We saw in the previous post that inflation is down as RBI mulls over further reduction in repo rate and CRR. So let's understand what they mean.
Repo Rate
A Repurchase Agreement (or repo) allows a borrower to use a financial security as guarantee for cash loan at a fixed rate of interest. A repo is equivalent to a cash transaction combined with a forward contract, as the borrower has to later buy back the security from the lender at a fixed price.
In the Indian context, repo rate is the rate at which banks borrow money from Reserve Bank of India (RBI).
Reverse repo is the rate at which RBI borrows money from banks.
CRR or Cash Reserve Ratio is a bank regulation which defines the amount of funds that the banks have to keep with the RBI (for India; a central bank otherwise). An increase of the CRR implies that the banks have less money available.
Statutory Liquidity Ratio (SLR) is the amount a commercial bank has to maintain, before it can provide credit to its customers. SLR is also determined and maintained by RBI to keep tabs on expansion of bank credit.
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Inflation occurs when there are less goods (supply) and more buyers (demand), resulting in an increase in the price. Well, I'm sure we all learnt that in school, but it was important here as bank interest rates are connected to inflation.
Monday, December 29, 2008
Sunday, December 28, 2008
Weekend Scoop : Satyam Chairman's Shares Mortgaged, Inflation Going Down, RPL Gains
The sensex was obviously closed over the weekend, so we'll just look at some of the financial effects of events earlier in the week.
The Satyam fiasco keeps getting gloomier; apparently Ramalinga Raju had mortgaged his shares (he and his family hold about 8.61% stake in the company) to institutional lenders, who might have sold them already. This has put added pressure on the board of directors, who were already under duress after academician Mangalam Srinivasan, an independent board member, had resigned on Dec 25.
Inflation is down to 6.61%; and with news of a possible reduction in repo rates, reverse repo rates and the CRR by RBI, experts predict that inflation can reach as low as 2% in March next year.
I had mentioned RIL's new venture in Jamnagar - Reliance Petroleum Limited (RPL) gained over 6 percent a day after the refinery started. Although Mukesh Ambani had to deal with the Petroleum Ministy's decision to turn down RPL's request to export LPG, citing that the country still has LPG deficit.
Also, business magnate Vijay Mallya announced that with approximately 500 crores turnover in December, Kingfisher airlines will break-even the losses it had sustained earlier.
The Satyam fiasco keeps getting gloomier; apparently Ramalinga Raju had mortgaged his shares (he and his family hold about 8.61% stake in the company) to institutional lenders, who might have sold them already. This has put added pressure on the board of directors, who were already under duress after academician Mangalam Srinivasan, an independent board member, had resigned on Dec 25.
Inflation is down to 6.61%; and with news of a possible reduction in repo rates, reverse repo rates and the CRR by RBI, experts predict that inflation can reach as low as 2% in March next year.
I had mentioned RIL's new venture in Jamnagar - Reliance Petroleum Limited (RPL) gained over 6 percent a day after the refinery started. Although Mukesh Ambani had to deal with the Petroleum Ministy's decision to turn down RPL's request to export LPG, citing that the country still has LPG deficit.
Also, business magnate Vijay Mallya announced that with approximately 500 crores turnover in December, Kingfisher airlines will break-even the losses it had sustained earlier.
Friday, December 26, 2008
Video Tutorials
Here's a link to some video tutorials on finance and the market.
http://vimeo.com/marketplace/videos/sort:date
http://vimeo.com/marketplace/videos/sort:date
A New List - Profit Booking, Investments, Mutual Funds et al
I've often used the word profit booking as being one of the reasons for the plumetting sensex over the past few days. So let's understand what that means first.
Profit booking means encashing or realising the profit or gain in a share by selling it - can be done by individuals or brokers or corporations.
Let's look at an example to understand.
If you buy a stock at about 100, which rises to 350 within two months. Then a week goes by and it only accounts to 355 or 360. Although it has risen in the past week, what's clear is that there is a slow-down. If you sell the stock now, you stand to take a profit from it - this is profit booking.
We now look at a few provisions which facilitate funding.
Investment is the choice by an individual to risk his savings with the hope of gain - in terms of a future return or interest from a deposit in the bank or a purchase made.
Private Equity consists of equity securities in operating companies which are not traded publicly on a stock exchange. A leveraged buyout, venture capital and growth capital are all categories of private equity investments.
Mutual Fund is a collective investment scheme which is professionally managed and pools in money from many different investors, and in turn invests the pooled money in stocks, bonds and other securities.
Hedge Funds is a private investment fund which is open to a limited range of investors and also permitted to undertake more activities than other investment funds. Hedge funds look to offset potential losses by 'hedging' (minimise exposure to risk) their investments using methods like 'short selling' (where you sell shares you don't own and repurchase, hoping to profit from a decline in the price).
Short selling can be best described by this pic I found on Wikipedia.
The opposite of this is 'going long', where a share is purchased with the expectation that its price will rise.
Profit booking means encashing or realising the profit or gain in a share by selling it - can be done by individuals or brokers or corporations.
Let's look at an example to understand.
If you buy a stock at about 100, which rises to 350 within two months. Then a week goes by and it only accounts to 355 or 360. Although it has risen in the past week, what's clear is that there is a slow-down. If you sell the stock now, you stand to take a profit from it - this is profit booking.
We now look at a few provisions which facilitate funding.
Investment is the choice by an individual to risk his savings with the hope of gain - in terms of a future return or interest from a deposit in the bank or a purchase made.
Private Equity consists of equity securities in operating companies which are not traded publicly on a stock exchange. A leveraged buyout, venture capital and growth capital are all categories of private equity investments.
Mutual Fund is a collective investment scheme which is professionally managed and pools in money from many different investors, and in turn invests the pooled money in stocks, bonds and other securities.
Hedge Funds is a private investment fund which is open to a limited range of investors and also permitted to undertake more activities than other investment funds. Hedge funds look to offset potential losses by 'hedging' (minimise exposure to risk) their investments using methods like 'short selling' (where you sell shares you don't own and repurchase, hoping to profit from a decline in the price).
Short selling can be best described by this pic I found on Wikipedia.
The opposite of this is 'going long', where a share is purchased with the expectation that its price will rise.
Thursday, December 25, 2008
Maruti, TATA Motors incorporate production cuts, Oil Majors prepare for losses
The market is showing no signs of improving as the Sensex continued its slide for the third day in succession - 118 points down from yesterday's close. Profit bookings remain the major culprit, while hope festers for an improvement in the next earning season starting January 13.
The auto market is perhaps one of the worst hit from the recession. TATA Motors announced their 4th block closure of the year - from December 28th to 31st. This is because they have to match production with demand, and right now most people are postponing purchases due to the financial crunch.
Close on its heels follows Maruti - who had already taken a production cut of around 6% in November. If sales continue to fall as they are right now, Maruti is likely to go in for more production cuts this month-end, somewhere in the range of 5-7%.
The three major oil companies IOC, HPCL and BPCL are getting ready to receive net losses in the third quarter of this fiscal. After a bad first quarter where only IOC netted barely any profit and then huge losses in Q2 (especially where the IOC was badly hit), things are not looking up for the big three in the third quarter either. Even though crude oil prices have fallen to $35 a barrel, the irony is that these companies have the burden of still holding stocks which they had bought at over $100 a barrel, and which are depleting gradually - hopefully by January-end they'll have exhausted those stocks. Even if the fourth quarter does bring some respite, it'll not be enough and they'll have to deal with annual net losses for this fiscal - which will be a new experience for the three oil companies.
On a different note altogether, Reliance Industries Ltd began processing crude oil in a refinery in Jamnagar, Gujarat which will probably become the world's single biggest supplier of fuel - it also has an advantage over other export-oriented rivals in Europe and Asia.
The auto market is perhaps one of the worst hit from the recession. TATA Motors announced their 4th block closure of the year - from December 28th to 31st. This is because they have to match production with demand, and right now most people are postponing purchases due to the financial crunch.
Close on its heels follows Maruti - who had already taken a production cut of around 6% in November. If sales continue to fall as they are right now, Maruti is likely to go in for more production cuts this month-end, somewhere in the range of 5-7%.
The three major oil companies IOC, HPCL and BPCL are getting ready to receive net losses in the third quarter of this fiscal. After a bad first quarter where only IOC netted barely any profit and then huge losses in Q2 (especially where the IOC was badly hit), things are not looking up for the big three in the third quarter either. Even though crude oil prices have fallen to $35 a barrel, the irony is that these companies have the burden of still holding stocks which they had bought at over $100 a barrel, and which are depleting gradually - hopefully by January-end they'll have exhausted those stocks. Even if the fourth quarter does bring some respite, it'll not be enough and they'll have to deal with annual net losses for this fiscal - which will be a new experience for the three oil companies.
On a different note altogether, Reliance Industries Ltd began processing crude oil in a refinery in Jamnagar, Gujarat which will probably become the world's single biggest supplier of fuel - it also has an advantage over other export-oriented rivals in Europe and Asia.
Tuesday, December 23, 2008
Another list of terms - Assets, bonds, stocks and securities
We went through derivatives yesterday, so the focus is on assets, bonds and stock exchange today.
Assets are everything of value, owned by a person or company.
Assets are everything of value, owned by a person or company.
- Tangible Assets - financial and fixed assets including bonds, stocks, cash, building, equipment etc
- Intangible Assets - nonphysical resources and rights such as copyrights, trademarks, patents etc
Bond is simply a loan - in the form of a security wherein the issuer owes the holder a debt and has to repay the holder (along with interest) at a later date, known as maturity.
Securities are negotiable instruments representing financial value. Categorised into debt securities and equity securities.
Stocks is often looked at as a synonym of shares. The share of a stock means a share of ownership in a company. Stocks can also refer to different financial instruments such as government bonds or securities.
Stock Exchange or Securities Exchange or bourse (European) is a corporation or mutual organisation which provides trading facilities to exchange stocks and other securities.
In Today's News: Satyam going downhill
Satyam has felt the backlash of its controversial near deal with Maytas. Although the deal has been called off, investors have definitely lost their confidence in the company - resulting in a 14% plunge in the exchange market at the end of trade this Tuesday on the BSE. To add insult to injury, the World Bank debarred the company from doing business with it for eight years, on the charges of data theft. There's also rumours flying about a possible resignation from the Chairman, Ramalinga Raju.
In other news, the Bajaj brothers have finally reached a mutual agreement after six years of dispute. Rahul has agreed to give younger brother Shishir control of Bajaj Hindusthan, with a stake of 32.47% in the company.
Also, Wipro is all set to buy the technological arm of Citigroup Inc., i.e. Citi Technology Services Ltd (Citos). The deal has been reportedly fixed at $127 million - this would be a mutually beneficial acquisition, helping Wipro to get assured business of about half a billion dollars in software services and infrastructure management over the next six years, while Citigroup can focus on core business operations. This is similar to the deal that they had earlier inked with TCS - in Ocotber, TCS had acquired Citigroup Global Services Ltd (CGSL), the backoffice centre of Citigroup, for $505 million.
In other news, the Bajaj brothers have finally reached a mutual agreement after six years of dispute. Rahul has agreed to give younger brother Shishir control of Bajaj Hindusthan, with a stake of 32.47% in the company.
Also, Wipro is all set to buy the technological arm of Citigroup Inc., i.e. Citi Technology Services Ltd (Citos). The deal has been reportedly fixed at $127 million - this would be a mutually beneficial acquisition, helping Wipro to get assured business of about half a billion dollars in software services and infrastructure management over the next six years, while Citigroup can focus on core business operations. This is similar to the deal that they had earlier inked with TCS - in Ocotber, TCS had acquired Citigroup Global Services Ltd (CGSL), the backoffice centre of Citigroup, for $505 million.
Today's List - Derivatives
Today I'll take a look at some terms which fall under the 'Derivatives Market'. I'd tried reading up on this in July, during the placement season (Torux!) and don't remember much of it now.
Derivatives are financial instruments (or contracts) which are derived from the value of an underlying, which can be an asset, an index or another derivative. The main types of derivatives: Forwards (Futures), Options and Swaps.
Forward contract is an agreement between two parties to buy or sell an asset at a specified time in future. Forwards are traded over-the-counter.
Futures are similar to forwards, but differ in two ways -
Derivatives are financial instruments (or contracts) which are derived from the value of an underlying, which can be an asset, an index or another derivative. The main types of derivatives: Forwards (Futures), Options and Swaps.
Forward contract is an agreement between two parties to buy or sell an asset at a specified time in future. Forwards are traded over-the-counter.
Futures are similar to forwards, but differ in two ways -
- Futures are standardised and are traded on an exchange
- Futures are margined, with significantly less credit risk
Option is a contract written by the seller which gives the buyer a right, but not an obligation, to buy (call option) or to sell (put option) a particular asset. The seller receives a premium in return for granting the option.
Swap is a derivative in which two counterparties agree to exchange one stream of cash flows against another stream - these streams are called the legs of the swap.
The Derivatives market is divided into two - a market for exchange traded derivatives (futures) and a market for over-the-counter derivatives.
Monday, December 22, 2008
Fall against the Dollar and Sensex below 10k
Monday turned out to be a bad day for the Indian market - the BSE's Sensex fell below the 10,000 mark to end the day at 9,928.35, down 171.56 points from Friday. The major factor responsible for this would be that the selling pressure intensified on heavyweights like Reliance Industries and ICICI. Traders resorted to profit booking in oil, gas and banking stocks in the last hour, which resulted in the tripping of indices. The Asian markets were also subdued, and the European market saw a weak opening.
The rupee also didn't have a field day on Monday - the Indian currency declined 1.6 per cent to 48.02 against the dollar. Apparently this happened as a result of importers stepping up purchases to meet their dollar needs. There has been an apparent spurt in demand from importers, including petroleum companies, who purchased dollars to meet their month-end payment requirements. Of course, The rupee has appreciated over 8 per cent from an all-time low of 50.615 on December 2.
In other news, the OECD (Organisation for Economic Co-operation and Development) has predicted that upto 25 million more people would become jobless by 2010, lending credence to International Labour Organisation's forecast that the total unemployed people at the end of 2009 would be around 210 million. Not a very exciting prospect.
The rupee also didn't have a field day on Monday - the Indian currency declined 1.6 per cent to 48.02 against the dollar. Apparently this happened as a result of importers stepping up purchases to meet their dollar needs. There has been an apparent spurt in demand from importers, including petroleum companies, who purchased dollars to meet their month-end payment requirements. Of course, The rupee has appreciated over 8 per cent from an all-time low of 50.615 on December 2.
In other news, the OECD (Organisation for Economic Co-operation and Development) has predicted that upto 25 million more people would become jobless by 2010, lending credence to International Labour Organisation's forecast that the total unemployed people at the end of 2009 would be around 210 million. Not a very exciting prospect.
First List of Terms
Well, let's begin.
First up, the term itself - Economics. It's derived from the Ancient Greek term oikonomia, which means the 'management of a household, administration' or in short, the rules of the household'.
I think by natural progression the next term to spring to mind would be Finance - it refers to the fields of time, money and risk along with how they are related.
Funding, or financing, means to provide capital - for short or long term purposes.
Capital refers to financial wealth, or the amount of wealth that a person controls or is capable of controlling. It can also be referred to as cash flow.
A credit rating assesses the credit worthiness of an individual, corporation, or even a country. Credit ratings are calculated from financial history and current assets and liabilities.
First up, the term itself - Economics. It's derived from the Ancient Greek term oikonomia, which means the 'management of a household, administration' or in short, the rules of the household'.
I think by natural progression the next term to spring to mind would be Finance - it refers to the fields of time, money and risk along with how they are related.
Funding, or financing, means to provide capital - for short or long term purposes.
Capital refers to financial wealth, or the amount of wealth that a person controls or is capable of controlling. It can also be referred to as cash flow.
A credit rating assesses the credit worthiness of an individual, corporation, or even a country. Credit ratings are calculated from financial history and current assets and liabilities.
A New Venture
This blog is aimed at college students - as the name suggests, it's all about economics for collegians. Hopefully it'll help those who are looking to brush up their skills and knowledge if they haven't studied finance in college - neither have I.
If I can stay faithful to my resolve, from this day I'll be putting up a few new terms everyday and also a blog on a major financial story of the day. This is how I plan to go about learning bits and pieces of the financial world, with a focus on the Indian economy. I invite you to learn with me.
If I can stay faithful to my resolve, from this day I'll be putting up a few new terms everyday and also a blog on a major financial story of the day. This is how I plan to go about learning bits and pieces of the financial world, with a focus on the Indian economy. I invite you to learn with me.
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