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Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
Monetary Systems in Current Markets
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Monetary Systems in Current Markets

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An attempt to discover how monetary systems work, role of central bank, etc. in current times, particularly for India.

An attempt to discover how monetary systems work, role of central bank, etc. in current times, particularly for India.

Published in: Economy & Finance, Business
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  • Dear Atul,

    I am glad the ppt was useful for you. Have enabled download.

    Best of luck for your career.

    Regards,
    Sunny
       Reply 
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  • hi sir,
    this slide can prove to be beneficial for my course that i am doing from simca,pune
    my id is atulpandey_sbs@yahoo.com.
    thanking you in appreciaition..
       Reply 
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  1. Demystifying Monetary Systems CA. Sunny Sabharwal
  2. Some basics <ul><li>Financial Market </li></ul><ul><li>A market where funds (finance) are taken from those who have surplus (investors) and provided to those who need it (business) </li></ul><ul><li>Who are financial intermediaries? </li></ul><ul><li>Banks, insurance companies, NBFCs, etc. </li></ul><ul><li>What is relevance of financial market? </li></ul><ul><li>An efficient financial market encourages & channelizes investments and hence fuels business growth </li></ul><ul><li>Shares and bonds markets most crucial; major funding sources for corporates </li></ul>
  3. Monetary System Investors SEBI RBI Regulators Financial Intermediary Business NBFCs Insurance Cos. Banks Investment Loan Control Interest Return
  4. Responsibilities of a Bank Head <ul><li>Liquidity Management : Ensuring enough liquidity to honoring liabilities </li></ul><ul><li>Liability Management : Acquire funds at low cost </li></ul><ul><li>Asset Management : The risk-profile, tenure and class of assets in which to invest funds </li></ul><ul><li>Capital Management : Match requirement of capital (of RBI and Reserves) </li></ul>Principle in Banking: Borrow Long, lend short Source : RBI
  5. Typical Balance Sheet of a Bank LIABILITY (OUTFLOWS) ASSET (INFLOWS) 1 Capital 1 Cash & Balances with RBI 2 Reserves & Surplus 2 Balances with Banks & Money at call/Short-notice 3 Deposits 3 Investments 4 Borrowings 4 Advances 5 Other Liabilities & Provisions 5 Fixed Assets 6 Contingent Liabilities 6 Other Assets
  6. Major factors that affect money <ul><li>Interest Rate </li></ul><ul><li>Inflation </li></ul><ul><li>Monetary Policies </li></ul><ul><li>Business Growth </li></ul><ul><li>Investor Sentiment </li></ul>
  7. Interest Rate <ul><li>Consists of – </li></ul><ul><ul><li>TVM (Cost of money) </li></ul></ul><ul><ul><li>Inflation </li></ul></ul><ul><ul><li>Risk Premium </li></ul></ul><ul><li>Determined by: </li></ul><ul><ul><li>Monetary Policy </li></ul></ul><ul><ul><li>Inflation </li></ul></ul><ul><ul><li>Risk </li></ul></ul><ul><ul><li>Demand & Supply of Money (bonds and money market) </li></ul></ul><ul><li>Fall/increase in interest rate -> increases/decreases bonds prices </li></ul><ul><ul><li>Repercussions </li></ul></ul><ul><ul><ul><li>Expected return on bonds falls </li></ul></ul></ul><ul><ul><ul><li>Investors switch from bonds to other assets </li></ul></ul></ul><ul><ul><ul><li>Overall borrowing increases </li></ul></ul></ul>Bond Price (P) = CP1 + FV (1+ r ) 1 (1+r) 2 Factor Relation Effect <ul><ul><li>1 </li></ul></ul><ul><ul><li>Monetary Policy </li></ul></ul>Both Easing Policy: Low Interest Rate Tight Policy: High <ul><ul><li>2 </li></ul></ul><ul><ul><li>Inflation </li></ul></ul>Direct <ul><ul><li>3 </li></ul></ul><ul><ul><li>Risk </li></ul></ul>Direct <ul><ul><li>4 </li></ul></ul><ul><ul><li>Demand of Money </li></ul></ul>Direct <ul><ul><li>5 </li></ul></ul><ul><ul><li>Supply of Money </li></ul></ul>Indirect
  8. Inflation <ul><li>Abnormal inflation results in higher interest rates </li></ul><ul><li>Why: </li></ul><ul><ul><li>Mathematically : (1+Real Rate) x (1+ Inflation Rate ) = (1+ Nominal Rate ) </li></ul></ul><ul><ul><li>For people : </li></ul></ul><ul><ul><ul><li>Reduces incomes & investments </li></ul></ul></ul><ul><ul><ul><li>Investors now require more return (impetus to invest) </li></ul></ul></ul><ul><ul><li>For businesses : </li></ul></ul><ul><ul><ul><li>increases cost of capital; affects ongoing operations </li></ul></ul></ul><ul><ul><ul><li>reduces expansion plans </li></ul></ul></ul><ul><li>In-turn is affected by – </li></ul><ul><ul><li>Demand & Supply: Actual & speculation </li></ul></ul><ul><ul><li>Expectations </li></ul></ul><ul><li>Tools for taming – </li></ul><ul><ul><li>Monetary Policies : tight or easing </li></ul></ul><ul><ul><li>Government Policies </li></ul></ul>E.g. BPLR
  9. Monetary Policies <ul><li>Purpose : to govern economic variables </li></ul><ul><li>Mainly used – </li></ul><ul><ul><li>Policy Rates </li></ul></ul><ul><ul><ul><li>Repo & Reverse Repo </li></ul></ul></ul><ul><ul><ul><li>Bank rate </li></ul></ul></ul><ul><ul><ul><li>CRR, SLR </li></ul></ul></ul><ul><ul><li>Open market transactions </li></ul></ul>Source : RBI Liquidity Adjustment Facility (LAF) a short-term discretionary instrument for smooth equilibrating of liquidity in the system. The repo and reverse repo interest rates are key signaling rates in the system Policy Tool Meaning Repo Rate at which banks borrow from RBI : Short-term Reverse Repo Rate at which RBI borrows from Banks Bank rate Rate at which banks borrow from RBI : Long-term CRR Amount of cash as a % of deposits to be kept with RBI SLR % of money (after reducing CRR) to be invested in govt. securities
  10. Investor Expectations <ul><li>How different investors’ expectations cause change in prices </li></ul><ul><ul><li>Using Dividend Discount Model </li></ul></ul><ul><ul><li>Two investors : A & B </li></ul></ul><ul><ul><ul><li>Past Dividend : Rs. 10 </li></ul></ul></ul><ul><ul><ul><li>K e : 15% </li></ul></ul></ul><ul><ul><li>Different growth rates expected : </li></ul></ul><ul><ul><ul><li>A (retail investor) = 5% </li></ul></ul></ul><ul><ul><ul><li>B (industry expert) = 10% </li></ul></ul></ul><ul><ul><li>Result : </li></ul></ul><ul><ul><ul><li>Price (A) = Rs.105 </li></ul></ul></ul><ul><ul><ul><li>Price (B) = Rs. 220 </li></ul></ul></ul><ul><li>Why different expectations – </li></ul><ul><ul><li>Asymmetric Information (lack of correct and complete information to some) </li></ul></ul><ul><ul><li>Personal bias : e.g. a previous loss may prevent from making riskier investments </li></ul></ul>Price (P) = D * (1+g) (K e – g)
  11. THE CRISIS
  12. The Sub-prime Crisis
  13. Worst hit sectors <ul><li>Information Technology </li></ul><ul><ul><li>Clients in US/elsewhere going bust </li></ul></ul><ul><li>Realty </li></ul><ul><ul><li>Hit from supply side – non-availability of funds </li></ul></ul><ul><ul><li>Slack sales – high interest rates and job losses </li></ul></ul><ul><li>Auto </li></ul><ul><li>SME </li></ul><ul><ul><li>due to reduced demand from parent industries </li></ul></ul>
  14. The Crisis <ul><li>Begun with sub-prime crisis in developed countries </li></ul><ul><li>Marking to market reduced B/S </li></ul><ul><li>Led to worldwide liquidity crunch </li></ul><ul><li>Since capital is required by all businesses; affected all </li></ul><ul><li>Observed to start affecting India in Sept ’08 </li></ul>“ Lemon Problem” Buyer does not know whether what he is buying is a peach or lemon. In recessionary times, when buyers are more risk-averse, one might forgo a peach fearing of a lemon. This leads to a contagious fear in the market of holding on cash or invest in short-term assets. Experts say : “ 2008 was a recessionary year; 2009 to be consolidating” Source : RBI 2008 2009 GDP 8.9 5.3 Industrial 8.8 2.8 Infra 5.8 3.0
  15. Investor Sentiment <ul><li>The one thing that AFFECTS the MARKET the MOST </li></ul><ul><li>Main reason behind extreme losses after any crisis </li></ul><ul><li>Functions both ways – </li></ul><ul><ul><li>Buyer (Businesses) : Aggressive or Defensive </li></ul></ul><ul><ul><li>Seller (Lenders) : Risk-takers or Risk-averse </li></ul></ul><ul><li>Bad thing for the depressed markets – </li></ul><ul><ul><li>Falls geometrically </li></ul></ul><ul><ul><li>Recovers arithmetically </li></ul></ul>Till Mid 2008 Markets Since then Buyer (Defensive) Buyer (Aggressive) Seller (Risk-taker) Seller (Risk-averse)
  16. What RBI is doing <ul><li>Policy rates lowered – </li></ul><ul><ul><li>Repo, CRR, SLR </li></ul></ul><ul><ul><li>BPLR </li></ul></ul><ul><li>Housing loan – </li></ul><ul><ul><li>Lowering of interest rates </li></ul></ul><ul><ul><li>Increasing the tenure </li></ul></ul><ul><li>Relief package for NBFCs thru SPV </li></ul><ul><ul><li>More loans </li></ul></ul><ul><ul><li>at lower rates </li></ul></ul><ul><li>Other measures </li></ul><ul><ul><li>Permitted banks to issue guarantees for > 10 years </li></ul></ul>SPV : Industrial Development Bank of India Stressed Asset Stabilization Fund (IDBI SASF) One of the main problems faced by banks in India is issue of long-term liabilities at high interest rates
  17. What to expect <ul><li>2009 to be a consolidating year </li></ul><ul><li>Increased Government expenditure </li></ul><ul><li>Banking & Infra to be see favorable future </li></ul><ul><li>Sectors like Realty and Manufacturing to take time </li></ul><ul><li>More focus on agriculture and MSME sector </li></ul><ul><li>Balancing of portfolio of banks rather than expansion </li></ul><ul><li>Things to be more clearer after General Elections </li></ul>
  18. Thank You ! Please feel free to contact me at Cell : +91 99586 77766 Email: sabharwal.sunny@yahoo.com

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