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.

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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





Summary:

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.

Background:

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:







Effective
1Jan.2015
1Jan.2016
1Jan.2017
1Jan.2018
1Jan.2019






Minimum LCR
60%
70%
80%
90%
100%

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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References:



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: http://indiabudget.nic.in/  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:

http://ramakrishnavadlamudi.blogspot.in/      http://www.scribd.com/vrk100


Connect with him on twitter @vrk100





















Tuesday 24 June 2014

Opinion on ITC Limited-VRK100-24Jun2014


Opinion on the stock of ITC Limited through tweets



















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Disclosure: The author is a long term investor in ITC stock.

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

Sunday 22 June 2014

Measures to Analyse Country Risk-VRK100-22Jun2014

 

 

Measures to Analyse Country Risk


The above are some of the measures, related to external accounts, used to analyse a country's risk.
 
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The following images (from old files) are included here after 06Oct2020 for reference purpose > 
 
These images are sourced from various web sources >
 
These images are just for information purposes only, this is not investment advice. Readers should consult their own advisers for advice before making any investment decisions.
 

















 
 

 
 


















 
 

 
 
 












 
 
 

 
























 





















 

 

 

 
 

Disclosure:  I've vested interested in Indian stocks. It's safe to assume I've interest in the stocks discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is an investment professional with a vested interest in financial markets. He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

 Twitter @vrk100