Moreover, because the gold standard gives government very little discretion to use monetary policy, economies on the gold standard are less able to avoid or offset either monetary or real shocks. Real output, therefore, is more variable under the gold standard. The coefficient of variation for real output was 3.5 between 1879 and 1913, and only 1.5 between 1946 and 1990. Not coincidentally, since the government could not have discretion over monetary policy, unemployment was higher during the gold standard. It averaged 6.8 percent in the United States between 1879 and 1913 versus 5.6 percent between 1946 and 1990."
So it would appear that the major benefit to the gold standard is that it can prevent long-term inflation in a country. However, as Brad DeLong points out, "if you do not trust a central bank to keep inflation low, why should you trust it to remain on the gold standard for generations?" It does not look like the gold standard will make a return to the United States anytime in the foreseeable future.


What Do We Use Today?
Almost every country, including the United States, is on a system of fiat money , which the glossary defines as "money that is intrinsically useless; is used only as a medium of exchange". We saw in the article " Why Does Money Have Value " that the value of money is set by the supply and demand for money and the supply and demand for other goods and services in the economy. The prices for those goods and services, including gold and silver, are allowed to fluctuate based on market forces. Next we'll look at how the monetary system used can change other variables in the economy.
What is the gold standard?
It’s a monetary system that directly links a currency’s value to that of gold. A country on the gold standard cannot increase the amount of money in circulation without also increasing its gold reserves. Because the global gold supply grows only slowly, being on the gold standard would theoretically hold government overspending and inflation in check. No country currently backs its currency with gold, but many have in the past, including the U.S.; for half a century beginning in 1879, Americans could trade in $20.67 for an ounce of gold. The country effectively abandoned the gold standard in 1933, and completely severed the link between the dollar and gold in 1971. The U.S. now has a fiat money system, meaning the dollar’s value is not linked to any specific asset.
Why did the U.S. abandon the gold standard?
To help combat the Great Depression. Faced with mounting unemployment and spiraling deflation in the early 1930s, the U.S. government found it could do little to stimulate the economy. To deter people from cashing in deposits and depleting the gold supply, the U.S. and other governments had to keep interest rates high, but that made it too expensive for people and businesses to borrow. So in 1933, President Franklin D. Roosevelt cut the dollar’s ties with gold, allowing the government to pump money into the economy and lower interest rates. “Most economists now agree 90 percent of the reason why the U.S. got out of the Great Depression was the break with gold,” said Liaquat Ahamed, author of the book Lords of Finance. The U.S. continued to allow foreign governments to exchange dollars for gold until 1971, when President Richard Nixon abruptly ended the practice to stop dollar-flush foreigners from sapping U.S. gold reserves.
Why is gold in debate again?
Libertarian Rep. Ron Paul (R-Texas) made a return to “honest money” a key plank of his presidential run, and the idea took hold among Tea Party conservatives outraged over the Federal Reserve’s loose monetary policies since the financial crisis. They argue that the U.S. debt now exceeds $16 trillion because the government has become too cavalier about borrowing and printing money. When the Fed prints money, gold-standard advocates say, it cheapens the value of a dollar, promotes inflation, and effectively steals money from the citizenry. In a nod to those ideas, the Republican Party’s 2012 platform calls for the creation of a commission to investigate setting a fixed value for the dollar. The gold standard “forces the U.S. to live within its means,” said investment strategist Mark Luschini. “Think of it as a person with a debit card rather than a credit card. The debit card holder can only spend what he or she has in the bank.”
What are the downsides?
A fixed link between the dollar and gold would make the Fed powerless to fight recessions or put the brakes on an overheating economy. “If you like the euro and how it’s been working, you should love the gold standard,” said economist Barry Eichengreen. Beleaguered Greece, for instance, cannot print more money or lower its interest rates because it’s a member of a fixed-currency union, the euro zone. A gold standard would put the Fed in a similar predicament. Gold supplies are also unreliable: If miners went on strike or new gold discoveries suddenly stalled, economic growth could grind to a halt. If the output of goods and services grew faster than gold supplies, the Fed couldn’t put more money into circulation to keep up, driving down wages and stifling investment.
Could the gold standard come back?
It’s very unlikely. In a University of Chicago poll this year, not one of 40 top economists surveyed supported a return to gold. The last gold standard commission, established by President Ronald Reagan, voted by a wide margin against bringing it back. The size and complexity of the U.S. economy would also make the conversion extremely difficult. Just to back the dollars now in circulation and on deposit—about $2.7 trillion—with the approximately 261 million ounces of gold held by the U.S. government, gold prices would have to rise as high as $10,000 an ounce, up from about $1,780, causing huge inflation. “It could do massive damage to the economy,” said John Makin, an economist at the American Enterprise Institute. So why the clamor for its return? Nostalgia, said economist Charles Wyplosz. “People long for a simpler age,” when the U.S. “was the dominant economy and there were no financial markets to speak of.” It’s like “getting back together with that old girlfriend,” said MarketWatch’s David Weidner. The current system may not be perfect, he says, but what people forget is that “the gold standard never works.”
Gold is one of the most widely discussed metals due to its prominent role in both the investment and consumer world. Even though gold is no longer used as a primary form of currency in developed nations, it continues to have a strong impact on the value of those currencies. Moreover, there is a strong correlation between its value and the strength of currencies trading on foreign exchanges.
To help illustrate this relationship between gold and foreign exchange trading, consider these five important aspects:
1. Gold was once used to back up fiat currencies.
As early as the Byzantine Empire, gold was used to support fiat currencies, or the various currencies considered legal tender in their nation of origin. Gold was also used as the world reserve currency up through most of the 20th century; the United States used the gold standard until 1971 when President Nixon discontinued it.
One of the reasons for its use is that it limited the amount of money nations were allowed to print. This is because, then as now, countries had limited gold supplies on hand. Until the gold standard was abandoned, countries couldn't simply print their fiat currencies ad nauseum unless they possessed an equal amount of gold. Although the gold standard is no longer used in the developed world, some economists feel we should return to it due to the volatility of the U.S. dollar and other currencies.
2. Gold is used to hedge against inflation.
Investors typically buy large quantities of gold when their country is experiencing high levels of inflation. The demand for gold increases during inflationary times due to its inherent value and limited supply. As it cannot be diluted, gold is able to retain value much better than other forms of currency.
In April 2011, investors feared declining values of fiat currency and the price of gold was driven to a staggering $1,500 an ounce. This indicates there was little confidence in the currencies on the world market and that expectations of future economic stability were grim.
3. The price of gold affects countries that import and export it.
The value of a nation's currency is strongly tied to the value of its imports and exports. When a country imports more than it exports, the value of its currency will decline. On the other hand, the value of its currency will increase when a country is a net exporter. Thus, a country that exports gold or has access to gold reserves will see an increase in the strength of its currency when gold prices increase, since this increases the value of the country's total exports.
In other words, an increase in the price of gold can create a trade surplus or help offset a trade deficit. Conversely, countries that are large importers of gold will inevitably end up having a weaker currency when the price of gold rises. For example, countries that specialize in producing products made with gold, but lack their own gold reserves, will be large importers of gold. Thus, they will be particularly susceptible to increases in the price of gold.
4. Gold purchases tend to reduce the value of the currency used to purchase it.
When central banks purchase gold, it affects the supply and demand of the domestic currency and may result in inflation. This is largely due to the fact that banks rely on printing more money to buy gold, and thereby create an excess supply of the fiat currency.
5. Gold prices are often used to measure the value of a local currency, but there are exceptions.
Many people mistakenly use gold as a definitive proxy for valuing a country's currency. Although there is undoubtedly a relationship between gold prices and the value of a fiat currency, it is not always an inverse relationship as many people assume.
For example, if there is high demand from an industry that requires gold for production, this will cause gold prices to rise. But this will say nothing about the local currency, which may very well be highly valued at the same time. Thus, while the price of gold can often be used as a reflection of the value of the U.S. dollar, conditions need to be analyzed to determine if an inverse relationship is indeed appropriate.
The Bottom Line
Gold has a profound impact on the value of world currencies. Even though the gold standard has been abandoned, gold as a commodity can act as a substitute for fiat currencies and be used as an effective hedge against inflation. There is no doubt that gold will continue to play an integral role in the foreign exchange markets. Therefore, it is an important metal to follow and analyze for its unique ability to represent the health of both local and international economies.

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Mutual Funds and Hedge Funds

First, the similarities:
Both mutual funds and hedge funds are managed portfolios. This means that a manager (or a group of managers) picks securities that he or she feels will perform well and groups them into a single portfolio. Portions of the fund are then sold to investors who can participate in the gains/losses of the holdings. The main advantage to investors is that they get instant diversification and professional management of their money.

Now, the differences:
Hedge funds are managed much more aggressively than their mutual fund counterparts. They are able to take speculative positions in derivative securities such as options and have the ability to short sell stocks. This will typically increase the leverage - and thus the risk - of the fund. This also means that it's possible for hedge funds to make money when the market is falling. Mutual funds, on the other hand, are not permitted to take these highly leveraged positions and are typically safer as a result.

Another key difference between these two types of funds is their availability. Hedge funds are only available to a specific group of sophisticated investors with high net worth. The U.S. government deems them as "accredited investors", and the criteria for becoming one are lengthy and restrictive. This isn't the case for mutual funds, which are very easy to purchase with minimal amounts of money.

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RBI stance on interests rates

Every man and his dog wants the interest rate in India to drop. Indeed, it will come down in the backdrop of a sharp fall in inflation, but will Reserve Bank of India (RBI) governor Raghuram Rajan oblige them on Tuesday when the Indian central bank announces its bimonthly monetary policy? My gut feeling is—no. A rate cut may happen in February when RBI announces its next policy, but in terms of probability, the annual monetary policy in April seems to be a better bet for a quarter-percentage-point cut in RBI’s repurchase, or repo, rate.
Pressure has been mounting on Rajan for weeks, ever since the release of data on inflation. It intensified with oil prices dropping to a four-and-a-half-year low. Finance minister Arun Jaitley has been pushing for a rate cut to boost growth in Asia’s third largest economy. Of course, every time Jaitley calls for a rate cut, he caveats it with a customary line, saying ultimately the decision will be taken by RBI and he is merely expressing his opinion.
This is an art perfected by India’s successive finance ministers and, to be fair to Jaitley, his predecessors P. Chidambaram and Pranab Mukherjee, had been far more aggressive in putting pressure on the central bank for a rate cut. At a time when the government is mulling over giving RBI a formal inflation target and setting up a panel to decide on monetary policy, the finance minister’s frequent expressions of personal opinion on the trajectory of interest rate look a bit odd, to put it mildly.
Even some members of the technical advisory committee on monetary policy have been talking about a rate cut. I presume these members were in favour of a rate cut at the last committee meeting before the October policy (but that their arguments did not cut ice with Rajan) and now they are making it public. Since the committee is advisory in nature and the opinion of its members—who are not part of the central bank—is not binding on RBI, there is nothing wrong with the committee members expressing their views openly.
Among corporations demanding a rate cut claiming that only a lower interest rate will change the investment climate and encourage companies to borrow when the cost comes down, the voice of the debt-laden companies is louder than those of others. They want the rate to decline as that will help them bring down the cost of servicing a massive debt burden. A recent India Rating estimate, based on an analysis of the credit metrics of the top 500 corporate borrowers in fiscal year 2014, pegs the aggregate debt of these companies at Rs.28.76 trillion, or 73% of the total bank lending to the industry, services and export sectors. Around 82 of these 500 borrowers have already been formally tagged as financially distressed, and another 83, accounting for 9% of the overall debt of the group, have severely stretched credit metrics. The operating profits of most of these 83 corporations barely cover the interest cost to be serviced.
The last time Rajan raised the repo rate was in June—by a quarter percentage point to 8%. At that time, the RBI policy document had said that “if the economy stays on this course, further policy tightening will not be warranted” and “if disinflation…is faster than currently anticipated, it will provide headroom for an easing of the policy stance”. Later, in August, while maintaining the status quo on the rate front, it said the upside risks to the target of containing retail inflation within 8% by January 2015 remained and, therefore, it was “appropriate to continue maintaining a vigilant monetary policy stance”. And, its last policy statement, on 30 September, said that “the balance of risks” to achieving 6% by January 2016 “is still to the upside”, adding: “the future policy stance will be influenced by the Reserve Bank’s projections of inflation relative to the medium-term objective (6% by January 2016), while being contingent on incoming data.” It also pointed out that the “base effects will also temper inflation in the next few months only to reverse towards the end of the year. The Reserve Bank will look through base effects.”
True to his words, Rajan has not tightened the policy any more. Indeed, a drop in inflation has provided headroom for easing of policy stance, but since this has happened because of base effects and the trend may not continue beyond November, Rajan is unlikely to be in a hurry to cut the rates.
In accordance with the so-called glide path, drafted by an RBI panel headed by its deputy governor Urjit Patel, the Indian central bank is targeting retail inflation at 8% in January 2015 to 6% in January 2016.
Wholesale price inflation dropped for the fifth consecutive month to 1.77% in October, its slowest since October 2009; retail inflation at 5.52% has been the slowest since January 2012 when the current series started. A year ago, in October 2013, it was 10.17%. Equally important is the fact that non-food, non-oil, so-called core inflation or manufacturing inflation has been slowing. Core retail inflation remained unchanged at 5.9%, and core wholesale inflation slumped to 2.5% in October, reflecting sustained disinflationary pressure and lower pricing power by businesses. Finally, food inflation, one of the key driving factors, slowed to 2.7% in October, from 9.6% in May—its lowest level since February 2012.
The reasons behind a sharp fall in inflation include a dramatic drop in international commodity as well as oil prices and the prices of food. The government has also done its bit by effecting a very modest hike in minimum support prices of agriculture produce and offloading food stocks even as a stable currency has not allowed imported inflation to seep through. The market has been expecting a rate cut; the rates of overnight indexed swaps are a testimony to that. The yield on 10-year benchmark, which was 8.49% in September during the last policy review, has dropped to 8.08% and the corporate bond yield has fallen even sharper. As a result of this, the spread between the government and corporate bond yield has shrunk from around 60-70 basis points to 10-20 basis points. A basis point is one-hundredth of a percentage point. Foreign institutional investors’ appetite for Indian paper has contributed to this.
Indeed, Rajan will take into account all these factors, but he may not be moved as yet for a rate cut. Inflation will fall further in November—retail inflation may drop below 5% and wholesale inflation below 1.5%, but the trend will reverse in the coming months when the statistical base effect wears off even as inflationary expectations continue to remain high. Besides, nobody knows how long crude oil prices will keep on dropping. So, Rajan may prefer to wait and be sure about the inflation trajectory before taking a call on the rate cut. He may take the decision in February if he is convinced or would like to wait for the government to demonstrate its commitment to fiscal correction in the February budget before announcing a rate cut in April. A rate cut on Tuesday will dent RBI’s credibility, particularly if inflation reverses its trend a couple of months later. Rajan has waged a war against inflation and he cannot afford to give up the fight halfway through. Only after bottling the inflation genie should he go for easing monetary policy.
Banks, however, may not wait for the RBI action to bring down their loan rates. Most banks have pared deposit rates in the past few weeks and at least one bank has cut its base rate or minimum lending rate. With credit offtake at a multi-year low even in the so-called busy season, I will not be surprised if banks start cutting their base rate in December-January and bring down the cost of money for their borrowers.

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RBI holds repo rates firm

The Reserve Bank of India (RBI) seems to  ensure that inflation is tamed before cutting interest rates.
Overseas investors have been buyers of local debt for seven straight months, the longest run of inflows in four years, taking their holdings to a record $49.2 billion as of 26 November. Borrowing in dollars to invest in rupees has returned 7.8% this year, the highest after Argentina’s peso among 23 emerging-markets carry trades .
RBI governor Raghuram Rajan is forecast to leave one of Asia’s highest benchmark rates unchanged on Tuesday, and signal possible easing next year as cheaper oil helps keep inflation below his January 2016 target. Global funds have flocked to buy Indian assets after he stabilized the rupee by raising borrowing costs, gold-import curbs narrowed the current-account deficit and the new government cut red tape.
“India is a strong conviction trade for us in the medium term,” Wee-Ming Ting, the Singapore-based head of Asian fixed income at Pictet, which oversees $25 billion of emerging-market debt, said by phone on 28 November. “We are overweight India bonds and will likely stay overweight for quite some time.”
Policy outlook
Rajan will keep the repurchase rate at 8% on Tuesday, according to 40 of 43 analysts. Three forecast a cut to 7.75%. Economists at Goldman Sachs Group Inc., Citigroup Inc. and Barclays Plc predict it will be lowered to 7.50% in the first six months of 2015. Growth in Asia’s third-largest economy slowed for the first time in three quarters, to 5.3% in the three months ended 30 September, official data showed 28 November.
Government bonds rallied this quarter, with the 10-year yield dropping 42 basis points to 8.09%, as a 35% decline in Brent crude prices from 30 June cooled inflation in the nation that imports about 80% of its oil. The notes have returned 14.1% this year, the best in Asia.
HSBC counts the securities among its top Asian trades in 2015 and predicts the yield will reach 7% by the end of next year and as low as 6% by end-2016, Andre de Silva, the bank’s Hong Kong based head of Asia-Pacific rates research, wrote in a 20 November report.
‘Top bonds’
India’s sovereign notes “rank top among Asian bonds in terms of carry, capital and to a certain degree, currency gains,” de Silva wrote. “Lower crude prices provide another reason to be overweight government securities as it allows the government to reduce subsidies while taming the current-account deficit and inflation.”
The rupee has surged 10% from an all-time low in August 2013 after Rajan raised rates three times in the September to January period. The currency has weakened 0.4% this year, the smallest decline in Asia after Indonesia’s rupiah and Thailand’s baht. It fell 0.3% to 62.0350 per dollar on 28 November.
India’s foreign reserves rose to $314.9 billion as of 21 November, from $275 billion in August last year, after reaching a near record $321 billion in July. Lower oil prices will help reduce the current-account gap to 1.5% of gross domestic product (GDP) in the year ending March 2015, compared with 1.7% in the previous year, according to HSBC.
Investor confidence
Foreigners poured a net $40.3 billion into Indian bonds and stocks this year as Rajan’s measures boosted investor confidence and Prime Minister Narendra Modi pledged to revive the economy from the worst slowdown in a decade by easing rules on foreign investment and building roads, ports and railways.
“If they continue on what they are doing at this point in terms of policy execution, I won’t be too surprised to see a 50 to 55 range for the currency in the next 12 months,” Adeline Ng, the Singapore-based head of Asian fixed income at BNP Paribas Investment Partners, which oversees $622 billion, said in a 18 November interview in Hong Kong.
While inflows have surged, further buying will depend on whether the RBI raises the current cap on sovereign debt ownership by foreign investors of $25 billion, according to Elara Securities Pvt. Almost 98% of the limit had been used as of 27 November, exchange data show.
‘Policy makers skeptical’
“The policy makers are skeptical about allowing too much short-term money very quickly after the last year’s experience, when the rupee tumbled on outflows,” Ashish Kumar, an economist at Elara in Mumbai, said by phone on 28 November. “The preference is for a long-term flows by way of foreign-direct investments and equities, and then debt.”
Consumer prices rose 5.52% in October from a year earlier, the least since the index was created in early 2012, and lower than Rajan’s January 2016 target of 6%. India’s 10-year sovereign bonds now pay an inflation-adjusted yield of 256 basis points, or 2.56 percentage points, the highest since at least January 2012.
“We continue to like Indian bonds based on the determination of the RBI to bring down inflation,” Rajeev De Mello, who manages about $10 billion as the head of Asian fixed income at Schroder Investment Management Ltd in Singapore, said in a 28 November e-mail interview. “A mild depreciation of the rupee will not offset the significant carry earned by investing in Indian bonds.”

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Mindblowing facts: How Black Money is converted to White Money

The following article takes a peep into some of the fraudulent ways Black Money is converted to White Money
1]   Converting black money into white – Incorporating the so called ‘capital gains company’
The mechanism takes advantage of the fact that long term capital gains on share purchase transactions (gains on shares held for over year) are tax exempt.
To explain the mechanism, with an example:
Pool A: many investors pool in their unaccounted money;
Pool B: at the same time, a group of investors with white (tax paid) money come together (or rather, they are arranged together by an intermediary);
Once the company is listed, the first group of people to buy stocks are those who want to convert black money into white. The money they use does not come from pool A. In fact, they use a small portion of their white money to buy shares at the listing price (say Rs. 10 for each share).
Once, investors from Pool A take positions (i.e. buy shares at the listing price), investors from pool B start buying thus inflating the stock price. At the same time they receive the unaccounted money from Pool A. While in practice they buy with the pool A cash, in accounts, they take a loss in their books and their (tax paid) white money disappears. Effectively they are buying with their white money to inflate the price of a listed stock and are receiving black money in return. To do this they are compensated a few percentage points of premium. For example, if they convert their white money worth Rs. 1 Cr., they will get black money to the tune of Rs. 1.05 Cr.
After 1 year from the date of initial purchase made by Pool A investors (to ensure the benefit of tax free long term capital gain) – as the stock price rises investors from Pool A start selling their holdings and investors from Pool B suffer huge losses (only on the screen). In return they have received the Pool A money, greater than the loss they suffer on the screen.
Eventually, the entire lot of Pool A investors cash out and the stock price collapses.
So when you see unheard of companies which show extraordinary performance without any improvement in fundamentals, or companies that continuously hit upper (or lower) circuits, chances are that you are looking at a manipulated stock.

2] Trading in a third party account
Typically an intermediary (typically a stock broker or an authorized person) opens an account for the investor in a third person’s name. Usually a company or for smaller accounts – in another individuals name, who falls below the taxable limit for income. This account is then funded with the investor’s money. The investor can trade in this account via call and trade facility or even using online banking and trading facility. Basically, it is no different than giving the investor access to another person’s trading /bank account which is funded 100% by the investor’s money.
When the investor wishes to withdraw his investments, he instructs the intermediary who gets a small percentage of commission to facilitate the whole system. In a lot of cases, the intermediaries end up even managing such money, this could at best be described as a ‘black portfolio management service’. It’s rampant to say the least.

3] Silver Utensils

Go to a Jeweler. Give him the amount you want to convert into white as cash. he would give you a cheque back for the same amount less 4%. He would give you a purchase bill to show that you have sold silver utensils to him. On the amount of the cheque when you file your return you will have to pay no capital gain tax as Silver utensils are Personal effects and capital gain does not arise on sale of personal effects. There you go , the money is white now!!!

4] Insurance Premiums:

  Another popular way of converting black into white money is showing income in cash like tuition income or any other professional fees.Just pay the tax at normal rate and your money is white now!!!!
Also people make investment where it is allowed to invest in cash and where the maturity is tax free for example buying an insurance policy where you are not required to show all your premiums and the maturity is tax free. For example your insurance premium is 25000/- per annum and you can pay 6000 in check (shown in books) and remaining in cash, people increasing the proportion of premium paid in cash increasing as and pay entire premium in white for last two years before maturity. No ITO is going to check premium of more then last two years and it is a small example. People are paying huge cash premiums everyday. In case of this small premium, the cost of investigation exceeds the benefit to the exchequer so the ITO will give a test check for at the max last two years.

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