THE YELLOW METAL IN PORTFOLIO

By Koshica Oberoi

The demand for the yellow metal- gold is not just for consumption but it is also driven by investment. So, now let’s look at how price including various other factors affect the investment demand for gold. The gold prices have stopped rallying, unlike 2012, when gold prices were racing up due to growing consumer demand in India along with expected demand from investors pushed up the prices to spectacular heights.

The surge in price of gold halted by the end of 2015, considered to be the base for many years. Although gold prices have delivered gains of 30% since 2015, there are today many factors exerting compelling pressures on gold prices- some propelling them further and others dampening them. The highest consumers of gold, India and China, witness a decline in the demand because of which it is expected that the consumer demand will remain flat. Therefore, it is investment demand for gold that will support the gold prices. The recent scenario of increasing geopolitical tensions, inflation and unceasing rally made by stocks in India and US, makes gold a safe haven and an attractive diversifier for the investors. The demand for gold can be classified as follows:

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#Fincabulary 30 – Moneyness

Meaning – A description of a derivative relating its strike price to the price of its underlying asset. Moneyness describes the intrinsic value of an option in its current state.

Moneyness tells option holders whether exercising will lead to a profit. There are many forms of moneyness, including in, out or at the money. Moneyness looks at the value of an option if you were to exercise it right away. A loss would signify the option is out of the money, while a gain would mean it’s in the money. At the money means that you will break even upon exercising the option.

#Fincabulary 14 – Bagel Land

Meaning – A slang term that represents a stock or other security that is approaching zero in price.

This term is typically used to describe an asset that has fallen from grace as opposed to a penny stock or other historically cheap security. If a stock or other asset is headed towards bagel land or is approaching zero, investors generally feel that the security is nearly worthless. In such cases, a company may be nearing bankruptcy or facing major solvency issues. While returning from bagel land is possible, the likelihood that equity investors will lose their entire stakes in the company becomes very high.

Rockstar Rajan – The Last Monetary Policy Review

By Sachit Modi

On August 9, 2016, Dr. Raghuram “Rockstar” Rajan, who is set to end his 3-year term on September 4, released his last monetary policy review. The RBI Governor, who has reduced the benchmark policy rate by 1.5% since January last year, decided to keep it static in his final review, owing to the inflationary trends. He also stated that, in order to achieve the Liquidity Neutrality goal, RBI will continue to pump funds into the market, as and when the need arises. This article gives few of the major highlights from the review.

The Bi-monthly Rates:

Repo Rate Reverse Repo Rate Cash Reserve Ratio Marginal Standing Facility Bank Rate Inflation Target Growth Forecast
6.5 % 6.0 % 4.0 % 7.0 % 7.0 % 5.0 % 7.6%

Inflation and Inflation Target

In June, the CPI-based retail inflation, driven by sharper-than-expected rise in the food prices (particularly vegetables and sugar), rose to 5.77 %, a 22-month high figure. Even though the market is expecting the food prices to increase further, the inflation target has been set by RBI at an optimist 5.0 % with an upside risk for Jan-2017. This has been kept in line with the RBI’s fixed target of bringing it down to 4.0 % in the next 5 years. The upper tolerance target of 5.0 % has been set by keeping in mind a strong expectation for a progressive monsoon and softening positions of oil and other commodities in the market. One thing to note here is that the inflationary trend is expected to be boosted by the contributions from the GST Bill and the 7th Pay Commission’s Housing Allowance. However, the governor is expecting the influence to be very minimal in the long-term.

Rate-cut Transmissions

The governor took a strong stance against the banks for passing on the rate cuts only modestly. Recently, the banks have been citing the upcoming $20 billion worth of Foreign Currency Non-Residents (FCNR) redemptions as the reason for the same. However, Dr. Rajan stated that RBI, with an efficient management plan and Open Market Operations (OMOs) to the tune of INR 80,500 crore, is well balanced to carry on the redemptions smoothly. This leaves the banks with no further reasons, ‘as of now’, to hold the cuts to themselves.

Conclusion

Overall, the RBI Governor’s valedictory policy was a hallmark of his term. This policy stands out as a unique document in terms of liquidity management, macroeconomic developments and pass-through of previous policy rate cuts to the lending rates.

A Myth: Devaluation helps exports

Author: Nayan Saraf

The conventional wisdom says, “If you devalue your currency, then it will give a boost to your export as it would look cheaper in the global market.” This wisdom has been running through the veins of economists and governments from many decades and played a vital role in determining the government’s economic policies. But over the years, with the increase in globalization and development of the financial market, this wisdom appears to be a myth now.

The first reason is the availability of derivative instruments such as Currency Swaps, Futures and Forwards, which helped importers as well as exporters in hedging the currency risk. This reduces the immediate impact of devaluation.

Second reason is that many exporters import their raw materials from across the world. For example, a car manufacturer imports different parts such as engine from one country, steel from another country and so on. In one way, he might think that his cars would be cheaper in the global market due to devaluation; on the other hand, his input costs have gone up since the cost of imported raw materials would be higher. Hence, he wouldn’t be benefited much from this currency devaluation, as he needs to maintain his profit margins.

Third reason is the increase in the labor cost, due to prevailing inflation in the economy. Currency devaluation leads to higher import costs that will eventually cause inflation. Hence, the work-force have to pay more for the same goods which will reduce their real wages, and soon they will demand for higher nominal wages which will eventually increase the labor costs for a firm.

Devaluation also leads to law of unintended consequences. Suppose China devalues Yuan to make its exports attractive abroad, it might get competitive advantages by doing so, and will help its economy and exporters to grow. But over the time, the manufacturers in other country will largely suffer due to the loss of market share. It will cause closure of plants, layoff, bankruptcy, and eventually, recession in those countries. And due to the spillover effect, a wider recession may result which might cause in declines in the sales of Chinese goods itself because of lack of demand abroad.

At last, other countries might use “Beggar thy neighbor Policy” of competitive devaluation or can put capital controls and other currency restrictions or can provide subsidies to protect their exporters.

All these practical implications don’t allow a country to boost its exports when it devalues its currency. Though there would always be short-term benefits, but in the long term, the country with low labor cost and efficient manufacturing would boost exports.