Why we are obsessed with money

What a way to exist!

For most of us, practically the whole day all we are thinking is about money and more specifically how to have more money!

As if money was the only thing in life. Unfortunately for most of us, circumstances just do not permit any other thought!

We are running behind money most of the time which is almost akin to have become obsessed with money. Everything that we are doing in life is centred around money.

Unfortunately, this is because we need money for anything and everything that we do. There’s nothing wrong and what are you doing, however the problem is that over time, it becomes a compulsive habit to keep earning more.

That’s where the danger is. The problem is that there is a point where from we chase money as an addiction, we chase money because we like to do so. If we did not chase money we would not know what to chase now because we get out identity from money and the amount of money we have.

Another thing is that right from childhood we are always taught and our minds are conditioned that everything that we are doing is going to be for the sake of earning money.

There is no one who told you that money is just a means, and then there is something greater in life to achieve. Some examples are legacy; building something, charity; to giving something / helping someone, passion; pursuing something and living; simply to enjoy life and your money

We have got addicted to this and how!

There are three reasons for this:

First, we are what we do. It is the human behaviour. I know I should exercise and I don’t. I know I should eat healthy and I don’t. I know I should spend time with my kids and I don’t. I know that, yes, money isn’t going to make me happy and I still keep trying to make money.

We live by the laws of inertia, in a pattern which is hard to break. But we have to break it. For ourselves and for the sake of people and reasons for which we are chasing money.

Secondly, we need signals of progress. Money is a measure of how far you have progressed in life. The more the money you have the more you can make sure your progress. It’s simply the logic of evolution. People need validation of their success. Bigger house, bigger car, branded goods and list goes on.

Thirdly, it’s the easy way out. It’s only human to avoid difficult things. Important things are very difficult to measure.  Have I been a good father or husband? Have I groomed my child well?  Such things take years to measure and we still don’t have answers.

So, should we not be focused on creating money for ourselves?

I’m not saying that. Definitely create. Take care of yourself for sure!! Use it to the maximum to make yourself happy!!! You need a certain amount and beyond that is extra.

The definition of their certain amount is naturally different from one person to another. If that extra is going to happen easily, without stress and without your involvement, then its fine. Basically don’t kill yourself for that extra. Be Smart.

Kartik Jhaveri is an expert at planning money, life and aspirations. He is a certified financial planner, wealth manager and financial freedom coach.

How the RBI actually helps you

RBI

Most of us in Mumbai, see this huge structure called the Reserve Bank of India and wonder what it really does. It’s also a tourist attraction!! It has so many other offices and again one wonders why they need to have so many offices. I’m going to try and highlight a very interesting part of RBI’s work and how it helps us directly on a day-to-day basis.

The RBI does a review of the monetary policy of the country at frequent intervals during the year. So how does the monetary policy help us investors to take smart decisions?

Monetary policy is a tool by which the RBI decides to raise interest rates or reduce interest rates or keep them steady.

In our country, as we’re an oil importing nation, this decision is very closely linked to Oil. Oil to a large extent contributes to inflation. We all know what happens when inflation keeps rising. We in India unfortunately do not see too much of inflation falling and things becoming cheaper.

Oil is Not Well

So when oil prices rise i.e. we see a rise in crude oil prices almost instantly we can expect rising food prices. This is because there is going to be a rising cost pressure for manufacturing & services. This rise obviously gets passed onto the retail consumers.

When this happens RBI adopts a hawkish stance, tries to pull money out of the system by raising interest rates. Now when interest rates rise no one seems to be interested in borrowing. This immediately puts a brakes on money circulation.  Less money chasing goods decreases the demand for money. This way it controls inflation.

There is yet another tool that the RBI has and that is known as the CRR or the cash reserve ratio.  This ratio in simple words means the amount of cash that the bank must maintain with the RBI as the percentage of the total assets. So when this increases banks are forced to park more with the RBI and this is also a way to control inflation.

On the other hand when things look dull, when there is a recession of sorts, the RBI comes to the rescue and gets into action to kickstart growth in the country. It does this by lowering the interest rates. This we all will understand quite easily because we see a direct benefit of this happening. We see a fall of interest outgo in our EMI’s for the home loan that we are carrying. New loans become cheaper.

Individuals are motivated to go out and make purchases, whether it is for a washing machine or a piece of real estate. Businesses are motivated to go out and borrow to buy more machinery, to expand capacity, to hire more staff and manpower and basically do everything that will add to the growth of business.

Economic growth results as a result of all this. It is also during this time that stock market rises, we see a rally in stock prices and mutual fund NAV’s jumping higher and higher each day. There is prosperity all around.

Critical Role

As you can see that the central bank of the country has a very very important role to play.  If it makes a mistake, things can go really wrong.  Imagine like the USA or Japan if our interest rates were very low; everyone would run to borrow, they would borrow more than they require because it would be cheap and easy to borrow. And that is very individuals would run into what is known as the debt trap, because someday you’ll have to pay back.

Each day the central bank attempts to make sure that everything in our country remains stable and financially there’s nothing that goes wrong dramatically.

Kartik Jhaveri is an expert at planning money, life and aspirations. He is a Certified Financial Planner, Wealth Manager & Financial Freedom Coach.

The year of the bond, once again!

We are not talking of James Bond, we are talking of investment bonds.

We are in a situation where the fixed deposit rates are at a general low and there is a lot of discontent among depositors of fixed deposits.

Whenever we see a situation like this, one way or the other, the bond markets come to the rescue. It comes to the rescue of smart depositors, who are agile to move their money from fixed deposits to bond funds.

Let’s understand what is happening and why.

What Exactly is Happening in the Bond Markets?

It is likely that in this year, investors of bond funds will make handsome gains. Bond prices may rise and there may be capital gains. Investors of bond funds not only earn the rate of interest, but also earn capital gains. So that way, they make more than the return they would make on fixed deposits. The returns could be a high single digit or sometimes as high as double digits.

Over three years, this will become practically tax free or the tax would be a very small amount. So, basically, I am thinking that a rally will happen in the bond market. There are three main reasons for this — reduction in government borrowing (which is favourable), recovery of trading losses (which is favourable) and no change in monetary policy (which is neutral).

A word of caution, however, that such bond market investments are also subject to bond-market volatility and should be considered ideally with the help of a financial expert.

Before proceeding further, let us, therefore, quickly explain a bond, bond fund and bond market. We need to do this because few people understand the bond markets and even fewer invest in the bond markets.

Bond is nothing, but a commercial transaction where the borrower is issuing a bond to the lender and the lender will earn a certain rate of interest. When interest rates fall, everyone becomes interested in owning that bond.

As a result, the demand for the bond increases, the price of the bond increases and the bondholder makes capital gains.

A bond fund is a fund where ordinary investors pool in their money and a fund manager buys them a portfolio of bonds.

Moving onto the Reasons For a Rally in Bond Funds…

Now, the fundamental reason for a rally is reduction in interest rates as it stimulates economy and growth.

Firstly, the government is a massive borrower of funds. So a reduction in government borrowing reduces the demand for money in the economy. As a result, prices of bonds rise and this contributes to capital gains for bond holders.

Secondly, the Reserve Bank of India (RBI) recently announced that the commercial banks and RBI, which are the largest lenders to the government, will have another year to offset losses they have incurred on account of buying government bonds in the past. This action will lead to a rise in the price of bonds and this contributes to capital gains for bond holders.

Lastly, on one side due to the rise in oil prices, there is more inflation and thus more money is needed for circulation in the economy. On the other side, many government bonds are maturing, which will provide money supply. So, it is likely that we see a neutralising effect and thus RBI will take no action. This inaction here will support capital gains as explained above. Hence, this year might be a year of good gains for the bond investors.

Kartik Jhaveri is an expert at planning money, life and aspirations. He is a Certified Financial Planner, Wealth Manager & Financial Freedom Coach.

Five new financial goals for you this summer

I am going to try and explain to you why the summer holidays of April and May are great months to get a lot of things started, financially speaking.

This time period in a way resets the financial clock. You also have the option to hit the reset button on everything you have done so far; financially speaking of course and hope to do better things better than you did last year.

Let’s look at some of the new and unusual things to do in April.

  • Make a learning budget

Learn something about money or anything you like. The best way to make money is to learn something about money. Just like if you wanted to learn cooking you will get into the cooking class. If you wanted to learn swimming you would enrol in the swimming class. If you find learning about money is too daunting task than learn something which is close at to your heart or related to your work. If you learn something new, there’s a possibility that you will use your new ideas to generate new income and in turn that will generate new wealth for you.  So make a budget, enrol somewhere and spend that budget. How about a % of your annual income? Spend it for sure!

  • Plan a unique holiday 

When you’re by yourself and without your mobile phone you will have the opportunity to think! When you have time to think, suddenly good ideas will come to your mind.  You may think this is silly but you can be sure that you will be amazed if your drivers experiment just once. So it might be a good idea to go for a holiday just by yourself. If you find that too intimidating, join a group of strangers. You can combine that with the adventures experience if you like.  Be extra careful if you’re going with your special buddies. Do this only if they are going to be in a position to help you discuss your idea and make it bigger. They must play the role of complimenting your thoughts. So make a schedule to do this holiday and obviously make a budget to make it happen. Think & create new ways of making wealth.

  • Make a prediction and make it happen

Be brave. Let’s aim to grow and multiply net worth by 50% by the time you come to the end of this financial year. This is not a joke and it is easier than you can imagine.  I’m speaking about NETWORTH and I’m not talking about return on investment. If your networth is Rs. 100 today, all I’m saying is that let’s aim to make this a 150 by the end of this year. This networth comprises of all your savings till date. This can be achieved by simply saving aggressively every month for the next twelve months. Just put this into a recurring deposit or liquid fund so you don’t spend it.  We just have to prove to ourselves that this is possible. Where and how we will invest this money will think about that later.

  • Eliminate a negative belief 

I want to give you an exercise here. Write down all your negative beliefs you have about money and wealth. Most people are not able to achieve the desired level of wealth because they think about wealth negatively. So even if you are earning a good amount of income you will never see yourself becoming wealthy. Examples are money causes problems, money causes a fight, managing money is complicated etc. Then for each negative thought, you have written down the positives i.e. the opposite for a few months. Soon negatively biased feelings will evaporate.

  • Make a new investment; something you have not done before

Again here you do not have to be a financial expert. The idea is to learn something new. There are hundreds of investment options. Our objective here is to learn something new. Talk to your advisor and seek his or her guidance. Just a word of caution here; don’t do anything which is speculative or is something that you just can’t understand. Do what do find easy you understand and do that then.

Kartik Jhaveri is an expert at planning money, life and aspirations. He is a Certified Financial Planner, Wealth Manager & Financial Freedom Coach.

Seeking financial freedom? The time is NOW!

John Lewis famously remarked, “If not now, then when? If not us, then who?” This is so appropriate in the current financial world that we live in.

That statement will leave to rest every other argument that is conservative and against the idea of wealth creation. We are often faced with the situation where there is no option but to create wealth. Read on to know why!

Interest rates are painfully low. For all those diehard fans of guaranteed investment returns, there’s hardly any place to go to. Thinking of fixed deposits? Feeling happy with 7%? And fully taxable? That period is over. Period.

That doctrine of investing into pure fixed deposits and similar instruments is unfortunately standing challenged. There is no option but to sprinkle it with a combination of a little something that will add to the returns earned from fixed income type of securities. In fact this category of investors are in a way, best placed in terms of the current tax laws.

They can earn about 9-10% with minimal or near zero tax over about five years and more. Starting to generate rate of return above the inflation level of 7% is starting to create wealth. So there it is; there is no option but to move in the direction of creating wealth.

For more evolved investors, who invest in equities and who and still sitting on the sidelines tend to run out of patience every now and then. They are sometimes waiting for the right time, sometimes waiting for correction, sometimes waiting for valuation and sometimes waiting for just nothing. Sometimes, just too busy to take action!

I totally understand not wanting to lose hard-earned money. But if the money does not move it will stagnate. That’s the problem with money.

Hit the Ground Running

Inaction and inactivity kills it. Makes it costly to hold. Makes us lose opportunities, sometimes small and sometimes significant. I know of many people including my dad, who just kept investing into equities and holding forever. No doubt they were hugely (big HUGELY) better off then the people in the same time zone. I think they could have done far better with some smart lessons on asset allocation. This is because if they compare the growth rate of their holding over a period of 20 or maybe 30 years the compounded rate of return earned is often not impressive.

It is just marginally better or a few percentage points above the fixed deposit rate. Hence the need for asset allocation, which simply put is not to have all eggs in one basket at any given point in time. These sections of investors anyways create wealth, and, asset allocation is the tool that ensures that the process of wealth creation continues uninterrupted. So again there it is; even for this section there is not option but to start enhancing their wealth creation activities, else returns will continue to remain forever mediocre.

Then there are skeptics and there is nothing much for skeptics of everything, except that they need a serious dose of financial education. Perhaps what if needed is a proof of concept and for that, which better country to live in other than India where financial transparency in investments is so high that I sometimes feel, it comes from another planet.

 Your Money Needs Action

Today, there is a whole lot of variety to choose from and we have never been more spoilt for choice. But the most important thing in all this is to understand that your money needs action. It needs activity and for that the time is now!

And furthermore, if you asked me this question 10 years ago; I would have said that, the Time is NOW. If you ask this question 10 years hence, I will still say the Time is NOW. Any time is the right time to start the process of creating wealth. All that is important is that you take your first step; then continue it all the way with zeal and determination… till you have the level of wealth that you desire. And if you accumulate more than you need, still do it and share it with the world.

If you want your financial freedom; then the Time is NOW!

Kartik Jhaveri is an expert at planning money, life and aspirations. He is a Certified Financial Planner, Wealth Manager and Financial Freedom Coach.

Young Turks: Here’s the success story of venture fund Aspada

Venture fund Aspada was co-founded by Kartik Srivatsa and Thomas Hyland in 2012 and has made 17 investments so far across Fin-tech, agriculture, health and edu-tech startups.

Young Turks takes a look at their investment thesis, their differentiated VC model and meet three of their portfolio companies – Capital Float that underwrites unsecured loans to startups and SMEs; Dunzo, a hyper local concierge and delivery player that is also Google’s first direct startup investment in India; WayCool, a Chennai-based agriculture-tech startup.

Top 9 listed developers’ revenue grew steadily in October-December quarter despite slowdown

real estate

Housing sales revenue of the top nine stock exchange-listed developers continued to grow steadily in October-December quarter (festive season). Home sales revenue of these developers during the quarter jumped 4 percent quarter-on-quarter and 2 percent annually.

According to an ANAROCK Property Consultants report, in first nine months of FY20, listed developers sell housing worth Rs 16,500 crore as compared to Rs 15,730 crore last year, a 5 percent rise.

Despite many headwinds, their collective revenues in Q3FY20 stood at a little short of Rs 5,800 crore, an increase of 4 percent on a quarterly basis and 2 percent in a year, the report stated.

Total residential space sold by the top players (excluding DLF) in the last quarter was about 21 million sq. ft, a little over 20 mn sq. ft. recorded in the previous year.

The top listed developers analysed include DLF Ltd, Sobha Ltd, Puravankara Ltd, Prestige Estates, Brigade Enterprises Ltd, Mahindra Lifespace Developers Ltd, Godrej Properties Ltd, Oberoi Realty Ltd and Kolte Patil Developers.

Godrej Properties, Prestige Estates and Sobha Ltd were the top 3 players with maximum sales revenue during the first nine months of FY2020. Together, they accounted for a 55 percent share of the total sales revenue of Rs 16,500 crore. Last year too, these 3 players topped the list with collective sales revenue of Rs 8,500 crore.

The trend of developers deliberately restricting new supply continues, as increasing launches at this juncture may lead to more unsold stock and reflect negatively on cash flows, the report said.

More Tatkal tickets for passengers now as railways remove illegal softwares

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More Tatkal tickets will be available for passengers now as the railways has weeded out several illegal software and arrested 60 agents who would use them to block such tickets, a top official said on Tuesday.

Railway Protection Force (RPF) director-general Arun Kumar said the software cleansing exercise means Tatkal tickets, which would earlier vanish within minutes of opening of the booking, will now be available for passengers for hours.

Those arrested include a Kolkata-based person with suspected links to Bangladesh-based terror outfit Jamaat-ul-Mujahideen Bangladesh (JUMB). In January, the RPF DG had said an e-ticketing racket with suspected links to terror-funding and money laundering was busted.

Officials explained on Tuesday that illegal software such as ‘ANMS’, ‘MAC’ and ‘Jaguar’ would bypass the IRCTC‘s login captcha, booking captcha and bank OTP to generate tickets, while a genuine user has to go through all these processes.

The booking process for a general user usually takes around 2.55 minutes, but those using these softwares could do it in just around 1.48 minutes, they said.

The railways does not allow agents to book Tatkal tickets and over the past two months, the RPF has nabbed around 60 illegal agents who were booking tickets through these softwares, making it virtually impossible for others to get Tatkal bookings.

“As of today, I can say that not one ticket is being booked through illegal softwares. We have plugged all the issues that we had with the IRCTC website and also nabbed most of those who were top operators of the softwares,” the RPF DG said at a press briefing.

With the arrests, Kumar said most of these illegal softwares, which used to generate business of Rs 50 crore-100 crore annually, have been blocked.

Booking for Tatkal tickets opens 24 hours before the day of travel.

The IRCTC’s ticket booking section reflects the impact of the railways action as it shows a jump in the availability of Tatkal tickets across the board.

For example, on October 26, 2019, Tatkal tickets were available for two minutes for the Magadh Express, while for February 10, they were available for over 10 hours after the bookings opened on February 9, 2020.

Similarly, on the Sampoorna Kranti Express, Tatkal tickets were available for a little over four minutes on November 16, 2019, while on February 8, 2020, they were available for 18 minutes.

On the Swatantrata Senani Express, on November 16, 2019, the Tatkal bookings lasted for just a little over two minutes, while on February 8, it lasted for more than an hour.

“This position has been taken from different zones and we have seen that the Tatkal tickets are available for longer. We are still monitoring other softwares which can be used to book tickets and will move on them as and when they try to book tickets illegally,” said Kumar.

The RPF DG said that seven people, including a Kolkata-based person who was in touch with Bangladesh-based terror outfit Jamaat-ul-Mujahideen Bangladesh, (JUMB) have been arrested in the latest crackdown, on February 8.

“Recently, we arrested seven people including Kolkata-based Jayanta Poddar who was in touch with JUMB operatives,” he said.

Among those arrested is one Rajesh Yadav, believed to be the fund manager for the illegal e-ticketing racket who was picked from Mumbai. Another person, Shamsher, who worked for Hamid Ashraf, a Dubai-based man suspected to be one of the masterminds of the racket, was arrested from Lucknow.

Ashraf, however, is still at large.

The DG also said that the RPF has arrested Satyawan Upadhyay, a developer by profession, who built the illegal ‘MAC’ software for ticket touts.

He further said that the RPF ran a drive against authorised IRCTC agents also on February 11 and 12, and 319 of them were arrested for dubious bookings.

As many as 317 user IDs were identified for blacklisting, he said.

General Motors to lay off all 1,500 plant workers in Thailand following sale

General Motors will begin laying off around 1,500 employees in Thailand in June, after announcing the sale of its production plants in the country, a government official said on Wednesday.

GM said on Monday it would sell its two plants in the eastern industrial province of Rayong to China’s Great Wall Motor. Its latest moves to retreat from Asia also included winding down its Australian and New Zealand operations.

Jak Punchoopet, adviser to the Minister of Labour, told Reuters all of the Rayong plants’ employees would be laid off under terms of GM’s sale agreement with Great Wall.

“The agreement was only for the sales of the plants and didn’t include the transfer of employees,” he said.

“Their plan is to lay off 1,000 employees in the auto parts manufacturing line in June, and then around 300 to 400 in the assembly line in October,” Jak said, adding that the rest of the staff at the two plants would be let go towards the end of 2020.

“Everything will be done by the end of the year,” he said.

GM will abide by Thai labour law and provide severance pay for the affected employees, Jak said, adding that the company will also grant an additional four-month bonus to all employees.

Great Wall, one of China’s biggest sport-utility vehicle makers, said it will sell cars from the Thai base as part of its plans to go global and tap the Southeast Asian automotive industry, for which Thailand is a hub.

Limited economic and trade takeaways during Trump’s India tour

Donald Trump vs Narendra Modi

Ahead of his maiden visit to India as US President, Donald Trump has said he is “saving the big deal” with India for later and does not know if it will be signed before the presidential election in November. Trump’s statement indicates that a bilateral trade pact may not materialise during his visit to New Delhi next week.

Trump has previously described India as a “tariff king” for imposing “tremendously high” tariffs on American products, and also expressed dissatisfaction over the US-India trade ties.

Sources told CNBC-TV18 that United States Trade Representative Robert Lighthizer, a lead negotiator, was supposed to come to India last week but the visit got cancelled. Now it is emerging that he may not even accompany the US President during his visit to India but a final call on that will be taken closer to the visit.

High tariffs charged by India on superbikes manufactured by the Milwaukee-based Harley Davidson have been flagged multiple times by President Trump. During the recent parleys, India was willing to recalibrate those tariffs.

However, on some issues, India has put its foot down. For instance, India has told US negotiators that it can’t give market access to US dairy products. India’s sensitivities on US dairy products arise from the fact that the cattle feed used by the sector is infused with animal extracts.

Another issue that US negotiators added to the list of demands is related to data. The US is insisting on free flow of data generated in e-commerce portals, apps and financial transactions like credit card and debit card swipes. India has told the US that the current government is deliberating on the regulatory framework related to both personal and non-personal data.

Coronavirus impact: The stocks that will gain or lose

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Among Auto and ancillary stocks, Tata Motors and Motherson Sumi will be impacted negatively due to their exposure to China while tyre stocks will benefit, according to Geojit Financial Services.
The consumer durable and capital goods companies will be negatively impacted because of the supply disruption of components like compressors for refrigerators and air conditioners, television panels, LED chips and motors etc, which will lead to rise in prices and shortage of supply products in channels, Geojit said.
The fall in crude oil price after the coronavirus outbreak offers cost benefits to FMCG players.
Domestic specialty and agro-chemicals players with strong supply chain and with global export footprints to benefit from hike in international prices, the brokerage said.
Any prolonged supply disruption from China will impact the Indian pharmaceutical industry growth over the next 2 quarters, the report said.
The oil and gas sector will be impacted marginally in the short term but will benefit in the medium-term.
Indian textile companies may benefit from the fall in China’s share in global textile and apparel trade.
Exports from China, the largest producer of metals is expected to fall, which will benefit domestic producers in the long run as manufacturers focus on diversifying their sourcing base going forward.

Wi-fi on flights: Nelco launches first in-flight internet service in India

Nelco Ltd, a Tata Group company, is now an in-flight internet service provider and has partnered with Panasonic Avionics Corporation for the same.

The VSAT solutions provider in India, in partnership with Panasonic Avionics, will provide in-flight connectivity on Vistara, the airline jointly owned by Tata Sons and Singapore Airlines. Vistara will use this service on its wide-body B787and A321, primarily on long-haul international flights from March-April.

With the in-flight communication service becoming operational, it will be possible for international aircraft flying over India as well as domestic airlines to offer broadband internet services to its passengers on board.

Nelco had operationalised its maritime communication service in September 2019 and hence it has now activated its complete license of in-flight and maritime communication service in India.

Nelco aims to achieve a leadership position in the segment of in-flight internet connectivity provider and sees huge growth potential for this service.

“Airlines will be able to optimize their operations, there will be additional onboard revenue streams, the faster turnaround time for aircraft and real-time monitoring of engine, components will be possible in a more efficient manner and there is also a potential for value addition,” Chairman and Managing Director P. J. Nath said.

Nelco will use Indian satellite GSAT-14 for the service.

India opened its airspace and waters to broadband internet service in May 2018 when the department of telecom approved the recommendations on the same from the regulator Telecom Regulatory Authority of India.

“Many airlines offer free of charge WiFi to frequent flyers, many offer it to all passengers on board, many offer a customised business model, this is for the airline to choose. There can be a premium package for streaming services like that for Netflix. Each airline will set the base price for their services separately,” Tom Eskola, Vice-president, Panasonic Avionics said

“It is up to the airline how to do the selling. Pricing is between the airline and the service provider. We have rates that are applicable inside and outside of India. In low-cost carrier, Panasonic or Nelco can control the pricing model, in other cases, airlines to control the pricing,” Eskola added.

Money creation and RBI: How the central bank modulates banking liquidity, explained

RBI monetary policy

In an earlier note, we had explored banking liquidity and credit creation from the perspective of the banking system.

We now explore questions relating to the Reserve Bank of India (RBI). Does a Cash Reserve Ratio (CRR) requirement control money creation? How do Basel liquidity and capital stipulations impact economic activity? Does the RBI need to regularly inject liquidity to support credit creation and economic growth? What tools does the RBI have to modulate banking liquidity, and what constitutes ‘deficit monetisation’?

A recap

Let’s start with a quick recap of the arguments of the previous article.

The banking system needs neither liquidity surpluses nor deposits to fund fresh loans. Loans create deposits that increase the system-wide requirement of statutory reserves. This can be met as long as the government is borrowing adequately.

Banking liquidity is altered by government flows, the demand for physical currency, RBI bond and currency market interventions, and statutory reserve limits set by the RBI. These are all largely outside of banking control.

Therefore, the banking system cannot “lend away” liquidity surpluses, nor can it actively source deposits to reduce any liquidity deficits. Characterising daily banking liquidity operations with the RBI as “lazy banking” is a misnomer.

Indirectly, however, persistent banking liquidity surpluses reduce short term rates, and can, therefore, nudge fresh client lending. Conversely, persistent banking liquidity deficits have the opposite impact.

The RBI balance sheet

The table below gives a snapshot of the RBI balance sheet at the beginning of the day, aligned with the banking system balance sheet used in the previous article.

The RBI has assets of Rs 43 trillion, in the form of foreign exchange reserves (Rs 33 trillion) and GOI bonds (Rs 10 trillion). These are funded by Rs 8 trillion of banking CRR and government balances, Rs 23 trillion of currency in circulation, and Rs 12 trillion of other liabilities and capital (some of which has been eyed by governments as extractable surpluses).

As described previously, through its daily Liquidity Adjustment Facility (LAF) repo and reverse repo operations, the RBI helps the banking system convert its surplus Statutory Liquidity Ratio (SLR)/ High Quality Liquid Assets (HQLA) into CRR and vice versa.

The CRR myth

Textbooks have taught us that a minimum CRR requirement helps contain the extent of credit creation through a “money multiplier”. This is how it’s supposed to work. Loans create fresh deposits. However, a part of these new deposits (currently 4 percent) need to be set aside as CRR, leaving less of the new deposit to fund fresh loans. The spiral of credit and deposits, therefore, narrows, restricting the growth in loans and deposits to a finite limit.

This is flawed reasoning, starting with the flawed premise that deposits are needed for the funding of loans. Here is a better way to approach this concept.

Loans are self-funded by the deposits they create, but the deposits so created increase banking statutory reserve requirements. Statutory reserve requirements are currently at about 23 percent of deposits for SLR/ HQLA, and 4 percent of deposits for CRR, for a total of about 27 percent of deposits.

The RBI LAF window allows for the fungibility across excess SLR/ HQLA and CRR. Therefore, all of bank reserve requirements can be met purely by adding adequate SLR/HQLA. In fact, banks cannot create CRR balances by themselves.

As long there is adequate SLR/ HQLA debt issuance, there is no constraint on the creation of reserve assets. For every Rs 100 of a standard loan, therefore, banks just need to lend Rs 37 to the government. Collectively, this would create Rs 137 of deposits, and the 27 percent of reserve requirement on these deposits would be met by the Rs 37 of fresh reserve assets.

In other words, CRR is not a limiting factor for credit and money creation in India at all. Indeed, countries such as the UK, Canada, Australia, New Zealand, Sweden and Hong Kong have zero CRR requirement. The real constraints to credit and money creation are Basel stipulations of capital and liquidity, besides the availability of adequate SLR/ HQLA assets.

However, persistent liquidity surpluses do bring down money market rates, and hence can push the banking system to lend more. Persistent liquidity deficits would have the opposite effect. The impact is subtle, rather than direct.

A corollary – The RBI liquidity injection myth

A corollary myth is that the RBI balance sheet must expand by some number – usually argued as at least the nominal GDP rate — to allow the banking system to grow.

This is just not true. Consider the current situation, where banking loans are at Rs 100 trillion. Assume that client loans were to grow by a very healthy 20 percent (Rs 20 trillion) over the year. If banks were already at the brink of reserve requirements, they would need to additionally lend 37 percent (or Rs 7.4 trillion) to the government, to meet overall statutory reserve requirements. In all, this would create banking deposits of Rs 27.4 trillion, increasing the RBI CRR requirement by an additional 4 percent (or Rs 1.1 trillion). Reflecting this, other things being equal, the RBI balance sheet would only need to expand by Rs 1.1 trillion, just 2.5 percent of the Rs 43 trillion RBI balance sheet.

Given reserve creation is between banks and the issuer of SLR/ HQLA, other things being equal, the impact on the RBI balance sheet can be minimal.

The real constraints – Basel capital and liquidity

While statutory reserves offer little constraints to credit growth, the requirement for Basel capital and liquidity do place balance sheet limits on banking credit and money creation.

While the capital restriction is fairly obvious, the Basel liquidity restriction needs some explanation. To meet short-term Liquidity Coverage Ratio (LCR) and long-term Net Stable Funding Ratio (NSFR) requirements, Basel nudges individual banks to fund assets with deposits that are behaviorally or contractually long term.

This hunt for stable term deposits can push up term interest rates. In addition, locking up deposits for longer terms reduces the circulation of money and hence economic activity.

Overall, Basel safety stipulations on bank capital and liquidity naturally constrain credit growth and economic activity, particularly key for emerging markets such as India.

Of course, besides Basel capital and liquidity, several other issues come into play around credit creation – the extent of investment opportunities available, the trust within the ecosystem, and the incentive structure for bankers and borrowers.

RBI and liquidity management

Banks have the primary responsibility of maintaining overall statutory reserves. Within that, only the RBI can ensure that banks maintain requisite CRR balances.

First, the external changes to CRR balances. Currency withdrawals reduce both banking deposits and CRR balances, whereas currency deposits increase both. Payments to the government reduce both bank deposits and CRR balances, while government spending increases both.

Thereafter, if the CRR balances are short of statutory requirements, the RBI has to create them, with outright purchases of foreign currency, outright purchase of SLR/ HQLA bonds, or the first purchase leg of foreign exchange swaps or bond repos. If CRR balances were in excess of statutory requirements, the RBI would need to sell bonds or currency instead.

Any RBI action in foreign exchange or bond markets would naturally impact market prices. In the fiscal year 2018-19, for instance, the RBI purchased Rs 3 trillion of GOI bonds in a bid to inject rupee liquidity. This amounted to 67 percent of the net GOI issuance for the year. Similarly, in the wake of foreign currency inflows during the fiscal year 2018-19, forward purchases of US dollar by the RBI avoided immediate rupee liquidity injection. However, such intervention pushed up forward premia, and actually encouraged even more reversible foreign currency inflows.

The central bank has to be conscious of the market fallout from their choice of liquidity management tools. Blinkered approaches of only considering the liquidity objective while ignoring the fallout in markets cannot make for sensible policy.

RBI and deficit monetisation

Central bank purchase of government bonds in the primary market is often characterised as “print and spend” monetisation of government deficits. Such purchases would increase the RBI’s GOI bond assets, against a like increase in the RBI’s government balance liabilities. As the government then spends this money, the banking system would see a balance sheet expansion, with an increase in banking deposits and a like increase in banking CRR balances.

Exactly the same banking impact is achieved both by the transfer of RBI surpluses to the government and by RBI purchases of government bonds in secondary markets.

A transfer of RBI surplus to the government would reduce the RBI’s “other liabilities and capital” and increase the government’s balance with the RBI by a like amount. As the government then spends this money, funds would move into the banking system, increasing banking deposits, banking CRR balances and hence the overall size of the banking balance sheet.

Likewise, across the purchase of government bonds by banks in the primary market, the subsequent purchase of bonds in the secondary market by the RBI, and government spending, the net impact on the banking system would be balance sheet expansion, with an increase in deposits against an increase in bank CRR balances.

While academics generally treat RBI purchases of bonds in the primary market as distinct from RBI secondary market bond purchases or RBI surplus transfers to the government, the net impact of the three on banking balance sheets is exactly the same – net creation of bank deposits, increase in bank CRR balances, and expansion of banking balance sheet.

In other words, as judged by the impact on the banking system, RBI OMO bond purchases and surplus transfers to the government are tantamount to deficit monetisation.

Summary

The notion of CRR capping money creation through a money multiplier is flawed, and CRR can well be done away with. However, persistent banking liquidity surpluses push money market rates lower and hence nudge increased credit growth. The converse works with persistent liquidity deficits.

Further, the notion that the RBI has to expand its balance sheet by the nominal rate of GDP growth to facilitate adequate growth in banking credit is questionable.

Basel requirements on bank capital and liquidity restrict credit growth and economic activity.

While banks maintain overall statutory requirements, the maintenance of banking CRR is in the hands of the RBI. Besides tweaking regulatory limits, the RBI can intervene in foreign currency and bond markets to manage bank CRR balances. These interventions impact market prices. Only focusing on the liquidity objective while ignoring the impact on markets cannot make for sensible policy.

In terms of impact, RBI surplus transfers and secondary market bond purchases constitute as much deficit monetisation as does any RBI bond purchases in primary markets.

Ananth Narayan is Associate Professor-Finance at SPJIMR. Read his columns here.

4 of the 6 fastest-growing languages in the US of Indian origin

Trump Modi Indian languages in the US

If you followed the 2016 US presidential election run-in, you wouldn’t have missed Donald Trump’s proclamation “Ab ki baar Trump sarkar” (Trump government this time), in one of his campaign ads. By all measures, he didn’t get his intonation or pronunciation right but the message to a vast majority of his target audience was loud and clear. A significant number of his voter base speaks Hindi after all.

Hindi was the second-fastest growing language in the United States between 2010 and 2017, according to the America Community Survey. The growth of the language, spoken predominantly in north India, was however, topped by another Indian language — Telugu.

Telugu, the Dravidian vernacular of the Telugu people spoken mostly in Andhra Pradesh, Telangana and the Puducherry, emerged as the fastest-growing language in the United States between 2010 and 2017, nearly doubling the number of speakers with an 86 percent growth.

Hindi was joint second with Arabic.

Fourth on the list was Urdu, another language of north Indian origin. Urdu, which recorded a 30 percent rise in speakers in the US, is spoken mostly in India and Pakistan.

Urdu was followed by Chinese and Gujarati. Both the languages registered a 23 percent increase.

As Trump embarks on his two-day India trip later this week and with the 2020 presidential elections just a few months away, the expectations of an “Ab ki baar Trump sarkar” encore wouldn’t be amiss. And with him set to address “millions” in Ahmedabad, perhaps Trump could try his hands at a bit of Gujarati as well.

Indian languages in the United States

Sachin Bansal aims to simplify financial services to make it more accessible

Sachin-Bansal, DHFL General Insurance

Sachin Bansal, co-founder of Flipkart, is these days intensely focussed on the financial services sector, having turned investor in a bunch of fintech companies.

Bansal is on a mission to revolutionise and disrupt India’s banking system, looking to simplify financial services and make it more accessible. “Digital technologies have changed a lot but the financial services space has not adopted all of that yet. So we thought that it would be a good thing if some of those principles of consumer tech can be brought into financial services,” he said in an exclusive interview to CNBC-TV18.

Bansal, who exited e-commerce company Flipkart after it was purchased by Walmart in May 2018 (link), used those days to understand India’s banking space and the financial services space “What I realised was that if you are an HNI in India, you get a great service but if you are a middle-class person or a lower-income person in India, you get a very bad experience.”

Bansal’s investments, particularly in finance, gathered pace last year (link). He has put money in financial services players such as Chaitanya India Finance Altico Capital, Indostar Capital Finance, U Gro Capital and fintech startups such as Kissht and KrazyBee, according to data from Venture Intelligence.

In the interview, Bansal explained how he plans to transform the financial services space in India. “ We are going to build a lot of technology in-house instead of outsourcing it and getting it done from vendors because we believe that creates a bit of a layer of separation from technology to the business, which is not healthy.”

Banking and financial services have transformed in the last 20 years and have largely become tech companies, according to him. “So, they need to build tech like tech companies, which is like Flipkart, Amazon, or a Google. I would say that we are going to try doing some of that and solve some key problems for our set of customers, which are middle class customers of India and see where it goes from there,” he said.

Industry experts agree that Bansal’s focus on financial services is backed by his insights on Indian consumers through his experience at Flipkart and the opportunity to disrupt the space with tech.

Bansal and Binny Bansal, both former Amazon employees, founded Flipkart in 2007

On the next steps, Bansal said he is the process of applying for some licences. “We are talking to regulators on a regular basis, we are engaging with them. There are back and forth questions and answers.”

 

Bansal said he faces regular questions because of his consumer tech mindset. “Can we run a great bank? Can we build a great bank? These are legitimate questions for any regulator.”

Market expert Aditya Agarwala of YES Securities is recommending a buy on these stocks

stocks, markets

The latest analysis and commentary by stock market guru Aditya Agarwala of Yes Securities on what is moving the markets today.

Agarwala’s stocks recommendations for the day are:

  • Buy L&T Technology with a stop loss of Rs 1,625 and target of Rs 1,870.
  • Buy Interglobe Aviation with a stop loss of Rs 1,420 and target of Rs 1,620.

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