India to Benefit from crude correction

After the political crises in Middle east the Brent crude traded above $125 which was a concern for further economic growth. After the recent financial crises where the worlds most powerful country USA was revised on its rating from AAA to AA+. The crude oil prices were eased and there is scope of crude oil prices falling in near future. Industries will benefit from this take, the operating cost of industries will fall and so the major chunk will be flashed in net profits. Also the inflation will come down and so there is scope of RBI revising n reducing interest rates. This prove a sigh of relief for UPA as the govt would claim on controlling inflation. The major variable at this juncture is fall in crude oil prices.  Also the Kharif output is reasonable enough due to sufficient monsoon which would also contribute to fall in inflation. But will these really pull down CPI inflation I think only khariff output will contribute but there is some scope of CPI reducing due to correction in crude oil prices.

KHP

ecomaniac

Banking Terminologies -> mnemonics

Most of us find  it difficult to understand terms of the central banks. I do sometimes. so lets go with each of them.

Lending rates : Rate at which lender (holder) lends money to the borrower (issuer). Borrower is called issuer because he issues a collateral security against money borrowed. Now the lending rate wrt bank is called Prime lending rate (PLR).

Prime Lending rate : Prime means priority so PLR for bank is lending money at some rate to its priority customers.


Cash Reserve ratio : Cash reserve means amt of cash commercial bank has to reserve i.e. maintain with RBI. So RBI may increase CRR to drain excessive cash from commercial banks.

REPO rate & Reverse REPO rate: REPO in financial terms means "Repurchase agreement." Now repurchase of what since RBI and commercial banks deal in cash. RBI with respect to any commercial banks stays on the top most hierarchy. So REPO rate is cash from RBI to Commercial bank on which RBI charges some interest. Now we go reverse i.e cash transaction from commercial banks to RBI to which RBI pays some interest known as reverse repo rate since in reverse case RBI borrows money.


Statutory liquid ratio- SLR : Statutory means "Pertaining to" in case of statutory liquid it pertains to something related to liquid savings like Gold, Silver, Precious stones, Stocks etc those securities which can be converted into cash soon precisely called "Cash equivalents." Commercial banks have to maintain some percentage of cash equivalents with central bank (RBI) this is called SLR.

Shall blog few more later.

KHP
ecomaniac

Junk bond or Junk Bomb

Junk is something which deserves trash sooner or later just because its life is short to consume. Similar are Junk bonds the more you own and do not redeem till longer time higher is the default risk. Junk bonds offer 3-4 % more than government securities. The demand for Junk bonds is in rising economy but the yields are inversely proportional to economic growth but not in case of recession where the yields fall. Consider the case of USA where Junk bonds evolved in 1980 and increased 10 folds as more and more cos issued Junk bonds. However Junk bonds have increased economic growth in growth stage but during recession in 1990-91. Junk bonds turned to Junk bombs where most of the cos defaulted to repay the bond holder (lender).

Junk bond are tradable in India but the markets are small and not popular. But I am worried when the markets will grow. Say a company defaults in Junk bonds so the equity price of that company falls in the exchange where it is traded due to investors sentiments. This will increase the volatility in the markets.

These innovative financial products if not used in effective and efficient manner will hurt the economy. Just need an alert regulated system on this one. Efficient an d effective use would be boon for the nation.

KHP

ecomaniac