..... . VALI disclosures . .....: 09/12/24, FinancialCommerceREPORT

Sunday, December 8, 2024

09/12/24, FinancialCommerceREPORT

NIFTY 50

MTNL

The Reserve Bank of India monetary policy committee's (MPC) guidance at the December rate review can be best described as ‘non-committal.' The Governor, representing the views of the MPC, emphasized the importance of price stability, given its regressive impact on the purchasing power of rural and urban households. The Governor balanced this by acknowledging that policy support might be required on a prolonged growth slowdown. Then, there is a need to account for global uncertainties and the almost definite spillover impact on the rupee as well as the domestic financial markets. Navigating through these known and unknowns, the MPC voted to pause on the benchmark rate, instead oiling the financial system by boosting the supply of liquidity.

Four takeaways

Firstly, the evolving growth-inflation divergence was acknowledged and reflected in the revised official projections. After accounting for the disappointing 2Q FY25 GDP growth, 3Q FY25 and 4Q FY 25 forecasts were marked down by 20-60bp, taking the annual FY25 growth forecast down by 60bp to 6.6 percent. Nonetheless, the MPC's underlying optimism on the growth trend remains, as the quarterly profile is expected to stay above average 7 percent in the first half of FY26. We are more conservative at 6.3 percent y-o-y for FY25, with the bounce in the 2HFY25 likely less pronounced than the committee expects.

Inflation beat official forecasts for a second consecutive quarter, necessitating 90bps and 30bps upward revision in 3QFY and 4QFY projections, respectively, taking annual inflation up to 4.8 percent vs 4.5 percent earlier. Authorities are counting on winter disinflation in the perishables, especially vegetables and kharif harvest arrivals, just as good soil moisture conditions, along with comfortable reservoir levels, augur well for rabi production.

Weather developments remain a key factor that could influence the timeline for achieving a durable alignment with the 4 percent inflation target. The pace of the disinflation trend might be slow if a late winter onset impacts rabi crop sowing. Between 2022 and 2024, the economy has gone through episodes of heatwaves and excessive rains, which has impacted the farm-to-fork supply chains. This has expanded the scope of inflation's vulnerability beyond monsoon rainfall and resultant reservoir levels. A simple exercise shows a 0.5 correlation between food inflation and the observed annual mean surface air temperature for India observed by the World Bank.

Secondly, what's next? The RBI MPC will have two more inflation prints and the FY26 Budget on hand by the February 2025 rate meeting. Headline inflation is expected to normalise on the passage of weather-related impact on the food basket, edging back into the 4-5 percent range. At the same time, the FY26 Budget presentation will point to further fiscal consolidation, converging towards the -4.5 percent deficit target. This should set the stage to kickstart rate cuts in February, but it is not a done deal. Global developments remain a key variable, with the US government set to take office in mid-January 2025. Subsequent policy announcements, including those with protectionist or inflationary implications, could influence the US dollar and interest rates, with potential ripple effects on Asian markets, including the rupee and INR market rates. In light of possible volatility, the RBI MPC will lean towards preserving rate differentials by extending the pause and focusing on managing rupee volatility.

Third, while there was limited room to act on the main benchmark rate, policymakers found a middle ground by extending liquidity support ahead of the upcoming squeeze on account of tax outflows, increased currency in circulation, and volatility in capital flows. The CRR will be lowered by 50bps - in two equal tranches of 25 bps each, with effect from the fortnight beginning December 14, 2024, and December 28, 2024. This will take the rate back to levels before the start of the hiking cycle in April 2022 and stands to infuse INR 1.16trn into the banking system, potentially boosting credit supply. Industry observers opined that the CRR cut could translate to a 2-6bps improvement in domestic banks' net interest income (assuming all funds are deployed for loans). On a structural note, as government spending (a frictional driver of liquidity) shifts towards a just-in-time disbursements approach over the coming years, the need for liquidity infusion is likely to increase.

Lastly, to attract capital inflows, the interest rate ceilings on FCNR(B) deposits will be raised to provide more competitive levels, depending on the tenor. The impact might not be material because existing limits are underutilised. The financial sector players might have preferred a CRR dispensation on incremental FCNR (B) flows.

Overall, the MPC chose to maintain the current stance, recognising potential global uncertainties in 2025. Domestic guardrails will help shield the economy from the worst of storms.

NIFTY 50

MTNL

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Trade Cycles

The four important features of Trade Cycle are (i) Recovery, (ii) Boom, (iii) Recession, and (iv) Depression!

The trades cycle or business cycle are cyclical fluctuations of an economy. A full trade cycle has got four phases: (i) Recovery, (ii) Boom, (iii) Recession, and (iv) depression. The upward phase of a trade cycle or prosperity is divided into two stages—recovery and boom, and the downward phase of a trade cycle is also divided into two stages—recession and depression.

Phases of Trade Cycle:

The phases of trade cycle are explained with a diagram:

(1) Recovery:

In the early period of recovery, entrepreneurs increase the level of investment which in turn increases employment and income. Employment increases purchasing power and this leads to an increase in demand for consumer goods.

As a result, demand for goods will press upon their supply and it shall, thereby, lead to a rise in prices. The demand for consumer’s goods shall encourage the demand for producer’s goods.

The rise in prices shall depend upon the gestation period of investment. The longer the period of investment, the higher shall be the price rise. The rise of prices shall bring about a change in the distribution of income. Rent, wages, interest do not rise in the same proportion as prices.

Consequently, the margin of profit improves. The wholesale prices rise more than retail prices. The prices of raw materials rise more than the prices of semi-finished goods and the prices of semi-finished goods use more than the prices of finished goods.

(2) Boom:

The rate of investment increases still further. Owing to the spread of a wave of optimism in business, the level of production increases and the boom gathers momentum. More investment is possible only through credit creation. During a period of boom, the economy surpasses the level of full employment and enters a stage of over full employment.

(3) Recession:

The orders for raw materials are reduced on the onset of a recession. The rate of investment in producers’ goods industries and housing construction declines. Liquidity preference rises in society and owing to a contraction of money supply, the prices falls. A wave of pessimism spreads in business and those markets which were sometime before sellers markets become buyer’s markets now.

(4) Depression:

The main feature of a depression is a general fall in economic activity. Production, employment and income decline. The prices fall and the main factor responsible for it is, a fall in the purchasing power.

The distribution of national income changes. As the costs are rigid in nature, the margin of profit declines. Machines are not used to their full capacity in factories, because effective demand is much less. The prices of finished goods fall less than the prices of raw materials.

✳Reality Tips to Traders

1)Trading in the stock market is a marathon. 2)Protecting your capital is key. (Learn to protect first) 3)Making 0 on the day is better than losing 50k 4)Losses happen; they are part of this business. 5)It’s not you vs. the market. It’s you VS you. 6)You are your biggest enemy; learn to be mentally disciplined. 7)Don’t follow the majority; follow the correct path. 8)Traders without a stop loss end up not being traders for long. 9)There is always another trade. 10)The big money is made waiting for the right set-ups. 11)Waiting for the right trade is the most powerful strategy. 12)It is better to cut a loss than to wait to be proven right. 13)Position sizing can make or break you. 14)Worry about the downside before you even think about the upside. 15)Don’t listen to headlines

..BANKING TERMINOLOGY

There are various types of Banks: PSU Banks, Private Banks, Co-operative/Regional Banks, Small Finance Banks and Foreign Banks. When you deposit money in a bank, let's say the bank gives you an interest rate of 4%. But when the bank lends out this money, they lend it out at say, 12%. The difference of 8% in the above scenario is effectively the profit of the bank! The loans that do not pay interest for 90 days are known as Non-performing Assets. Banks have to provide for such bad loans. Structure of a Bank Asset for a Bank: The asset portion of a bank's capital includes cash, government securities, and interest-earning loans (e.g., mortgages, letters of credit, and inter-bank loans). Liabilities for a Bank: The bank's main liabilities are its capital (including cash reserves and, often, subordinated debt) and deposits. The latter may be from domestic or foreign sources (corporations and firms, private individuals, other banks, and even governments). Banks are required to maintain Liquidity with the Reserve Bank of India: SLR (Statutory Liquidity Ratio): It is the money a bank needs to preserve in the form of cash, gold or government Bonds before providing credit customers. This limitation is added by RBI on banks to make funds available to customers on-demand at your earliest convenience. Banks are required to maintain SLR at 18%. CRR (Cash Reserve Ratio): Banks are required to hold a certain proportion of their deposits in the form of cash. Banks don’t hold these as cash with themselves, but deposit such amounts with RBI / currency chests. CRR rate is at 4.5% currently. Repo Rate: The rate at which the RBI lends short-term money to the banks. The RBI through its Monetary Policy committee changes the repo rate to balance growth and Inflation. Reverse Repo rate: The rate at which banks park their short-term excess liquidity with the RBI. Now let us understand various terminologies for Banks Net Interest Income (NII): This is the spread the bank makes on its lending. It is calculated as Interest Income – Interest Expended Net Interest Margin (NIM): This is the spread the bank makes on its lending. It is the earning which is left after deducting the cost paid to depositors from its yields on Loans. This is denoted in % terms. The formula is Yield on Loans – Cost of funds Capital Adequacy Ratio (CAR): The capital adequacy ratio (CAR) is a measure of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. Essentially, it is the Capital that is available to lend. Tier I Capital – In simple words this capital is freely available with the bank to lend out. Tier II Capital- This is the capital tied up somewhere and is less freely available to lend. In case of an adverse event, the bank can use this capital to lend. Under Basel III norms, a bank’s tier 1+tier 2 capital must be a minimum of 8% of its risk-weighted holdings. The minimum capital adequacy ratio, also including the capital conservation buffer, is 10.5%. Current Account Saving Account (CASA)- There is no interest paid on the Current Account and a small interest rate is paid on a savings account. The combination of both is called CASA which shows the liabilities of the bank on which it pays relatively less interest. Deposits: Bank deposits are a savings product that customers can use to hold an amount of money at a bank for a specified length of time. In return, the financial institution will pay the customer the relevant amount of interest, based on how much they choose to deposit and for how long. Now let us come to NPA. Gross NPA (GNPA): It is the total loans on which no payment has been paid for 90 days or more. GNPA % is usually shown in each Bank’s quarterly results. The percentage is basically the GNPA amount as a % of the total advances. Slippages: Slippages denote the fresh amount of loans that have turned bad in a year. The slippage ratio of a bank is calculated as Fresh accretion of NPAs during the year /Total standard assets at the beginning of the year multiplied by 100. Provisioning Coverage Ratio (PCR): This is the ratio of provisioning to GNPA and indicates the extent of funds a bank has kept aside to cover loan losses. For Instance, a company has GNPAs of Rs 100 and they have set aside 50 Rs, then the PCR is 50%. Net NPA (NNPA): The total figure left after deducting provisions made for bad loans from GNPA. (GNPA – Provisions+upgrades/writeoffs = NNPA) Special Mention Account (SMA) SMA-0 is a category in which stress with respect to the principal and interest has remained overdue for a period of 0 to 30 days. SMA-1 is a category in which stress with respect to the principal and interest has remained overdue for a period of 30-60 days. SMA-2 is a category in which stress with respect to the principal and interest has remained overdue for a period of 60-90 days

..... . VALI disclosures . .....

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Sunday, December 8, 2024

09/12/24, FinancialCommerceREPORT

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04/02/25, Gold Reserves: The glittering yellow metal, has attracted humans since its discovery. It has always been a significant and trustworthy part of any nation's economy and financial stability for centuries

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