Saturday, 24 October 2015

Seven Reasons why Gold Monetization Scheme will be a Spectacular Failure-VRK100-24Oct2015

Why Gold Monetisation Scheme 2015 will be a spectacular failure

Indians simply love gold--there is no rationale or logic--the buying decision is more of a psychological or emotional one. The same is true across the globe except in the US or a few other nations.

We love something tangible such as gold--we can feel it, touch it, kiss it, display it or wear it. You can also lend it or borrow money against gold ornaments. Gold as a financial asset is not very successful in India.

Government and regulatory authorities say gold is an unproductive asset. But most of the Indian public doesn’t buy this argument. Their lust for gold is enormous; nobody can change the views of the people.

Government’s sermons on discouraging Indians to buy physical gold won’t work. Indians see it as a highly liquid asset—though they get shortchanged routinely by gold merchants and jewelers in the form of less weight, higher rates, making charges and others.

Governments have no business to tell people what they want to buy or consume. They can’t say gold is undesirable for you. People are intelligent enough to make their own choices.

Many believe gold is a safe instrument in times of crises, war or other disasters. There is no point in fighting such views. Humans love for gold will continue forever—its demand may wane or rise depending on factors such as central bank policies, government fiscal policies, interest rates or financial crises.

Many Indians are wary of governments or their schemes. Because such schemes involve a lot of paper work and/or seen as a waste of time. Physical gold works as an insurance against the failure of governments in protecting people’s interests.

Gold may not have any intrinsic value, but as an insurance against the ineffective monetary policies of global central banks, physical gold acts as a perfect hedge in one’s portfolio as part of asset allocation.

P.Chidambaram, when he was finance minister, officially imposed several curbs on gold imports. As per official numbers, gold imports declined for some time. But gold smuggling has gone up. Net-net, the impact of gold curbs on India’s current account deficit is only minimal. The gold smuggled will reflect elsewhere in India’s imports.

Once the government loosens its curbs, Indians will buy more gold in a resurgent way. The suppressed demand for gold may rear its head in future.

Gold Monetisation Scheme 2015:

With a view to mobilizing physical gold from Indians, the Government of India last month launched a scheme named Gold Monetisation Scheme 2015, to be implemented by scheduled commercial banks across India.

In the words of the government, the objective of the scheme is “mobilizing the gold held by households and institutions in the country and to putting this gold into productive use.

India’s central bank Reserve Bank of India, a few days back, issued directions to banks on the implementation of the scheme.

Seven reasons why Gold Monetisation Scheme 2015 will be a spectacular failure:

1) Any government scheme comes with a lot of stupid and bureaucratic rules. Though GMS 2015 is a slight improvement over the old gold deposit scheme, the new scheme has its own share of complexity. If anything can’t be explained in one minute to a user, the product is bound to fail.

2) As the RBI circular on GMS shows, the product involves a lot of costs for banks. These high costs will deter banks from offering this product with a lot of enthusiasm—unless the Modi government batters this product on bankers’ heads the way it had successfully done with the Jan Dhan Yojana. Deposits under the Gold Monetisation Scheme will attract CRR and SLR—the statutory requirements of Reserve Bank of India.

3) Let us come to the user. Gold is the easiest conduit for black money in India. All the government’s evangelistic zeal for GMS 2015 will make users wary of its ultimate intentions. I mean the suspicion is that Modi government will try to target black money holders in the name of GMS. Indians are completely put off by moralizing (from the likes of P. Chidambaram and Arun Jaitley) which describe gold as unproductive. Most Indians including the poor hold gold as it’s highly liquid.

4) Indians have enormous lust for gold and gold ornaments. These gold bugs will not like their gold ornaments being melted into gold bars. This is the most deterrent factor of this product for the end user.

5) Banks may offer only two percent annual interest on this product. As such it’s not worth going for a product that offers very low interest. Under the current market conditions, there are a plenty of products that offer higher interest.

6) There are only 331 Assaying and Hallmarking Centres in India—and most of them are concentrated in South India. This number is too small for the success of this product.

7) Know-your-customer (KYC) rules are applicable for this scheme. When they hear KYC, more than 50% of the public will run away from the product! Without doubt, KYC is the most dreadful word in India right now!

Written with malice and jaundiced eyes against all governments:

Copyright © RamaKrishna Vadlamudi—24 October 2015.

Please read the following links for full details of the scheme:

1) Government of India notification on GMS 2015:

2) RBI circular on GMS 2015:

Disclosure: Gold does not form part of my asset allocation—that is to say I don’t own gold in any form.

Disclaimer: The author is an investment professional. The views are personal. His views should not be construed as investment advice. Before making any investments, you are advised to consult your registered financial advisor. The author will in no way responsible for the decisions taken by readers.

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Thursday, 12 March 2015

Weak Monetary Policy Transmission-VRK100-12Mar2015

Why is monetary policy transmission (MPT) slow in India?

(Please see comments below)

Downward stickiness of lending rates: Whenever Reserve Bank of India (RBI) decreases policy rates, banks do not pass on the benefit of lower interest rates to borrowers immediately. The pass-through of policy rates to lending rates is rather slow. Why?

Bank deposit rates are fixed, not floating. When interest rates decline, deposits contracted at higher rates in the past continue to enjoy those rates till maturity. So, banks' cost of funds will not come down immediately.

In contrast, when banks cut lending rates, they have to cut rates on all loans with immediate effect. Most of the bank loan rates are floating. In addition, Indian banks are suffering from a high share of bad loans.

Interest rates are set by the government on small savings, which restrict the reduction in bank deposit rates.

Persistence of large market borrowing programme of the governments hardens interest rate expectations and complicates the transmission. 

When RBI decreases policy interest rates, the banks are slow to decrease lending rates. But when RBI raises policy rates, they are quick to increase lending rates. This divergent response of banks to RBI policy rate changes decreases the effectiveness of RBI’s monetary policy transmission.

The introduction base rate system of loan pricing in banks in July 2010 has not helped matters much. 

Many experts are of the view that banks are protecting their margins by not passing on the benefits of lower interest costs, immediately, to borrowers.

What India needs right now to make the monetary policy transmission more effective is more competition in the banking system. But the RBI and the Indian government are very reluctant to issue new bank licenses.

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Friday, 29 August 2014

India's First Quarter GDP Surges-VRK100-29Aug2014

India’s real gross domestic product (GDP) in April-June (first quarter of 2014-15) surged by 5.7 percent over the first quarter GDP of 2013-14. This is quite positive for the economy and a great relief for the Central Government. The GDP measures a country’s national income and is the total value of all goods produced and services provided within a country. After clocking sub-5 percent growth rates for almost all quarters in the last two years, the GDP growth crossed 5 percent in the latest quarter.

The GDP at factor cost is Rs 14.38 lakh crore in the first quarter of 2014-15. And the GDP at current market prices is Rs 28.43 lakh crore. The surge in the first quarter GDP is led by finance, insurance, real estate and business services (10.4% growth over first quarter of 2013-14); electricity, gas and water supply (10.2% growth); community, social and personal services (9.1% growth); and construction (4.8% growth).

A substantial part of the increase in GDP growth can be attributed to the previous UPA government. The former finance minister P Chidambaram took several steps to revive the economy, though his methods are questionable. The current account deficit was brought under control through some blunt measures, such as, curbing gold imports and raising interest rates. The UPA government controlled the fiscal deficit also, though with the help of some creative accounting, extracting special dividends from cash-rich public sector enterprises and postponing expenditures to the next year.

The surge in GDP growth is a positive for Indian stocks. Global stocks too have been on the upswing for several years though the outlook for the economies of the US, eurozone and China is not very rosy. Prices of crude oil and some other commodities are in decline in recent months—a positive for India.

On expectations of higher growth from the new government, foreign investors have invested heavily in Indian stock and government bond markets this year.

Now the speculation will shift to a possible upgrade in India’s sovereign rating. There have been some rumours that the rating agencies, such as, Standard and Poor’s and Moody’s may consider raising India’s rating. If it happens it will be a boost not only for India’s economy but also for Indian stocks.

However, rainfall from India’s South-West monsoon is deficient in several parts of the country, which may negatively impact agricultural production and livelihoods of millions. The Reserve Bank of India is still battling with inflationary pressures, especially, food inflation.

We also need to watch how the new NDA government led by prime minister Narendra Modi will revive the moribund manufacturing sector and create millions of jobs for India’s restless youth. As far as infrastructure sector is concerned, several measures have been taken in the past three months to revive road and other projects. Indians are hoping for a better future.

Related Articles:

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Abbreviations: NDA – National Democratic Alliance, UPA – United Progress Alliance
Data source: Central Statistics Office, GoI.

Disclaimer: The author is an investment analyst, equity investor and freelance writer. This write-up is for information purposes only and should not be taken as investment advice. Investors are advised to consult their financial advisor before taking any investment decisions. He blogs at:

Connect with him on twitter @vrk100

Monday, 11 August 2014

What is Liquidity Coverage Ratio?-VRK100-11Aug2014


Banks, across the globe, have to maintain liquidity coverage ratio (LCR) as part of the Basel III norms. These norms are prescribed by the Bank for International Settlements. BIS a global body that acts as a bank for central banks.

Liquidity coverage ratio is the proportion of highly liquid assets that a bank should maintain to meet its liquidity needs in a 30-calendar day period. The LCR is calculated as a ratio of high-quality liquid assets to the total net cash outflows over the next 30 calendar days.

The LCR enables a bank to withstand any financial shocks, such as a run on its deposits, a credit rating downgrade or derivative-linked shocks. These global norms are being introduced effective 1st of January, 2015 (see table above).

The 2007/2008 global financial crisis forced central banks to adopt more stringent liquidity requirements—in the form of the liquidity coverage ratio and net stable funding ratio—to manage liquidity risk in a better manner.

Let us discuss the background and more details of this liquidity coverage ratio.


During the 2007/2008 global financial crisis, banks and other financial institutions mismanaged their liquidity requirements. The collapse of Lehman Brothers drove home the importance of liquidity in the banking system. Banks could not liquidate their assets, leading to severe stress in the money markets.

Liquidity risk arises when securities cannot be purchased or sold without a significant loss in value. This risk is most acute in periods of unusually high market stress as happened during the global financial crisis.

With a view to managing such liquidity risks, the Basel Committee on Banking Supervision (BCBS) has introduced new measures, including the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). The NSFR requires banks to fund their assets with more stable sources of funding—providing sustainable maturity structure of assets and liabilities over long term.

What is the need for an LCR?

Once LCR is implemented, banks will be in a better position to meet short-term emergency liquidity (cash) needs. The LCR bolsters a bank’s ability to withstand any financial and/or economic shocks in the short term. It will also reduce the risk of spillover from the financial sector to the real economy.

The Liquidity Coverage Ratio is a key component of the Basel III framework. Basel III norms are global regulatory standards on bank capital adequacy and liquidity endorsed by the G20 Leaders.

The LCR enhances the short-term resilience of banks to potential liquidity disruptions by ensuring that they have sufficient high-quality liquid assets to survive an acute stress scenario lasting for 30 days.

The stress scenarios may include: a run on the bank deposits; a bank losing its ability to raise unsecured funds; a credit rating downgrade; market-related stress and derivative-linked shocks.

How to Calculate the LCR?

As mentioned above, the liquidity coverage ratio is the proportion of highly liquid assets that a bank should maintain to meet its liquidity needs in a 30-calendar day period. The LCR is calculated as a ratio of high-quality liquid assets to the total net cash outflows over the next 30 calendar days.

The LCR has two components: the value of the stock of high-quality liquid assets (HQLAs) and total net cash outflows.

LCR = Stock of HQLA / Total net cash outflows over the next 30 calendar days

The LCR should be equal to or greater than 100 percent.

Banks, across the globe, have to maintain this LCR from 1 January 2015. With effect from 1 January 2015, the LCR will be 60% and rising in equal steps of 10% every year to reach the minimum of 100% LCR on 1 January 2019 as given below:


Minimum LCR

Effective 1 January 1, 2019, the LCR should be minimum 100% (that is, the stock of HQLA should at least equal total net cash outflows) on an ongoing basis. However, during periods of financial stress, banks may use their high-quality liquid assets to tackle liquidity issues and thereby falling below 100 percent.

High-Quality Liquid Assets (HQLA):

Liquidity of an asset indicates the ability and ease with which it can be converted to cash. Liquid assets are those that can be converted to cash quickly in order to meet financial obligations. Liquid assets include cash, reserves kept with central bank and sovereign debt.

To remain viable, banks must have enough liquid assets to meet its near-term obligations, such as withdrawals by depositors.

Banks must hold a stock of HQLA to cover the total net cash outflows over a 30-day period under the prescribed stress scenario. These HQLAs must be unencumbered—that is free of any legal, regulatory or contractual restrictions.

The HQLA should have the fundamental characteristics of low risk; ease and certainty of valuation; low correlation with risky assets; and listed on a developed and a recognized exchange. And their market-related characteristics should be:  active and sizeable market; low volatility; and flight to quality.

Level 1 and Level 2 Assets:

HQLA consist of Level 1 and Level 2 assets. Level 1 assets generally include cash, reserves kept with central bank, and certain marketable securities backed by sovereigns and central banks, among others. These assets are typically of the highest quality and the most liquid, and there is no limit on the extent to which a bank can hold these assets to meet the LCR.

Level 2 assets are comprised of Level 2A and Level 2B assets. Level 2A assets include, for example, certain government securities, corporate debt securities (including commercial paper) and covered bonds.

Level 2B assets include lower rated corporate bonds, residential mortgage backed securities (RMBS) and equities that meet certain conditions. Level 2 assets may not in aggregate account for more than 40% of a bank’s stock of HQLA. Level 2B assets may not account for more than 15% of a bank’s total stock of HQLA.

Level 2A and Level 2B assets are subject to haircuts ranging from 15% to 50%.

Total net cash outflows:

The term total net cash outflows  is defined as the total expected cash outflows minus total expected cash inflows in the specified stress scenario for the subsequent 30 calendar days. Total expected cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities and off-balance sheet commitments by the rates at which they are expected to run off or be drawn down.

Total expected cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in under the scenario up to an aggregate cap of 75% of total expected cash outflows.

Total net cash outflows over the next 30 calendar days =

 Total expected cash outflows – Min {total expected cash inflows; 75% of total expected cash outflows}

Frequency of calculation and reporting:

The LCR should be used on an ongoing basis to help monitor and control liquidity risk. The LCR should be reported to central banks at least monthly. However, central banks may increase the frequency to weekly or even daily at their discretion. The time lag in reporting should be as short as feasible and ideally should not surpass two weeks.

The LCR versus the SLR in the Indian context:

The Reserve Bank of India (RBI) issued the liquidity coverage ratio guidelines for Indian banks on 9 June 2014. These are more or less in line the norms prescribed by the Basel Committee on Banking Supervision.

Indian banks will have to maintain this LCR over and above the statutory liquidity ratio (SLR) prescribed by RBI. As the assets kept for LCR purpose are unencumbered, those assets will be outside of the SLR obligation.

While the purpose of LCR is to meet the short-term liquidity requirements, the purpose of SLR is long-term in nature. The SLR mainly serves three purposes in India:

o  It serves as a solvency cushion for banks (ultimately, bank depositors) against any emergencies –like liquidity crisis, bank failures, etc
o  It is used by the Central Government to raise money (government borrowings) cheaply from banks
o  RBI uses it as a monetary policy tool to infuse (absorb) liquidity into (from) the banking system

With effect from 9 August 2014, the RBI cut the SLR for Indian banks by 50 basis points to 22 percent of net demand and time liabilities (NDTL). The latest SLR cut is expected to help Indian banks in meeting the new LCR norms.

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Disclaimer: The author is an investment analyst with a vested interest in the Indian stock markets. This is for information purposes only. This should not be construed as investment advice. Investors should consult their own financial advisers before taking any investment decisions. The author blogs at:

Tweets at @vrk100

Thursday, 10 July 2014

India 2014-15 Pre-Budget Bites-VRK100-10Jul2014

My Pre-Budget Bites on India Budget 2014-15

 (Older Tweets are presented at the top)

Wednesday, 9 July 2014

India's Economic Survey and Household Savings-VRK100-09Jul2014

Data:  Economic Survey 2013-14.

India’s household savings have been declining since the financial year 2009-10. From an all-time of 25.2 percent in 2009-10, the household sector savings rate declined to 21.9 percent in 2012-13 as a percentage of GDP at current market prices.

Household savings consist of financial assets and physical assets. Interestingly, households in recent years have shifted from financial assets to physical assets, such as real estate and gold. Stung by excessive inflation, low real interest rates and moribund stock market, they have no choice but to shift their savings to physical assets.

After reaching an historic high of 12.0 percent in 2009-10, the financial assets’ share in GDP has come down drastically to 7.1 percent in 2012-13. The trend is just opposite for physical assets, whose share in GDP has enhanced from 13.5 percent in 2008-09 to a record 15.8 percent in 2011-12 before falling to 14.8 percent in 2012-13.

It will be interesting to watch what the new finance minister Arun Jaitley will do to stimulate household sector’s financial assets, while presenting the 2014-15 budget tomorrow.

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Some of my Tweets on Economic Survey 2013-14:

Disclaimer: The author is an investment analyst, equity investor and freelance writer. The author has a vested interest in the Indian stock markets. This write-up is for information purposes only and should not be taken as investment advice. Investors are advised to consult their financial advisor before taking any investment decisions. He blogs at:

Connect with him on twitter @vrk100