Credit Derivatives- Part I

"The news hit stocks and knocked jittery credit markets hard, with the widely watched iTraxx Crossover index breaking above 600 basis points for the first time, a reflection of soaring debt-insurance cost" - Reuters
"Credit risk measure the change in the credit quality that have the potential for creating losses resulting in stress in systemtically important financial institutions". Derivative is a risk shifting agreement, the value of which is derived from the underlying asset. The underlying asset can be anything you value, which could be physical commodity, an interest rate, a company's stock, a stock index, a currency, or virtually any other tradable instrument.
The reason we go about analyzing this is because of the credit concerns now extend beyond the subprime crisis. One way this is becoming increasingly evident is through the pressure on the balance sheets of financial institutions. What began as deterioration in credit quality altered the market liquidity and this altered various credit products valuation as people added more risk component in the short term. The credit worthiness of customers and the lending rates of the financial institutions are under distress. The question is what is the way forward?
Although the economic condition is adding to the distress, most of it is mitigated by the efforts of the central bank to instigate spending. There should be other ways of improving this situation.
This situation is not just for European or American markets, but it extends to markets like India, where we witnessed some adverse fallout since the starting of this year, a spillover effect.
This has lead to tighter economic and monetary policies which could curtail economic activity further. Falling equity prices will exacerbate the reduced consumer spending. And finally, capital spending could be reduced as the cost of capital increases.

What is interesting is the way the emerging markets are responding to these global cues. High inflation which is as high as 7% in India for example will have to go down as the global economy shrinks. What about the equity inflows in India? According to the recent study on equity inflows in emerging markets by Bank of New York goes against conventional wisdom. It find little to no net effect of inflows on equity prices. But definitely there is a significant relation between the inflows and the equity prices in India at least in the short term.

In the subsequent article we will see how credit is managed and what are various credit derivative products that are available.

What is going to move the market from here?

The secondary market witnessed a steep downward movement last month. In the period of January 14-22 BSE30 Sensex lost 4100 points incurring a loss of 16,000 billion for the investors. When Nifty futures turned into discount, it created heavy short positions. Investors were not having enough money to meet the margin calls on their future contracts, and brokers were forced to sell in large numbers. The major drain of money from the secondary market happened mainly because of the following reasons-

1. Reliance power IPO, which came with a bid for nearly Rs 11000 Crores and got oversubscribed by 73 times.
   
2. Future Group, which came with IPO to fetch around Rs 490 Crores, got oversubscribed by 133 times.
   
3. FII withdrawal from the market amounted to Rs 13035.7 Crores in the month of January.

Though FII were selling in large volume because of global cues, the major part of domestic money was stuck with the IPO of Reliance and Future Group and no buyer was available in the market.

Now in the month of February, with fed cut in interest rate huge capital inflow is expected through FII’s. Reliance Power has completed the allotment of shares and it has refunded around Rs 1 lakh crores to the bidders. Future Group also refunded the sum for unalloted bids, which is around Rs 50,000 crores. This huge inflow in market is expected to make the market bullish in the short term. But the movement will majorly be decided by the sentiments, and any negative news will turn the market bearish. The concern over the recession in the US economy is going to keep the market volatile and investors need to be cautious about their investment.

Challenges ahead for Indian Monetary Policy

The much expected rate cut by RBI did not happen. In the midst of all the all sorts of speculation, RBI has adopted a policy of wait and watch for the time being. So what’s there left in Indian market in coming days? The impact of differential interest rate is going to have diverse effect. The following heads could be one way to summarize the future move.

More inflow of dollar is expected in the coming months and the huge capital inflow will further complicate the monetary policy. Rupee has already appreciated by almost 12.3% against dollar in last year and further gain could worsen the plight of export industry. Textile industry has already lost more than 50,000 jobs the issue needs to be addressed soon.

We witnessed the lowest inflation of last 5 years in December 2007, but the wholesale price index rose 3.93% in the week ended January 19. This inflation was highest in the last five months. The huge capital inflow in the market from outside is expected to put pressure on inflation. The petroleum price hike also seems imminent and this going to further accelerates inflation. RBI’s stand on keeping the interest rate intact reflects that curbing inflation is of highest priority at this point of time.

Large capital inflow has increased the liquidity in the market and monetary policy has got complicated, RBI needs to be flexible to act on each and every global clue to keep the interest of one and all.

Stock Markets Unwinded

Here comes an article which will let you know the basics of a stock market. So let’s straight away start the topic which I think is of interest to everyone in the country.

First of all for those who think that stock markets are the easiest ways to become rich, think twice as it is one of the most troublesome places. It can make one earn a crore a day and loose two the next day. So with this constraint in mind let’s try and know our markets a bit better.

Let’s start with what does bulls and bears mean. Bulls mean people who purchase stocks and bear the one who sells them. All of you must have heard of about market indices as BSE Sensex or Nifty. One see’s the value of indices jumping up and down throughout the day. What does the value mean? If we take example of BSE Sensex it is the weighted average of thirty stocks which are representative of all the sectors of the economy. Thus these indices change with the change in the underlying stock prices. The next question which must be floating in your mind is what causes the change in stock prices. Well there are several factors which can cause a change in the stock price. Some of them are:

1. Recession in the economy or industry
2. Lower than expected performance of the company
3. Getting a new contract
4. News of its merger or its acquisition

Seeing the factors listed above don’t one get a feeling that these factors are transient and one most see the long term growth prospects of the company. Well my friends the stock markets are driven by something known as “Market Sentiments”. Mostly these sentiments don’t take into account long term growth prospects of a company but are driven mostly by the things happening right know in the company or industry or economy of the country or the global economy as a whole.

Further, I would also like to add that demand and supply, which are yet again governed by the market sentiments play a huge part in deciding the price of the stock and in turn the index value.
Now as we have learnt about the stock price movements and index value movements let us move into a bit more detail to understand the kind of markets prevalent in the country. Now the place where shares do get traded are known as Capital Markets. These can further be classified into primary markets and the secondary markets. The primary market is one where the Initial public offer (IPO) of a company i.e. shares for the first time are on offer while secondary market includes the place where day to day trading happens. Now a few of you must be having doubts about how does the price of an IPO is decided as the share is still not out in the market. Well it a complex process and will discuss about it in the next article. So let’s wind up this article now and will be back with more articles related to the vibrant world of stock markets very soon.

Impending recession and the aftermath

The bearish movement in Indian stock market in last couple of weeks draws everyone’s attention towards the world economy again. In the era of globalization, any significant move in the economy of big players is going to have well spread impact (Article on Decoupling theory). And if the movement is there in US economy no country will be left untouched...

The movement in the US economy started in the month of September with the Subprime crisis followed by credit crunch in the US market. All the major banks in US reported huge losses and Federal Reserve had to cut the interest rate first time after 2003 by 50 basis points (0.50%). The complete effect of subprime crisis was yet to be realized and that was evident with further writing off bad debt by major bank in 3^rd quarter of 2007. The economy started slowing down, and financial market came under much stress. Fed had to intervene again within 4 months of earlier cut and the interest rate was dropped by 75 basis points to 3.5%. This was again followed by reduction in benchmark short-term interest rate by 50 basis points to 3% within 9 days of previous cut. This was the most aggressive movement in interest rates since 2001, and is expected to keep the housing slump and the credit crunch brought on by a meltdown in the home-lending market from pushing the broader economy into the red.

But even after all these measures, the consumer spending in the U.S. increased at the slowest pace in last six months. The unemployment insurance jumped, U. S. economic growth slowed to 0.6% annual rate in the 4^th quarter from 4.9% in the prior three quarters. All these facts indicate towards an impending slowdown and countries need to hedge the movement to all possible extent.

Countries like India has got major exports in U.S. and reduced consumption rate will certainly impact the export business heavily. While, the export industries are already suffering with appreciation in Rupees and it will get worsen with any slowdown in demand abroad; the crude oil price had come down after the speculation on reduced demand by the world’s biggest energy consuming country U.S. This will relax the Indian oil companies a bit with reduced subsidy (more about Crude oil price and its impact).

The significant cut in interest rate by Federal Reserve is aimed to avoid any credit crunch and after the RBI (Reserve Bank of India) decision not to cut the interest rate, heavy credit inflow is expected in coming month. The volatility in stock market reflects the suspicious and bearish environment. The GDP in the year 2007 grew by 9.6% and growth is expected to be close to 9% in FY2008. The government needs to be well prepared for any uncertainty and be ready with flexible policy to avoid any major impact.

Economic Fundae - Interest Rates

It is a really a good time to start with the economic fundamentals as there is so much happening across the globe with recession and our phenomenal growth story. It becomes easy to see what we are discussing in theory in the real life. Inflation is something most of the developing nation is fighting against. At least in India, the Reserve Bank of India has done a great job in controlling the soaring price rise that happened in 2007. But what are the policy that RBI has at its disposal to control inflation? These are largely the tools and policies different from the fiscal policy.

Before answering this question we will look into one of the important macroeconomic variable which connects the present with the future – Interest Rates. The rates which our bank pay is called as the nominal interest rate and this measure the increase in the value of the money we hold. It can be seen as the amount that we get paid for forgoing the consumption at present.

The other class of interest rates is called the real interest rates which are essentially the increase in the purchasing power. Think of a capital as a corn seed. The increase in value from the seed to the corn is the real increase in value. But due to the general increase in prices of other commodities – inflation our corn will fetch us more money than the actual value. This is called the nominal value which is the real value plus the inflation.
R = I – πe
This equation gives the relationship between the real interest rate and the nominal interest rate & inflation rate.

Why is there a fluctuation in the interest rate? This is dependant on the amount of money in circulation. Now the big question is whether the RBI sets the interest rate or sets the money circulation? It sets the money supply.

It is done through a series of steps called as the open market operations. In this the central bank buys bonds – a debt instrument, in exchange for money, thus increasing the stock of money, or it sells bonds in exchange for money paid by the purchasers of the bonds, thus reducing the money stock.

Now ask yourself this question, what will happen to the exchange rate if the central bank sells $1 billion from its foreign currency reserves?

We fairly understood about the strict monetary policy. Now it is time to see what is happening in the scenario of recession. The U.S central bank has announced a interest rate cut in order to combat the recession. By cutting interest rates the FED would be boosting U.S economy by making it cheaper to borrow. But it has its implication also in the spending habit. This artificial intervention of the central bank is rarely seen unless it is absolutely necessary to do so.

The other side is the reduction in the earnings due to the interest rate cut. This will immediately give arbitrage opportunity for investors to borrow money from the U.S banks and invest in a country like India where the interest rates are higher. Sensible isn’t? But is it what our finance minister will also be happy about? We will see in the subsequent article of the critical analysis of the forth coming budget and the interdependency of the various macroeconomic variables we have learnt so far.

Economic Fundae - Fiscal Policy

The big question that our finance ministry will face is how to react to the global recession and our stock market crash. Although these are issues which need correction from various economies, let us see what tools are at hand to control the economic fluctuation. Last year -2007 although we saw our GDP grow more than 8%, we were facing with issues like inflation. The Reserve Bank of India which is the principle organization in command of our economy was taking numerous measures to curtail inflation. What essentially were they doing? What is the role of government in these situations?

Fiscal Policy is use of government spending or tax policy to control aggregate demand-
The taxes that we pay are essentially the source of funds for our government. Now what kind of taxes we pay? Where does the money go?

To understand this we will revisit the equation which is worth remembering
GDP = C + I + G -NX

The G – Government spending composes of two components, the purchases of goods and services & government transfers – which include government spending on individuals without expecting any goods or service. In India we can think of this as the spending towards to rural development and poverty alleviation. But targeting government expenditures simply to reduce poverty is not sufficient; government needs to stimulate economic growth to help generate the resources required for future government expenditures. This becomes the rationale for a budget deficit.

The government can influence the consumer spending by controlling the taxes and the transfers. This is sensible because the more the tax we pay the less is our disposable income – which is our revenues minus the taxes (total income available to spend).

Now why would our government want to control aggregate demand? This is just to control the effects of recession – “Refer Economic Fundae – Business Cycle” or inflationary pressure.

What could it possibly do?
1. Increase government spending
2. A tax cut
3. A increase in government transfers.

This could be the opposite when our government has inflationary pressure.

But remember it is not that easy and it is not that fast to bring in a change. There is also a concept of multiplier to the effect of government spending- it is the ratio of the change in GDP to the change in aggregate spending. In simple terms if you sow Rs 100 you may end up reaping 200!

This multiplier effect may not be there if the government policy is to cut taxes or increase government transfers. This is because not all of the tax benefit you get may be spent, which is given by the marginal propensity to consume.

Now the budget is just a few weeks ahead, we often hear the terms like budget deficit (at least in my generation I have not heard of a budget surplus). What it means? Whether budget deficit is good or bad?

The budget balance is equal to the government savings which is governed by the following equation
S = T – G – TR
T- tax receipts
TR – Transfers

In general, the government runs budget deficits, when there is a recession and surplus when there is economic expansion. In India we have seen the politicians have the habit of wooing the voters by having a tax cut and hence a deficit budget. By doing so, Indian government have run in deep debts. Remember the interest payments for these debts, which are also funded by the taxes that we pay.

Now a novice person like me would think what if the government would print more money to fund the debts. Remember there is always a problem with the inflation.

Now you are all set to think in terms of the finance ministry tools. In the next article we will see how the central bank controls inflation.

Economic Fundae - Business Cycles

Macroeconomics as a discipline is about the study of national economy, total output level, the general trend in employment. All this not only nation wide but also with respect to the global economy. I write this article as the stock market tanked 4000 points roughly about 20% in two days in reaction to the global recession- economic downturn. In the past century we have seen years of boom and bust between years, which is called the business cycle. What is happening today in the stock markets can be only a fraction of the impact which was there during the Great Depression- stock market crash of October 1929, but we can immediately strike a relationship in these events. But why is there business cycle, and what are reasons for the recession? This is a subject we are currently dealing with.

In fact we all would agree to the fact that the salary we get today is at least twice as much as our parents. This even after adjusting for inflation- which is the rise in the price level of goods and services have grown phenomenally. This is attributed to the long run growth of an economy. We are trying to address the issue of growth in the long run and the intermediate recession and expansion.

For an engineer turned management graduate like me trying to understand this phenomenon of recession would immediately associate with the unemployment, the effects of aggregate output and the government policy on these issues.

Looking at the issue of unemployment- the percentage of total number of people in the labour force who are unemployed. In general we have higher unemployment rate during recession and lower during expansion. The policy measures which are undertaken to stabilize the severity of the recession or to rein in the expansion are the Monetary Policy - which involves changes in the money, interest rates etc. & the Fiscal Policy- which involves changes in the tax policy or government spending etc.

Before going further to the discussion of recession, we will define what an open economy means. Until 1991, India had the policy of restricted trade regime, which essentially is the closed economy - the economy which does not trade goods or services with other countries, self sustained. This principle goes against what Adam Smith in his book mention of division of labour. A country should try and maximize its production in which it is generally good at. It is more of a focused approach rather than channelizing to all what an economy needs.

After 1991, India opened its economy to the world because of the crunch and the request by IMF to do so. Hence an open economy is one which trades with other countries. This is different from the closed economy dynamics with the exchange rates - which is discussed in the previous article.

There are numerous reasons for recession and it is measured by looking into the amount of business activity which is happening- Unemployment, industrial production etc. One should remember the effect of the "Paradox of thrift" - which is the reduction in spending forecasting a economic hard time actually leads to a slump in the economy and the business begins to layoff.

There were enough cues this time for the U.S economy slowdown and one article in our blog addressed the issue of "Merrill Lynch faces huge loss due to bad mortgage write-downs".

Long run growth is about the general increase in the standard of living. But remember we are all dead in the long run!!!

Economic Fundae - Exchange Rates

In any system it pays to standardize. Essentially this is been the case in every development over the years. We have always tried to find new opportunities in standardizing processes which will improve efficiency.

This can also be seen in the international trade, where people had looked into ways of standardizing the exchange of goods and service. We need to go back to history to see how gold standard worked and what lead to the Bretton Woods system. Much of our worries about raising rupee against dollar dates back to one of greatest move in history by the then President Roosevelt abrogated contracts in which payment was specified in gold.

This system in simple terms made countries to settle their internaional balances in U.S dollars, while the U.S. government redeemed other central banks holdings of dollar for gold at a fixed exchange rate of $35 per ounce. This system came to an end when U.S government was no longer able to redeem dollar for gold in 1971.

Now another question emerges as we probe further into the currency maintained by a country. How will the country decide on their currency?. What should be the growth rate of the currency?. What should be the quantity of the currency?

Gold standard served two purpose, one the domestic standard trying to determine the currency quantity and the rate of growth of money supply. This worked in tandem with the world's gold stock.

Next Gold also provided a standard for the international exchange. Consider the scenario in which U.S fixed the price of gold at $20 per ounce, and the U.K government fixed it at £4 per ounce, then the exhcnage rate equalled $5 per pound. This is called as the fixed exchange regime.

After 1971, we have the floating exchange rate. This works in a simple rule that the central bank of a country will not intervene in the rates set by the market. Hence the demand for a particular currency helps in determining the rates. This demand is because of the larger acceptance of the goods and services of a particular country.

Lets understand the rules of the floating exchange rates more and its interaction with the interest rates and inflation in the subsequent articles.

Economic Fundae - Inflation

Inflation in simple terms is the loss of purchasing power of a currency. If today 10kg of general items can be bought of 100 Rs, then after a year how much money will be required to buy the same amount of goods? Inflation gives an idea of that general increase in price of goods.

There are standard ways to measure inflation such as the Wholesale Price Index (WPI) and Consumer Price Index (CPI). WPI measures the increase in price of basket of goods at the wholesale level. It is measured weekly. CPI gives the measure of the cost of given basket of goods (Wheat, Pulse etc) and services which the consumer has to pay. CPI is always greater than WPI.

Although there are inherent problems with this measure which is largely attributed to the weights attached to the goods and services and also the changing quality which is very hard to quantify. This of course can have huge difference in the policy decisions. There can also be a cumulative wrong measurement due to these inherent problems in scientific methods in economics.

Now if we were to answer what an effect does it has on policy making and the other variables in macroeconomics, we need to understand a bit more of how the Monetary Policy and fiscal policy is taken.

Rupee appreciation and its after-effect

The rupee has witnessed around 12% appreciation last year, the most since at least 1974. On 16’th Jan 2008, it was quoting at 39.068 per US dollars (USD) against 44.28 at the end of 2006. The strong economic fundamental is one of the major factors for attracting Foreign Direct Investment (FDI). The appreciation got further strengthened by the sub-prime crisis in US. The sub-prime crisis in US led to fall in US market and investor started taking their money out. They looked for the best market to invest and found Indian market more attractive. According to Security and Exchange Board of India (SEBI), the net investment in India by FII was 19.53 bn USD in 2007 as compared to 8.87 bn USD in the year 2006, a 120% increase in the FII inflow. As per the data from commerce ministry, Foreign direct investments through august last year totaled $12.9 bn USD as compared to $11.1 bn for the whole of year 2006. This high inflow of money from the international market has increased the demand of rupee significantly and that has propelled the sudden surge in value of rupee against dollars. This could have impact on various aspects including trade, inflation and government policy as well.

International Trade:

The strengthening of rupee has made import attractive while it has severely impacted the export. Export growth slowed down to an average 17% till Oct, 2007 from 21.3% a year earlier. The current account (Account for export and imports) deficit widened in the three months through September to $5.5 bn, while the capital-account (Account for FDIs , FIIs and overseas borrowings) surplus more than doubled in the quarter to $34.75 bn. IT business is one of the worst hit industries with all the companies showing slump in growth. These companies have sought for government interference, which is yet to be addressed.

Petroleum Prices:

The soaring crude oil prices has always been a cause of concern for India oil companies with no say in the domestic pricing of petroleum products. The $100 per barrel crude oil would have left government with no other choice except increasing the oil price, which no government will be willing to do when hardly a year is left for the Lok Sabha election. The appreciation in rupee has helped government to compensate the high oil price to some extent.

Impact on Inflation:

January 2007 witnessed the highest inflation in last 3 years because of increased demand for pulses and general goods with supply constraints. The appreciation in rupee made import cheaper and hence decreased price, which led to decrease in inflation to almost 5 years low in December, 2007.

As the full impact of subprime is yet to be amortized and expected further cut in Federal Reserve interest rate, the rupee is expected to further appreciate to 38 per dollar by the end of this year.

Economic Fundae - GDP

Good Accounting turns data into information!

This article is aimed at people trying to understand the basics of national accounting.

GDP:Gross Domestic Product is the value of all the goods and services produced in the country within a given period. This includes all the goods and services produced in the geographical boundaries of the country irrespective of who produces. The other slight variant is the GNP which include receipts from abroad made as factor payments to domestically owned factor production. For example, part of India's GDP corresponds to the profits made by Hyundai Motors from its Indian operations. But these are part of the Korea's GNP because they are income of Korean-owned capital.

Although the difference is not significant in countries like U.S. it certainly is important where most of the countries labor is abroad working for a multinational company.

The fundamental national accounting equation will be as

Y= C + I + G + NX

Consumption spending by household sector, includes spending on anything under the sky. The only exception being the investment which people make in durable goods.

Then the government purchases are the government spending on the goods and services. Think of anything which government spends like laying roads, providing higher education etc. Again the only exception being the transfer payments. The transfer payments are those which does not get a service in return to government spending. This is logical as they are not a part of any of the current production.

The letter I in the equation refers to the Gross private domestic investment. In simple words, investment is associated with the business sector's adding to the physical stock of capital, which in turn will increase the economy's ability to produce output in the future.

The last term is the Net Exports, the difference between the exports and imports. They are to account for domestic spending on foreign goods and foreign spending on domestic goods. Confused, well we just finished the accounting of the entire nation. There is more than one reason to be confused, like most of our politicians.

Governments budget deficit is often a term we hear particularly in a country like India. This essentially means the difference between the government expenditures and the taxes received. Remember to include transfer payments as a part of government expenditures (which is slightly different from the government purchases)

Quick Fact:

GDP of India: (2007-08): 41,25,725 Crores of Rupees

Without further delay we will introduce you to other macroeconomic variables which are inflation, currency exchange rates, interest rates, monetary system and the business cycles.

Soaring Crude Oil price and its impact on India

With the crude oil touching $100 per barrel in the very first week of the year, it is expected to brings a bitter taste all over the world except the oil-producing countries.

But how about India? India imports around 76% of its domestic demand and the increase in oil price is always a matter of concern for the policy-makers. But this time story is not all the same, while one side the international crude oil price is at all time high, the Rupee has appreciated by more than 12% which is highest at least last 20 years. The appreciation of domestic currency has offset the impact of high price to some extent.

The last increase in the domestic oil price was there in June, 2006 and which was followed with downward revision twice. The oil price has huge impact on general pricing and hence inflation. With the moderate and negligible increase in oil price government has well maintained the inflation and common man is happy about it. But, the bigger picture is quite ominous. The major supply of oil in India comes from the PSU’s like IOCL, BPCL, and HPCL. As per MoneyControl, Petroleum has an under recovery of nearly Rs 9.5, diesel Rs 11.3, LPG Rs 380 per cylinder, and kerosene Rs 21. This under recovery includes the marketing, which has to be shared equally between marketing companies (ONGC, GAIL etc) , upstream companies(IOCL, BPCL etc) and government .With crude oil price peaking all time high and subsidized petroleum price in domestic market, these companies are making huge losses. A part of loss is swallowed by the government by issuing oil bonds to these companies and rest partially compensated by the three marketing companies ONGC, Oil India, GAIL.

The political aspect of the pricing can also not be ignored. The central government coalition lost the election in Gujarat, Himachal and even in Punjab. The Lok Sabha election is going to be held in 2009 and government has to rely of appeasement approach. Left has already out its deep concern over any plan of increasing oil price.

Now, how the price moves in international market and what step government takes to tackle the situation is going to be quite interesting.

Monetary Policy

Monetary policy intends to achieve a balance between excess and shortage of money supply in the market/economy. These policies are concerned to the supply/control of money. It influences the pace and direction of economic activity, money supplies, interest rates, borrowing and price level.

In the case of shortage of money on the economy the growth gets hampered which has negative impact on the prosperity of people. On the other hand if there is excess of money in the market, the prices of goods and services goes up and severely impacts the poor. The government/RBI needs to make sure that the sufficient money is available with market for the growth without affecting the poor.

The main objectives of monetary policy are –

Maintaining the price stability

Inflation has strong negative impact on social welfare and needs to be maintained at lower level.

High and stable employment

Employment opportunities could be increased by higher investment and economic activities, which in turn requires availability of credit at reasonable interest rates.

Economic growth

Adequate credit is required for the productive activities and hence sound monetary policy is required for supporting the growth in an economy

Stability of exchange rates

Exchange rate (amount of dollars per Rupees) is a crucial factor determining a country’s position in the international trade (import and export). Increase in the exchange rate () discourages export and enhances imports and vice versa. The current increase in exchange rate(appreciation of rupees against dollars) had a negative impact on the IT industry which is mainly based on export.

Fluctuation in exchange rates makes the planning difficult for the traders and hence monetary policy should aim on preventing any sharp fluctuation in the exchange rate.

Sectoral deployment of finds

Depending upon the priorities laid down in the plans/by government, Monetary Policy (RBI) determines the allocation of funds and interest rates among different sectors. Examples: Priority sector lending; recent move to increase interest rate on housing loans.

Special Section for CAT / MBA entrance GD/PI Finance articles

This post contains the list of all the Finance articles, in this blog, that may be relevant for CAT or other MBA aspirants preparing for GD/ PI. You may send your request for any relevant article that you want on this blog.

We have two authors for this section: Saurav & Selwyn. They shall be presenting their views & relevant facts on the current topics in Finance.

So far we have these articles in this category. The list will get updated with the new posts.

List of economics articles:
Soaring crude oil prices and its impact on India
Monetary Policy
Rupee appreciation and its after-effect
Economic Fundae - GDP
Economic Fundae - Inflation
Economic Fundae - Exchange Rates
Economic Fundae - Business Cycles
Economic Fundae - Fiscal Policy
Economic Fundae - Interest Rates

List of economics articles:
Stock Markets Basics

To view all the posts with tag CAT in a single page.