We are sure many of you would have felt at one time or the other, the weight of expectations from your parents. You might have faced the pressure in your own way and perhaps some of you may even be wilting under the pressure. Though this article from an educationist is basically aimed at parents, we strongly recommend that it be read by even students. If you know how your parents should be behaving, when they don't behave that way, at least you will be aware of their deficiency and you will be in a better position to handle the pressure.
It certainly looks so with with the dollar beginning to harden against currencies like the euro. The strengthening of the dollar is confirmed by a rise in DXY - the currency index that measures the relative value of the dollar to a basket of currencies — by 2.48% since January 14 at around 78.525 levels. The index is viewed as the barometer of the greenback against major currencies in the world. Currencies in the basket include the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc.
How is a rise in DXY suggesting unwinding or possible unwinding of the dollar carry trade?
The carry transaction is where global fund managers borrowed dollar and converted it into currencies of countries they chose to invest in. This had captured the imagination of global investors (mostly hedge funds) as the greenback weakened and the US Federal Reserve cut interest rate to battle recession. Hedge funds and other international investors found their borrowing cost go down every time the US central bank slashed rates and the dollar dipped against other currencies. As rates dropped, they borrowed more to push up stocks in these markets, which in turn drew more investors.
It looked like an invincible strategy, till now.
Investors, who have been banking on the cheap dollar to punt, are now feeling the jitters, with the dollar beginning to harden against currencies like the euro. A stronger dollar means that they will have to convert more of other currencies to pay the interest on the dollar loan.
As the carry currency turns more expensive, markets begin to fear that investors will start to sell some of the stocks to pay back the loan which no longer looks cheap. This, in market parlance, is the carry trade unwinding. In the past, markets had been shaken by unwinding in yen, which for years had been the favourite carry trade currency.
A downturn in the economy generally leads to deterioration of asset quality of banks and increase in NPLs. At the bottom of the business cycle, the bank NPLs tend to be high and banks increase provisions against higher NPLs. These higher provisioning requirements makes bankers cautious at the bottom of the business cycle. They tighten credit, further deteriorating borrowers financial position and making general economy worse.
In contrast, at the peak of the business cycle, companies performance is strong and banks NPLs are low. Banks tend to reduce provisions because of lower NPLs, ease credit terms and expand their loan portfolios, spurring economic growth. This easy credit approach results in poor loan selection, leading to higher NPLs when the cycle turns. The net result is that banks procyclical actions at the high and low points in the business cycle tend to further amplify the cycle with all the negative consequences associated with this increased volatility. The alternative approach being considered now is a “countercyclical” provisioning approach under which banks build their reserves during good times when their earnings are high and let these reserves come down during the economic slow down.
A lower growth in farm sector due to the widespread drought and floods in some parts of the country is likely to pull down economic growth in the third quarter to 6-6.5%, according to Pronab Sen, chief statistician of India and secretary, ministry of statistics and programme implementation.
Farm production is likely to dip by 6- 7% during the third quarter.
As per RBI guidelines, loans given to infrastructure sector, specially road, construction, telecom and ports, fall under the unsecured category as there is no tangible asset that can banks can take over in the case of default to secure their loan.
But now the government has reportedly written to the RBI asking it to consider classifying loans to infrastructure sector as secured lending to ensure an increased flow of funds to the sector.
The government's argument is that most of these projects are formed through the private-public participation (PPP) route and have implicit government support.
There is little cause for these loans turning into non-performing assets. Further, the payment towards these loans is made through the escrow account, from which the principal amount is given to the lender first.
As banks have a cap on lending to unsecured category, government wants them to consider lending to infrastructure as secured, so that the sector doesn't suffer from the sectoral cap.
According to RBI norms, banks have to make a provisioning of 20% in the first year, if unsecured loans goes bad or becomes non-performing asset in banking parlance. The provisioning amount goes up to 100% in the second year for unsecured NPAs.
Reportedly this is what is happening. With their appearing to have broken ranks with the G77 in Copenhagen summit, the BASIC countries now want to cozy up to the Least Developed Countries to retain their negotiating strength. As it is making common cause with the rest of the developing bloc that would give it better negotiating strength.
The proposed fund will be bilateral in nature and not under the auspices of the United Nations Framework Convention for Climate Change. The fund is unlikely to be a formal set up as that would require setting up of structures. Instead, each of the four BASIC countries will co-ordinate their climate-related aid to vulnerable countries.