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 ?

Withdrawal:

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.

Loan:

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.

Banks:

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.

Bonds:

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.

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.

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.

Agile: Nature’s way of managing, sustaining and empowering an organization.

Introduction:

It’s a century long tradition that humans have learned from nature, which took billion of years to form, [effectiveness supersedes efficiency] and now has sustained for billions of years, on how to lead a comfortable, productive and prosperous life. So, does nature offer any management thoughts on how to build a large scale, sustainable and empowered organization? A little introspection leads us to the answer as a big “YES”. It’s impossible to have a thought that any single person (or even GOD) would have orchestrated creating nature which is so complex to fathom for human being. Rather, it’s fair to have a thought that an environment [framework] would have been created to facilitate the growth of species; where miniature species formed (taking their own time), experimented with each other, self aligned, evolved and sustained into an empowered variety of strong and large species. The same applies to formation of the galaxy, the human immune system and the “Agile” way of managing people and work. The Agile principle and Nature principle are one and the same, which is to create environment [framework] to facilitate the growth and rest is automatically take care of.

Principle of growth for long term sustainability:

Principle	Nature’s way of management	SCRUM way of management	output
Framework	Climate Change, Rain, Day and Night, Ice Age etc.,	Backlog, Sprint, Standup Meetings, Sprint Review, Retrospective etc.,	Long term sustainability
Experimentation and Risk Taking	Species were formed by experimentation with each other	Risk/Experimentation or Failure is encouraged in SCRUM world. Effectiveness supersedes efficiency	Optimized and Effective solution
Self Aligning	Heat and Rain to cool etc.,	Team is responsible. Team discovers the mistakes and fixes then accordingly	Empowerment
Variety	Different kinds of species	Multicultural team	Strength

Agile thought framework for Growth:

Business Essentials:
Value should supersede plan; Priorities clearly defined; Feature differentiated from scenarios.

Recent studies have depicted that more waterfall projects have either failed or have not been able to achieve their effectiveness: Due to deviation from what is required; Time to market; Cost outweigh benefits due to unwanted features. Agile philosophy addresses most of these. Deviation is addressed by re-prioritizing backlog from feedback by already developed features instead of following a plan i.e., value supersedes plan. Time to market is addressed by keeping a prioritized backlog, which in event of an imminent release due to market dynamics could be easily released. (It is observed and found that 20% of top requirements address most of the business value). Cost overrun is addressed by differentiating features from scenarios. In event of cost overrun, functional product can be released with most of the features, without some scenarios covered. Essential factor for Agile to be effective is how we collect our requirement [Split features in to scenarios], prioritize and assign value. Should we fail to practice these then we essentially are following a waterfall methodology but in Sprints.

IT Essentials:
Effectiveness should supersede Efficiency [Lean Principle]; Frequent and small change;

One of reasons Agile is practiced is to improve probability of success and time to market of our products. From IT perspective, it should not be understood that delivering the features as efficiently (quickly) as possible increases the effectiveness of the product. This is a common IT mistake and it’s mostly inside to outward looking. Instead, IT should engage with customer during the implementation to effectively reprioritize the feature/product backlog based on the change in customer/market requirements and then try to deliver them as efficiently as possible. Effectiveness should supersede efficiency. Should this not be implemented, effectively we will be following a waterfall methodology but in Sprints.

A frequent and small change decreases the risk of major failure and improves system traceability. In case of system failure, this ensures quick and effective action. To achieve this, sound lean engineering practices like continuous integration, TDD, unit test case development, automated testing, regression testing need to be built around development.

Facilitators of Growth: All the Ceremonies, Artifacts and Roles in SCRUM are the facilitators of growth that enable great business value proposition, risk taking, experimentation, a self aligned and empowered team to achieve a large scale, and a self sustained and empowered organization just like our Mother Nature.

Finally, Agile is a discipline that requires a mindset change. Once achieved, even waterfall can become Agile.