Demystifying Monetary Systems: Basics and the 2008 Crisis

Demystifying Monetary Systems CA. Sunny Sabharwal

Some basics ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Monetary System Investors SEBI RBI Regulators Financial Intermediary Business NBFCs Insurance Cos. Banks Investment Loan Control Interest Return

Responsibilities of a Bank Head ,[object Object],[object Object],[object Object],[object Object],Principle in Banking: Borrow Long, lend short Source : RBI

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

Major factors that affect money ,[object Object],[object Object],[object Object],[object Object],[object Object]

Interest Rate ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Bond Price (P) = CP1 + FV (1+ r ) 1 (1+r) 2 Factor Relation Effect ,[object Object],[object Object],Both Easing Policy: Low Interest Rate Tight Policy: High ,[object Object],[object Object],Direct ,[object Object],[object Object],Direct ,[object Object],[object Object],Direct ,[object Object],[object Object],Indirect

Inflation ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],E.g. BPLR

Monetary Policies ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],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

Investor Expectations ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Price (P) = D * (1+g) (K e – g)

Worst hit sectors ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

The Crisis ,[object Object],[object Object],[object Object],[object Object],[object Object],“ 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

Investor Sentiment ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Till Mid 2008 Markets Since then Buyer (Defensive) Buyer (Aggressive) Seller (Risk-taker) Seller (Risk-averse)

What RBI is doing ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],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

What to expect ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Thank You ! Please feel free to contact me at Cell : +91 99586 77766 Email: sabharwal.sunny@yahoo.com

Demystifying Monetary Systems: Basics and the 2008 Crisis

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Demystifying Monetary Systems: Basics and the 2008 Crisis