13.10.2008

• Why is there a liquidity problem in our country? That there is a problem can be gauzed from the fact that inter-bank call rates (rates at which banks lend among themselves in call markets) have shot up to 23% on Friday.
  
• There has also been an outflow of rupees last week due to RBI selling dollars to prop up the rupee. This means there are fewer rupees to lend.
  
• Other than this there appears to be no other solid reason. If this is so, the CRR cut should ease the problem. But let us wait and watch as the developments in the market unfold today.
• To answer such a question who else can you turn to, if not the venerable Dr. Rangarajan? Look at this interview where he answered this question in ample measure. The second question in the interview is what is highly relevant for our understanding of the current liquidity crisis.
• Take a look at this graphic which gives the global liquidity crisis in a nutshell and also how the major economies and groupings are trying to battle it out.
  
• What are some weapons in RBI's arsenal to increase liquidity?
• It can unwind bonds issued under the MSS (Market Stabilization Scheme; we have noted about what this MSS is on 12th March, 2008).
  
• It can allow borrowing against oil/fertilizer bonds by making them eligible for repo transactions. Perhaps even allow the money market mutual funds access to the repo window.
  
• It can increase the debt limits for FIIs.
• It can further reduce the CRR to about 6%; the rate at which it was just 18 months ago.
• It can cut the repo and reverse repo rates.
• It can rapidly set up a sovereign fund with a corpus of at least $25 billion to support the equity of well run Indian listed companies and mutual funds. At a time when the FIIs are unwinding, this gives an excellent opportunity to shore up the confidence in the markets; as India Inc's fundamentals are sound.
• Remember anything about Franklin D. Roosevelt's New Deal?
• New Deal is the name given to the recovery efforts taken up by the US government back in 1933 to overcome the ill effects of the Great depression.
• Look at the parallels between the 1930's situation and what exists today in the US. A well written piece.
• You can't also afford to miss a very good piece written by Samir Barua, the Director of IIMA on the current crisis. Abnormal times call for abnormal reading and preparation. That's why I am pointing out so many links for you today.
  
• Exports to US face hard times
• Amid a growing fear of insolvency, goods shipped to hundreds of American firms are no longer getting the export cover (insurance for export proceeds) freely. State-owned Export Credit Guarantee Insurance has placed restrictions on covers granted to single-buyer exports due to fears that several US companies may fail to pay up. Many of the exporters with single buyers have been unable to acquire cover because of the restrictions. For exporters, the concern is twofold. One, with the US economy in bad shape, the risk of bankruptcy of small importers is on the rise. Second, the credit risk has also gone up because of deterioration in the financials of many US banks involved with the letter of credit.
• Some reports say that there have been default incidents of around $25 million amid reports that international credit insurers like Coface have downgraded the US. Coface is an organization that has expertise in risk analysis and supports companies in the monitoring, management, protection and financing of their accounts receivable (i.e., monies that companies in one country have to receive from companies in other countries for the exports they made).
• For years, the US has been funding its imports from China and other parts of Asia through a massive current account deficit. There have been fears that unwinding of the current account deficit could cause a crisis. But while emerging markets continue to fund the US deficit by investing in in US treasuries, it is the importers who are now facing the crunch.
• What is meant by 'unwinding of the current account deficit' in the above note?
• What it means is that the countries who have been lending to the US (by investing their forex surpluses in US treasury bills) will stop doing so.
• What is the chance that it will happen? See the above note? And see how markets -- stock, financial or others -- are always gripped by a herd mentality? If the predominant mood is 'selling', everybody will only do one thing: sell. If the predominant mood is 'buying', then everybody will only 'buy'. It is this herd mentality which is the hallmark of capital markets everywhere. Similarly, when a few countries stop investing in US treasury bills; all other countries will follow the trend in a herd mentality. This is the worst that can happen to the US right now.
• If and when this happens, the US dollar will take a severe beating and collapse against all major currencies. It is then that the forex surpluses of many countries will start getting invested in other 'safe' and 'profitable' areas. This will most probably be the BRIC countries which are on a growth path in the medium to long term. Once this happens, the financial balance of power will shift away from Wall Street (US) and Canary Wharf (UK) to possibly BRIC countries.
• Take a look at how the wealth of the top 10 business families of India Inc got eroded!
• Look at this picture.
  
• You shouldn't miss this editorial comment on Raigad SEZ referendum. Very well articulated opinion.
• Next Mars probe by the US is facing budget concerns
• The Mars Science Lab is an ambitious follow-on programme to the two small rovers, Spirit and Opportunity, currently exploring the equatorial regions of Mars for signs of past water.
  
• But costs for the probe, which is about the size of a sport utility vehicle and is designed to assess Mars’ suitability for life, already have swelled to $1.9 billion from $1.6 billion.
  
• Proposed to be launched sometime in 2009 or 2011, the programme will be facing some tough questions on funding.
  
• Sainthood conferred on Indian nun
• Sister Alphonsa, a nun from a remote village in Kerala who passed away 62 years ago, on Sunday became the first woman saint from India when Pope Benedict XVI conferred sainthood on her at a time when attacks on Christians in the country have invited sharp international criticism. Sister Alphonsa died at a young age of 36 in 1946.