Rama Krishna Vadlamudi NOVEMBER 14th, 2009
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DEVELOPMENTS IN FOREIGN EXCHANGE MARKETS BETWEEN APRIL 2009 and Nov. 13th, 2009. This article chronicles several important developments that have occurred in the financial markets the world over during this six-month period with particular reference to India. For example, several policy initiatives have been taken by Reserve Bank of India during the reference period. All these have been codified and brought under a single document for the benefit of general readers and experts. This is an easy reference guide to students of financial markets. To aid them, the developments have been detailed month-wise. Please have a look at them:
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1. Income Tax Slabs 2009-10 for Salaried Class 2 246
2. Direct Taxes Code Bill 2009-analysis 1 084
3. Public Provident Fund PPF ac-Little Known Facts 1 037
5. Good and Services Tax-GST-an introduction 1 041
4. Interest Rate Futures-NSE launches IRFs 674
6. Nifty Bees-Exchange Traded Fund 607
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APRIL 2009
• The European Central Bank (ECB) has on April 2nd cut its lending rate by 25 bp to 1.25 per cent. This is the sixth time ECB has lowered its key rate since October 2008, when it stood at 4.25 per cent.
• US unemployment rate has increased to 8.5 per cent in March 2009, the highest level since 1983
• The Indian Government would buy bonds worth USD 10 billion as its contribution towards increasing the capital base of IMF by USD 500 billion announced at the G-20 meeting in London early this month. India’s share in close to 2% in the Fund and as such it is contributing 2% of the new capital base to the IMF.
MAY 2009
• India’s merchandise exports declined 33 per cent in March 2009 to touch USD 11.52 billion, the lower performance in three months of fourth quarter of financial year 2008-09. This is the sixth month in a row that exports registered a decline. For the full year 2008-09, merchandise export grew at only 3.4 per cent in dollar terms to touch USD 168.70 billion. This is the first time in a decade that merchandise exports recorded a single-digit growth.
• The current problem with the US is that US citizens have increased their savings in times of a an economic crisis. This is further aggravating the slowing US economy.
• The European Central Bank has cut its main interest rate by 25 bp to one per cent which is a record low since the ECB’s inception in 1998
• Federal funds rate and discount rate: The US federal funds rate, in a practical sense, is similar to inter-bank call money borrowings whereby banks/financial institutions lend their overnight surplus funds to other needy banks. The official definition of fed funds rate is: the interest rate at which depository institutions (usually banks) lend balances at the Federal Reserve to other depository institutions overnight. The current fed funds rate is 0% to 0.25%.The discount rate is the rate charged to commercial banks and other depository institutions on short-term loans (usually overnight) they receive from their regional Federal Reserve Bank’s discount window. The Discount Window is an instrument of monetary policy that allows eligible institutions to borrow money, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions. The current discount rate is 0.50% (for primary credit). Because primary credit is the Federal Reserve's main discount window program, the Federal Reserve at times uses the term "discount rate" to refer to the primary credit rate. On March 17, 2008, the primary credit program was temporarily changed to allow primary credit loans for terms of up to 90 days. Also, the spread of the primary credit rate over the FOMC's target federal funds rate has been reduced to 25 basis points. These changes will remain until the Federal Reserve determines that market liquidity has improved. All loans must be secured by collateral acceptable to the Federal Reserve Bank.
JUNE 2009
• India’s exports shrank by 33.2 per cent in April 2009 (USD 10.74 billion), while imports (USD 16.08 billion) registered a fall of 36.6 per cent
• EXIT STRATEGY: Central Banks around the world, it seems, have been looking for an “Exit Strategy” – that refers to the process of withdrawal of massive fiscal and monetary stimulus packages that governments and central banks were forced to inject into their flagging economies. If inflation resurfaces, central banks will be hard pressed to withdraw liquidity from the system.
• Car giant General Motors (GM) has filed for bankruptcy protection, marking the biggest failure of an industrial company in US history. The widely expected move comes after GM had seen its losses widen following a steep fall in sales in recent years. General Motor’s move into bankruptcy protection is backed by the US government, which is expected to take a 60% stake in the company.
• BRIC SUMMIT: The world's newest economic grouping has ended its first major summit by calling for a more diversified international monetary system. But the leaders of Brazil, Russia, India and China stopped short of criticising the world's dominant currency, the US dollar. The group also repeated calls for greater representation at major institutions, such as the World Bank.
• For the first time in nearly two years India’s current account recorded a surplus in the March 2009 quarter; with the surplus being USD 4.7 billion
JULY 2009
• General Motors (GM) says it has emerged from bankruptcy protection after creating a "new GM" made up of the carmaker's best assets. The leaner GM will own four key brands including Cadillac and will be 60.8% owned by the US government. Canada, which provided $9.1bn in loans, will have an 11.7% stake. A United Auto Workers union retiree healthcare trust fund will hold 17.5%.
• Chinese economy clocked a GDP growth of 7.9 per cent during second quarter (April-June 2009), up from 6.1 per cent achieved during the first quarter
• India Infrastructure Finance Company Limited (IIFCL) raised Rs 10,000 crore for refinancing banks for infrastructure lending. Now, the company says it is ready to lend this money to banks in the next six to seven months, said its chairman SS Kohli.
• The current limit for FII investment in government securities is USD 6.5 billion while for corporate debit, it is USD 15 billion
• RBI has permitted FIIs and NRIs to invest in IDRs (Indian Depository Receipts) subject to FEMA. With a view to facilitating eligible companies resident outside India to issue Indian Depository Receipts (IDRs) through a domestic depository and permitting persons resident in India and outside India to purchase, possess, transfer and redeem IDRs, RBI has decided to operationalise the IDR Rules, notified by the Government of India, as amended from time to time, with immediate effect. Accordingly, eligible companies resident outside India may issue IDRs through a domestic depository. Automatic fungibility of IDRs is not permitted. IDRs shall not be redeemable into underlying equity shares before the expiry of a one year period from the date of issue of the IDRs.
• Though Hong Kong dollar is officially pegged to the US dollar at 7.80, they allow the market fluctuations to take place between 7.85 and 7.75; beyond which Hong Kong Monetary Authority will buy or sell the USD for HKD to keep it stable. Its 100% currency board system is one of few in the world where they have kept it so with 100% sanctity to its true meaning of if the peg. At this point of time, HKD is hovering at 7.75 to the USD.
AUGUST 2009
• India and South Korea signed a comprehensive economic partnership agreement. This is the second economic agreement for India, the first being with Singapore.
• India has signed a free trade agreement (FTA) with the 10-nation ASEAN. Under the FTA, India will lift import tariffs on 80 per cent traded products between 2013 and 2016, starting from January 1, 2010.
• In the US, the savings from households has gone up to 7 per cent of GDP
• The economies of France and Germany have moved out of recession with both reporting that their GDP grew by 0.3 per cent , quarter on quarter in April to June 2009
• The European Central Bank and Bank of England kept their key interest rates unchanged at one per cent and 0.5 per cent respectively
• Japan has come out of recession, recording a GDP growth of 0.9 per cent in April-June 2009 – this work out to an annualized growth of 3.7 per cent year-on-year. The Bank of Japan has kept its key interest rate (officially known as the uncollateralized overnight call rate) unchanged at 0.1 per cent.
• India’s Commerce Minister has unveiled a new Foreign Trade Policy (FTP) 2009-14 on August 27, 2009 (For full details, please log on to www.scribd.com/vrk100 and look for my document dated November 10th, 2009)
• During January-June 2009, Chinese banks said to have lent a record USD 1.1 trillion in new loans, triggering off a wave of speculation that this lending spree would create a bubble in the long run with the Shanghai index falling by more than 20 per cent from its July 2009 peak
SEPTEMBER 2009
• RBI Governor, D.Subbarao has said that there is no need for a single regulator for the financial markets and that it is better, at least for the time being, to stick to the current arrangement of having separate regulators for banks, insurance, stock market, pensions and so on
• India’s holding of US Treasury Securities at the end of July 2009 stood at USD 38.9 billion versus USD 39.3 billion at the end of June 2009
• Public sector banks in India are getting funds of USD two billion from World Bank to shore up their capital. This money comes at an interest of 1.05 per cent over LIBOR for tenors above 14 years and without any conditionalities attached thereto as part of IBRD’s Development Policy Loan. It approved other loans also: USD one billion to Power Grid Corp and USD 1.12 billion for IIFCL.
• At present, banks are permitted to raise lower Tier II subordinated bonds without special features such as Call and Step up options. On a review of international practices in this regard, it has been decided to permit banks to issue subordinated debt as Tier II capital with call and step-up options.
• Assets held by ETFs backed by gold bullion jumped 55 per cent in 2009 as financial turmoil and inflation concerns boosted the metal’s appeal as an alternative investment. The value of the assets jumped to USD 51.4 billion as of August 31. This compares with USD 33.1 billion on December 31, 2008. The SPDR Gold Trust, the world’s biggest bullion-backed ETF jumped 50 per cent to USD 32.6 billion this year as on August 31.
OCTOBER 2009
• Reserve Bank of Australia has raised its interest rate consecutively for the second month from 3.00 per cent to 3.25 per cent. It’s the first G-20 country to raise interest rates after the world was hit by the global economic meltdown last year.
• The Rupee, on October 6th, breached the psychological level of 47 to the US dollar on robust dollar inflows and greenback’s weakness against the euro. Rupee on that day ended at 46.88, a gain of 64 paise over previous day.
• India has been ranked as 134th out of 182 countries based on Human Development Index (HDI). HDI is computed on three criteria: PPP per cap GDP, health (life expectancy) and education (adult literacy rate, combined gross enrollment ratio). The Human Development Report 2009 has used data till 2007.
• Media reports suggest that CFTC (Commodity Futures Trading Commission) is trying to put curbs on commodity ETFs, that are listed on stock exchanges and are traded like shares. CFTC is the US regulator for commodity futures. Many market watchers charge exchange traded funds with driving up grains and energy prices to record highs last year, raising the cost of food and fuel before the recession hit all financial markets with steep losses. CFTC is trying to prevent such a phenomenon from recurring in commodities and is working with Securities Exchange Commission to standardize rules for all investors.
• Experts feel that Japan is likely to cede its ranks as the world’s second-largest economy sometime next year. The second may go to China which has been doing very well economically in the last decade or so. Not long ago, Japan was the “economic miracle,” an ascendant juggernaut on its way to rivaling the US, which has the biggest economy. Japan is crushed by rising national debt and loss productivity due to ageing population. Income inequality and poverty are on the rise. Unemployment stands at a record high of 5.7 per cent, while prices and wages are falling fast. China has surpassed Japan in having the biggest trade surplus and foreign currency reserves, as well as the highest steel production. And next year, China could overtake Japan as the largest automobile producer. Annual GDP growth in Japan averaged 10.4 per cent in the 1960s, 5 per cent in 1970s, 4 per cent in 1980s and 1.8 per cent in 1990s.
• The number of US bank failures this year has hit 100 after US federal regulators shut down the Florida-based Partners Bank. The Federal Deposit Insurance Corporation (FDIC), which controls the banking sector, has taken over the bank that held USD 68.7m in assets. Alarmingly, the number is growing every month.
• Mr Rajaratnam, founder of Galleon hedge fund, was charged with five others with carrying out $25m in insider trading by the Securities and Exchange Commission (SEC). It has been labelled the biggest hedge fund insider trading case in US history.
•
• Russian economy is going to shrink by 7.5 per cent during 2009, said its President Medvedev. Russia has been hit by fall in oil exports as it is depended on oil.
•
• The US budget deficit has reached a record level of USD 1.4 trillion in the year to September 30, 2009, as per Congress estimates. This is said to be 9.9 per cent of its GDP and is higher by more than three times the deficit of 2008 .
NOVEMBER 2009
• Bank collapses in the US have crossed more than 107 in 2009 till now
•
• Reserve Bank of Australia has raised its interest rate consecutively for the second month from 3.25 per cent to 3.50 per cent. RBA raised its interest rate from 3.00 per cent to 3.25 per cent in October 2009
•
• Sixty-four per cent of global currency reserves are in US dollars, according to IMF. The share of euro is 27 per cent. OPEC countries prefer to price their petroleum products only in the USD. The euro zone hardly has any oil reserves.
•
• RBI places the draft guidelines on Over the Counter (OTC) Foreign Exchange Derivatives and Hedging Commodity Price Risk and Freight Risk overseas for comments. The Reserve Bank of India has proposed to allow banks to offer plan vanilla cross currency options to persons residents in India, who transform their rupee liability to a foreign currency liability.
The important changes proposed in the draft guidelines are as follows:
a). Importers and exporters having foreign currency exposures in trade transactions, are being permitted to write covered call and put options both in foreign currency-rupee and cross currency and also receive premia.
b). AD Category I banks are being permitted to offer plain vanilla cross currency options to persons residents in India (other than AD Category- I banks), who transform their rupee liability to a foreign currency liability.
c). Since importers and exporters are being permitted to write covered call and put options both in foreign currency- rupee and cross currency and also receive premia, the facility of zero cost structures/cost reduction structures is being withdrawn.
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In addition to the above developments, several initiatives have been taken by the government has taken a number of initiatives. GOI has re-introduced exchange-traded interest rate futures in India.
LATEST FINANCIAL TERMS EXPLAINED IN A DOCUMENT dt. 9.10.09 (see it on SCRIBD)
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AUTHOR: RAMA KRISHNA VADLAMUDI
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FINALLY, WISHING YOU ALL SUCCESS IN YOUR EXAMS!
All these issues have been thoroughly discussed through my articles and documents published on the above mentioned websites. Readers may note all these articles have been painstakingly researched supported by authentic data and author’s vast experience in financial markets for more than two decades. And readers can read and download these articles freely from anywhere in the world anytime. Some important articles posted on the websites are:
FOR MORE ON AUTHOR'S DOCUMENTS ON THE FOLLOWING SUBJECTS, PLEASE LOG ON TO: www.scribd.com/vrk100 AND DOWNLOAD ALL THE FILES (SCRIBD is a free website in its true sense)
Name of the article/document Article Updated as on
1 Goods and Services Tax GST-India-First Discussion Paper 11-Nov-09
2 Maharashtra Seamless Ltd-a brief analysis 10-Nov-09
3 India's Foreign Trade Policy 2009-14-HIGHLIGHTS 10-Nov-09
4 Junior NIFTY BeES-how to make higher profits from it 6-Nov-09
5 RBI bought 200 tonnes GOLD-Should you buy it now? 4-Nov-09
6 ONE PAGER ONLY!-Bharti Airtel-Why You Should Consider It For Your Equity Portfolio 2-Nov-09
7 Bharti Airtel-Why You Should Consider It For Your Equity Portfolio 2-Nov-09
8 RBI Annual Policy-Second Quarter Review-28102009 28-Oct-09
9 Currency Futures Market in India-Status Check after one year 27-Oct-09
10 Financial Markets Developments April to September 2009-Policy actions and others 25-Oct-09
11 India & World-Macro Economic Indicators 23-Oct-09
12 The Swagger is back on Wall Street!-Outlook for Stock Markets 19-Oct-09
13 Currency Futures Market in India-Status Check after one year 14-Oct-09
14 Financial Terms Latest-Decoded 9-Oct-09
15 Government Securities Market in India & Duration Management 9-Oct-09
16 India & World-Macro Economic Indicators 9-Oct-09
17 Bond Basics-All You Wanted to Know About Bonds 5-Oct-09
18 Limited Liability Partnership LLP 5-Oct-09
19 Forex Swaps & IRS - an introduction 4-Oct-09
20 Exchange Traded Funds and NIFTY BeES 30-Sep-09
21 NIFTY BeES-Exchange Traded Fund-making risk less profits 30-Sep-09
22 European Cenral Bank ECB Key Policy Interest Rates 21-Sep-09
23 Money Market Mutual Funds 5-Sep-09
24 Public Provident Fund PPF A/C-Little Knownn Facts 5-Sep-09
25 Income Tax Slabs 2009-10-Resident Indians-HUF 3-Sep-09
26 Direct Taxes Code DTC 2009 2-Sep-09
27 Interest Rate Futures IFRs in India 28-Aug-09
28 Carbon Credits and Kyoto Protocol 25-Oct-07
29 Sovereign Wealth Funds-SWFs 25-Oct-07
30 Particpatory Notes-P Notes 18-Oct-07
31 International Financial Reporting Standards-IFRS 8-Sep-07
32 Perpetual Bonds & their Features 31-Aug-06
33 Real Estate Investment Trusts-REITs 20-Jun-06
34 Commodities Trading 7-Jun-06
35 Information Technology Act, 2002 24-Jun-04
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