Tuesday, January 17, 2012

CRR Cut: Effect on Industry, Economy and People

RBI is meeting on Jan 24th to conduct normal open market operations ( OMO ). The market hugely expects that RBI will cut CRR by some basis points. So what does this mean to normal people ? Does the interest rate on home loan, auto loan etc., come down ? To answer this let's look at what CRR means.

CRR is the ratio of money the bank needs to keep for every rupee of deposit that customer keeps with the bank. For example: If investor "A" keeps Rs.100 in the bank "A", and CRR is 10% then bank "A" must keep Rs.10 as the reserve and can lend the remaining Rs.90 to customer "B". If the customer "B" deposits this Rs.90 in another bank "B", then bank "B" can lend Rs.81 to customer "C" and must keep Rs.9 in their vault. So this craziness goes on and essentially (1/CRR) [ Money Multiplier] *Inital Deposit i.e., in our case 100*10 = Rs.1000 of new money is created for every Rs.100 (hard currency) deposit a customer makes in the bank. To summarize, a CRR cut would basically allow banks to take the money they have kept as reserves and lend it to customers and thus increase the money supply in the system.

 Having understood what CRR is, now let's try to know how is it would affect normal customers, banks and corporations ?

Normally, banks don't have all the deposit money customers have made in their bank as they would have lent it to other customers. However, they have enough money ( based on their forecasting) to honor the per day withdrawal commitments. If the withdrawals are more than their forecast (assuming their liquidity is low) they borrow from RBI paying interest rate ( Repo Rate) by pledging their assets ( Bonds) or borrow from other banks paying interest rate (Call rate). This borrowing by paying interest rate ( Repo Rate or Call rate) reduces the profitability of the banks relatively.

Loans are the primary way banks make tons of money. They borrow from RBI at lower rates and lend them to customers at higher rates and make profit. This is a simplistic explanation of how banking system works. Should the bank need to loan to corporates or customers and their liquidity is low, they borrow from RBI or other banks by paying interest, in the form Repo or Call rate.

But now, due to the cut in the CRR, immediate new money is available to the banks (from their reserves) which makes them liquid. Instead of going to RBI or other banks to honor withdrawal commitments or loans, they can do it internally without paying interest rate to banks or RBI, thus increasing the profitability of the bank relatively and making more money available in the system to lend.

This has following affect on banks, customers,corporates, bond market and share market::

Normal Customers:
Chances that interest rates of all types would go down, it will be based on individual banks and their liquidity.
FD rates will stop going up.
Loans for individuals and corporates would be easily available.

Profitability of banks would increase (as described above)

Stock Prices:
Banks, Auto, Capital goods, Real estate stocks would go up due to lower interest rate payments flowing out and also more demand from retail customers.


Infra bonds:
Yields on Gsec and other bonds will go down. Hence, going forward, mostly, all the tax savings infra bonds would offer lower interest rates. If you want to invest in tax savings infra bonds, do it now, before the CRR cut. 

Fiscal Deficit:
Government's Interest payments would be reduced due to lower interest rates and hence fiscal deficit would go down.

Fixed Income Funds:
Fixed income funds would perform relatively better, especially Gilt funds.

To summarize, the CRR cut would greatly benefit everyone.

Thursday, January 12, 2012

Spiritualism and Leadership

Meditation is a key foundation of spiritual world, which is an inward looking practice performed to channelize all our energy in understanding one's soul or potential. Effective meditation requires a subject to zoom out from many distractions in life and concentrate/channelize all the energy only on few (God, Faith, etc.,) .i.e saying NO to many things to understand the real-self or real potential. Once achieved, like Lord Buddha did, achieving the impossible is just a matter of time. Success could be achieved with high probability. Also, due to all the energy being channelized inwardly, it creates a high magnetic field around a subject that attracts lot of people similarly like it happens with celestial bodies.

In the past decade the most talked about topic, other than the financial crisis, was Apple and it's co-founder Steve Jobs. Steve Jobs had an uncanny knack of delivering successful products one after another. He made people believe in what he told. It was like being in Steve's magnetic field, it was one way traffic with no exit. I have experienced it and I believe so may people have it. So, what made Steve tick and achieve this phenomenal feat of attracting customers ?  One reason for success could be easily traced back to his early days when he was involved heavily in spiritual life more than in business. Once enlightened and realizing his potential, like Lord Buddha, he returned and transformed the entire technology industry. Steve himself said that one of the important things in leadership is saying NO to many things and not saying yes,  which I think perfectly aligns with spiritualism.

Spiritualism is an act of leadership which teaches us to say NO to many things so as to be right in many other things. Finally, there is no one path to success. However, the combination of spiritualism and skill can lead to high probability of success.

Monday, January 2, 2012

Education: What really it is ?

Getting children educated  is a big enigma in these prevailing times. We spend a good amount, 10 to 15 years, of our life worrying about getting children educated. Battles are fought at home on which good school the child should get enrolled in to; advice is sought from various educated circles on what coaching the kids need to get; temples are visited for miracles to happen; grand plans are made on the what the future of kid be. To summarize, no stone is left unturned to make the child educated i.e., the journey is craved out, the goal is set. However, during this whole process the intent of education is lost.

So, what really is the intent of education ? What should be the role of the parents/teacher in it ?

The intent of education is to understand the principles and elements of problem solving instruments, which could be applied to ever changing and evolving complex problems. The intent of education SHOULD NOT be to solve the same problem again and again.  

Every individual is unique in one way or other, it is a mystery and beauty of nature. Hence, individuals take unique ways or routes, based upon their talent, to achieve success. The roles of parents and teachers should be to participate actively to help kids discover their inner most talent and their unique way to achieve the goal.This philosophy, though hard to practice, has better chances of success as it is extension of the individual's natural self, which includes their thinking, body structure and philosophy. So parents should avoid participating in the rat race of education, which emphasizes individuals to choose their path that is monetarily lucrative or socially acclaimed ( e.g., engineering, medicine, management) and which is not a natural extension of their self.

As rightly said, "nature always take the most efficient route". Similarly, extending natural self of kids by honing their natural talent is the most effective and efficient way to help them to be successful in any profession chosen by them.

Finally, education is a path to attain wisdom and not the only path.