This blog is intended to help differentiate between the above 3 accounts.
NRE and NRO are the rupee accounts whereas FCNR account is maintained in foreign currency.
NRNR - Non Residential Non Repatriable are also rupee accounts
Proceeds from foreign currency notes/TCs can be credited to the NRE accounts. NRE account can be opened by local funds or by foreign funds. NRO account can be opened using either local fund / foreign fund.
NRO/NRE accounts both can be used to make local payments
Balances from NRE account can be repatriated abroad freely. While those from NRO account cannot be sent outside and used only for local payments.
http://www.iic.nic.in/iic5_a02.htm
Sunday, June 29, 2008
Sunday, June 22, 2008
Euro Zone
Euro Zone is the currency union of all the countries that use EURO. European Central Bank is responsible for monetary policies in the Euro Zone
Saturday, June 21, 2008
How higher crude oil prices also increase the price of vegetable oils
Recently a news clip that higher crude oil prices affect the prices of vegetable oils grabbed my attention and I tried get more information on this.
So the reasons why the price of vegetable oil is also rising are:
1. More and more vegetable oil is used as BIO FUEL. Yes so your palm oil, castor oil, soya bean oil which are usually used for cooking is now used as a fuel. So less oil available for cooking -> Price rises
2. More and more crops such as corn are now being used for making bio fuels instead of cooking oil. So less crop for cooking purposes. Price rises.
3. Farmers are realizing more profits by switching to bio fuel crops. Then less crop for vegetable oil -> Price rises
**Interestingly, corn which is used for producing ethanol is not only used in cereal but is also fodder for cattle. So also expect a price hike in meat and milk.
So the reasons why the price of vegetable oil is also rising are:
1. More and more vegetable oil is used as BIO FUEL. Yes so your palm oil, castor oil, soya bean oil which are usually used for cooking is now used as a fuel. So less oil available for cooking -> Price rises
2. More and more crops such as corn are now being used for making bio fuels instead of cooking oil. So less crop for cooking purposes. Price rises.
3. Farmers are realizing more profits by switching to bio fuel crops. Then less crop for vegetable oil -> Price rises
**Interestingly, corn which is used for producing ethanol is not only used in cereal but is also fodder for cattle. So also expect a price hike in meat and milk.
Thursday, June 19, 2008
All about NBFCs
Non Banking financial corporations are registered companies that can engage in businesses such as
a.) Loans and advances
b) Insurance
c) acquisition of shares/bonds/debentures/any marketable security
what NBFCs cannot engage in
a) agricultural activity
b) industrial activity
C) Sale purchase of immovable property
How it is different from a bank is that it does provide feature of demand deposits like the bank does.
A NBFC can either be registered with Sebi or RBI. Dual registration is not required.
NBFCs that are registered with RBI are
a) Asset Financing Companies (AFC)
b) Investment Company (IC)
c) Loan Company (LC)
Mind you that all NBFCs cannot hold deposits and those that can hold have a certificate from RBI. The networth of the NBFC should be greater than the deposits held.
a.) Loans and advances
b) Insurance
c) acquisition of shares/bonds/debentures/any marketable security
what NBFCs cannot engage in
a) agricultural activity
b) industrial activity
C) Sale purchase of immovable property
How it is different from a bank is that it does provide feature of demand deposits like the bank does.
A NBFC can either be registered with Sebi or RBI. Dual registration is not required.
NBFCs that are registered with RBI are
a) Asset Financing Companies (AFC)
b) Investment Company (IC)
c) Loan Company (LC)
Mind you that all NBFCs cannot hold deposits and those that can hold have a certificate from RBI. The networth of the NBFC should be greater than the deposits held.
Difference between Privatization and Divestment
Privatization is the process of transferring the ownership of a business of a public sector to the private sector. In a broader sense, privatization refers to transfer of any government function to the private sector including governmental functions like revenue collection and law enforcement.
Divestment is said as the opposite of Investment. Investment means acquisition of certain assets; divestment means the release of assets. A business may be that a particular arm of its is not compatible with its core business and hence may decide to shelve or divest this business. Divestment may be done for various economic or social reasons.
Disinvestment: Disinvestment means shrinkage if the capital available or withdrawal of capital from a business.
Divestment is said as the opposite of Investment. Investment means acquisition of certain assets; divestment means the release of assets. A business may be that a particular arm of its is not compatible with its core business and hence may decide to shelve or divest this business. Divestment may be done for various economic or social reasons.
Disinvestment: Disinvestment means shrinkage if the capital available or withdrawal of capital from a business.
Wednesday, June 18, 2008
what is short-covering
Short Covering is best explained with an example.
Supposing a broker has 50 shares of Rs10 of some company. The broker feels that company doesnt have good prospects and sells the share at Rs. 10. Now suddenly in evening or next day, company's prospects may seem good and share price rises to Rs. 15.
At this point broker may like to buy the share and then to avoid further loss buys 50 shares at Rs15. This is known as short covering- where there is no fresh purchase.
Supposing a broker has 50 shares of Rs10 of some company. The broker feels that company doesnt have good prospects and sells the share at Rs. 10. Now suddenly in evening or next day, company's prospects may seem good and share price rises to Rs. 15.
At this point broker may like to buy the share and then to avoid further loss buys 50 shares at Rs15. This is known as short covering- where there is no fresh purchase.
Tuesday, June 17, 2008
how higher interest rates weaken a currency
News that the US fed bank may increase the interest rates caused the dollar to weaken against other currencies.
This can be best explained with the help of an example. Suppose 1 dollar is currently equal to 42 Indian rupees. So now if the fed bank increases interest rates borrowing money will be more expensive. So with say 84 rupees I can borrow 2 dollars currently at the interest rate of 8.5%. If the interest rate is hiked, borrowing dollar becomes more expensive.
At this time the dollar values is then weakened to say Rs 41. In this way I can buy more dollars with the same 84 rupees but will give higher interest rate.
This is all done to even out higher interest rates so the customer borrowing is not affected by much.
Also as a general rule, higher interest rates will create less demand for a currency and hence its value will fall
This can be best explained with the help of an example. Suppose 1 dollar is currently equal to 42 Indian rupees. So now if the fed bank increases interest rates borrowing money will be more expensive. So with say 84 rupees I can borrow 2 dollars currently at the interest rate of 8.5%. If the interest rate is hiked, borrowing dollar becomes more expensive.
At this time the dollar values is then weakened to say Rs 41. In this way I can buy more dollars with the same 84 rupees but will give higher interest rate.
This is all done to even out higher interest rates so the customer borrowing is not affected by much.
Also as a general rule, higher interest rates will create less demand for a currency and hence its value will fall
Repo Rate, Reverse Repo Rate, CRR, Call Rate
Repo rate is the rate at which banks borrow money from RBI. Increase in the repo rate makes borrowing more expensive for the banks
CRR or Cash Reserve Ratio is the amount of money banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down.
http://openlib.org/home/ila/MEDIA/2004/CRR.html
As per RBI rules, certain percentage of deposits with the bank has to be kept as cash with RBI. This ratio (what part of the total deposits is to be held as cash) is stipulated by the RBI and is known as the CRR, the cash reserve ratio. When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 10, banks will hold Rs10 with the RBI and lend Rs 90. The higher this ratio, the lower is the amount that banks can lend out. This makes the CRR an instrument in the hands of a central bank through which it can control the amount by which banks lend.
Reverse Repo Rate is the rate at which banks park their excess liquidity with RBI.
Obviously the reverse repo rate will be less than the repo rate.
Call Rate is also called the overnight rate. This is the rate at which a depository institution (bank) lends money to another depository institution overnight. This rate is a very good indicator of the short term lending rates.
In countries that have central banks, like India, it is the rate at which RBI lends money to banks overnight.
CRR or Cash Reserve Ratio is the amount of money banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down.
http://openlib.org/home/ila/MEDIA/2004/CRR.html
As per RBI rules, certain percentage of deposits with the bank has to be kept as cash with RBI. This ratio (what part of the total deposits is to be held as cash) is stipulated by the RBI and is known as the CRR, the cash reserve ratio. When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 10, banks will hold Rs10 with the RBI and lend Rs 90. The higher this ratio, the lower is the amount that banks can lend out. This makes the CRR an instrument in the hands of a central bank through which it can control the amount by which banks lend.
Reverse Repo Rate is the rate at which banks park their excess liquidity with RBI.
Obviously the reverse repo rate will be less than the repo rate.
Call Rate is also called the overnight rate. This is the rate at which a depository institution (bank) lends money to another depository institution overnight. This rate is a very good indicator of the short term lending rates.
In countries that have central banks, like India, it is the rate at which RBI lends money to banks overnight.
Friday, June 13, 2008
exchange rate or inflation- what the gov should worry about more
For a country like India, today both the exchange rate and inflation are not heading in the right direction. The rupee is weakening against the dollar whereas the inflation is rising. At this time it becomes important to understand whether the government should take measures to control exchange rate or the inflation.
Lets consider that the government gives more priority to exchange rate. The rupee is weakening against the dollar. To strengthen rupee, the government can only sell the dollars it has. This will strengthen rupee. But what will be the repercussions? By selling dollars the dollar reserve with the government will lessen. With less rupees the imports could be hit, which may actually lead to inflation due to less supply!!
The government will then have to resort to borrowing more dollars and weaken the rupee again. Borrowing may hurt the government fiscal more and weaken the economy and rupee even more. Due to weakned economy FIIs will be less interested in investing in India and hence will not infuse more money in the country.
So it makes no sense to manage exchange rate over inflation.
On the other hand, with inflation under control, there is a chance of business growth. Although inflation control measures are always a damp-ner for the businesses, but with inflation under control common man will be more buoyant about the economy. With more business, the economy and thus the rupee is likely to become more strong.
In the view of raghuram rajan, exchange rate should be left upto the market forces and government should take care of inflation.
Lets consider that the government gives more priority to exchange rate. The rupee is weakening against the dollar. To strengthen rupee, the government can only sell the dollars it has. This will strengthen rupee. But what will be the repercussions? By selling dollars the dollar reserve with the government will lessen. With less rupees the imports could be hit, which may actually lead to inflation due to less supply!!
The government will then have to resort to borrowing more dollars and weaken the rupee again. Borrowing may hurt the government fiscal more and weaken the economy and rupee even more. Due to weakned economy FIIs will be less interested in investing in India and hence will not infuse more money in the country.
So it makes no sense to manage exchange rate over inflation.
On the other hand, with inflation under control, there is a chance of business growth. Although inflation control measures are always a damp-ner for the businesses, but with inflation under control common man will be more buoyant about the economy. With more business, the economy and thus the rupee is likely to become more strong.
In the view of raghuram rajan, exchange rate should be left upto the market forces and government should take care of inflation.
Thursday, June 12, 2008
How Ranbaxy acquisition will affect the stock holders
Now that daiichi sankyo has acquired stake in ranbaxy, there is bound to be change in investor holdings and their profits. To acquire control daiichi needs 51 % stake in company
1. Daiichi buys 35% from singh family. Another 65% is with the preferred and common stock holders.
2. Daiichi can 9.4% in ranbaxy through preferred allotment of shares
3. Daiichi can offer to buy 20% of 65% shares in market.
4. If daiichi still cannot reach 51% , it will get offer to buy another 4.9 % through preferred allotment
1. Daiichi buys 35% from singh family. Another 65% is with the preferred and common stock holders.
2. Daiichi can 9.4% in ranbaxy through preferred allotment of shares
3. Daiichi can offer to buy 20% of 65% shares in market.
4. If daiichi still cannot reach 51% , it will get offer to buy another 4.9 % through preferred allotment
Preferred and Common stock
The main reason for having preferred stock and common stock is to differentiate the ownership from management. Now suppose a particular shareholder has 5% stake in a company. This shareholder has a minority yet sizable stake and may use his 5% ownership to force the company to include him in the corporate making. Many companies would not want this. So this shareholder will be given 5% preferred shares but will have limited voting rights in companys' decisions.
**preferred stocks are not traded on the bourse like common stocks.
There are convertible preferred stocks that can be converted to common stocks.
Preferred stocks can also be returned to the company at a fixed price
*preferred stock is generally given to private equity owners who have stake in the company
1. Dividend Payout
Preferred stock holders have a confirmed dividend payout every quarter. Common stock holders may or may not get dividends depending on the company performance.
2. Decision making Rights
Common stock holders have higher priority on corporate decision making than the preferred share holders. For common stock holders generally 1 stock equals 1 vote
3. Liquidation / Bankruptcy
In case a company goes for liquidation or files for bankruptcy, the preferred share holders get preference for getting all company assets before the common stock holders
**preferred stocks are not traded on the bourse like common stocks.
There are convertible preferred stocks that can be converted to common stocks.
Preferred stocks can also be returned to the company at a fixed price
*preferred stock is generally given to private equity owners who have stake in the company
1. Dividend Payout
Preferred stock holders have a confirmed dividend payout every quarter. Common stock holders may or may not get dividends depending on the company performance.
2. Decision making Rights
Common stock holders have higher priority on corporate decision making than the preferred share holders. For common stock holders generally 1 stock equals 1 vote
3. Liquidation / Bankruptcy
In case a company goes for liquidation or files for bankruptcy, the preferred share holders get preference for getting all company assets before the common stock holders
Tuesday, June 10, 2008
Effects of raising interest rate by US
Ben bernanke today announced that to control inflation the fed bank will increase the interest rate. To understand what affect this will have we have to look at both the short term and long term perspectives.
First the short term
1. Because Int. rate have been increased to control inflation, the first entities which would be affected are the businesses. As increased interest rate would make borrowing expensive, less number of firms would be interested in going for credit. So, stocks of such companies fell.
2. Obviously the inflation would be controlled
3. For those who invest in dollar securities, their returns would increase. So in a way there is more demand for dollar. Dollar has therefore strengthened against other currencies.
Long term perspective
Impression that inflation will be controlled and business will be secure in the future, the risks have reduced. Due to this price of 10 year bond has reduced
Effect on oil prices
by increasing interest rate, borrowing dollar has become difficult. So demand for the dollar commodity - crude oil has reduced a bit and hence oil prices have fallen
First the short term
1. Because Int. rate have been increased to control inflation, the first entities which would be affected are the businesses. As increased interest rate would make borrowing expensive, less number of firms would be interested in going for credit. So, stocks of such companies fell.
2. Obviously the inflation would be controlled
3. For those who invest in dollar securities, their returns would increase. So in a way there is more demand for dollar. Dollar has therefore strengthened against other currencies.
Long term perspective
Impression that inflation will be controlled and business will be secure in the future, the risks have reduced. Due to this price of 10 year bond has reduced
Effect on oil prices
by increasing interest rate, borrowing dollar has become difficult. So demand for the dollar commodity - crude oil has reduced a bit and hence oil prices have fallen
how a weak dollar causes oil price to rise
Oil is dollar commodity
Now due to weak economic condition in US, the dollar is already weak. Now in Europe, also Canada and Japan, their currencies have become stronger as compared to the dollar. So they can buy more dollar-commodities at a cheaper rate.
As a result these countries can afford to buy more oil at a cheaper rate. Hence there is a huge demand for oil from these countries and more the demand, the oil price is going to rise.
In addition to the high demand, such countries are buying more and more oil to hedge against inflation because tomorrow no one knows what the scenario will be!
Now due to weak economic condition in US, the dollar is already weak. Now in Europe, also Canada and Japan, their currencies have become stronger as compared to the dollar. So they can buy more dollar-commodities at a cheaper rate.
As a result these countries can afford to buy more oil at a cheaper rate. Hence there is a huge demand for oil from these countries and more the demand, the oil price is going to rise.
In addition to the high demand, such countries are buying more and more oil to hedge against inflation because tomorrow no one knows what the scenario will be!
Friday, June 6, 2008
why the dollar has weakened
obviously because there is a less demand for the US dollar in the forex. But why?
1. Crude Oil is traded in dollars. All developing/developed countries are buying oil in dollars. There is an excessive supply of dollars in the market. The supply here is more than the demand. And hence by supply-demand principle, the dollar is becoming weak.
2.No one wants to buy US dollars. People buy US dollars for investing in treasury bills, US corporate bonds when they know that the economic situation in US is strong.
But currently the economic situation in US is in doldrums. Few people want to invest in US and hence there is a less demand for US dollars.
3. Due to recession, US Fed bank has reduced interest rates. Even greater deterrent for foreign players to invest in US.
4. A bit of higher inflation is causing US goods to be more expensive. Less people are interested in buying US goods because they are expensive. Hence they are not buying the US dollar for purchases.
5. US economy is import based. It currently has a huge trade deficit. Its pumping huge dollar supplies to the world. Due to this there is a great SUPPLY of dollar in the world. Hence value of dollar is falling.
6. Other reason why the dollar is weakening compared to other currencies is that the economic situation in other European countries or Japan or middle east is much better than in US.
1. Crude Oil is traded in dollars. All developing/developed countries are buying oil in dollars. There is an excessive supply of dollars in the market. The supply here is more than the demand. And hence by supply-demand principle, the dollar is becoming weak.
2.No one wants to buy US dollars. People buy US dollars for investing in treasury bills, US corporate bonds when they know that the economic situation in US is strong.
But currently the economic situation in US is in doldrums. Few people want to invest in US and hence there is a less demand for US dollars.
3. Due to recession, US Fed bank has reduced interest rates. Even greater deterrent for foreign players to invest in US.
4. A bit of higher inflation is causing US goods to be more expensive. Less people are interested in buying US goods because they are expensive. Hence they are not buying the US dollar for purchases.
5. US economy is import based. It currently has a huge trade deficit. Its pumping huge dollar supplies to the world. Due to this there is a great SUPPLY of dollar in the world. Hence value of dollar is falling.
6. Other reason why the dollar is weakening compared to other currencies is that the economic situation in other European countries or Japan or middle east is much better than in US.
why India is opposed to WTO
Why India feels the WTO recommendations are a stymie to its growth
1. The developed countries esp. US want more access to the markets of developing countries like India. India feels this will threated the local farmers and lower competitive prices will take away their livelihood.
2. US wants to give limited access to the developing countries to its markets. It proposes that in case of a) increased supply and b) falling prices of goods - it can levy import duty on the foreign goods which will be higher than the maximum duty permitted by WTO!!
3. US also wants more leeway on NAMA (non-agri market access). Non Agri products compose more than 85% of products under WTO. Having more access to the non agri market in developing countries is also detrimental to Indian manufacturers
4. US and developed countries also want infusion of RE-MANUFACTURED goods in developing countries. Bringing these low cost second hand machines, goods can erode the indian local market..
"these are highly protectionist moves which are against the market forces", India.
1. The developed countries esp. US want more access to the markets of developing countries like India. India feels this will threated the local farmers and lower competitive prices will take away their livelihood.
2. US wants to give limited access to the developing countries to its markets. It proposes that in case of a) increased supply and b) falling prices of goods - it can levy import duty on the foreign goods which will be higher than the maximum duty permitted by WTO!!
3. US also wants more leeway on NAMA (non-agri market access). Non Agri products compose more than 85% of products under WTO. Having more access to the non agri market in developing countries is also detrimental to Indian manufacturers
4. US and developed countries also want infusion of RE-MANUFACTURED goods in developing countries. Bringing these low cost second hand machines, goods can erode the indian local market..
"these are highly protectionist moves which are against the market forces", India.
Wednesday, June 4, 2008
what is book value of a share
Total owner's equity = Assets - Liabilities
Book Value of a share = (total owners equity) / No. of outstanding shares
Generally the market value of the share should be and is greater than the book value.
Book Value of a share = (total owners equity) / No. of outstanding shares
Generally the market value of the share should be and is greater than the book value.
Tuesday, June 3, 2008
how a weak rupee causes inflation
A weak rupee would always make the exporter happy.
Consider this weak rupee ----> exports profitable -----> more money in market --> inflation
Consider this weak rupee ----> imports not profitable ---> more money goes out ---> have to buy dollars to finance imports ----> rupee weakens more
Consider this weak rupee ----> exports profitable -----> more money in market --> inflation
Consider this weak rupee ----> imports not profitable ---> more money goes out ---> have to buy dollars to finance imports ----> rupee weakens more
why you should not drop interest rates (too much )during recession/ slowdown
Even though it may seem logical to reduce the interest rate during a slowdown to attract more investment, it may not be the most prudent decision when it come to foreign investment.
Consider a country say A that invests in America because it gets good rate of return in comparison to its own country. Say the roi in home country is 5% and that in America in 7%. So A would be tempted to invest in America. But if the rate of return fall to 5% in US, it may not be very wise to invest in US.
eg. say A is INDIA. want to invest 10000 Rs. 10000 rs is equal to 250 $ approx.
I invest 250 $ in US at 7% for 1 year. Interest is 17.5 $ = 700 rs.
I invest 10000 in India at 5% for 1 year. Interest is 500 rs. = 12.5 $
So makes more sense in investing in US. So even during the time of recession, to keep the foreign inflows coming should not reduce the interest rates drastically as done by Ben Bernanke.
Consider a country say A that invests in America because it gets good rate of return in comparison to its own country. Say the roi in home country is 5% and that in America in 7%. So A would be tempted to invest in America. But if the rate of return fall to 5% in US, it may not be very wise to invest in US.
eg. say A is INDIA. want to invest 10000 Rs. 10000 rs is equal to 250 $ approx.
I invest 250 $ in US at 7% for 1 year. Interest is 17.5 $ = 700 rs.
I invest 10000 in India at 5% for 1 year. Interest is 500 rs. = 12.5 $
So makes more sense in investing in US. So even during the time of recession, to keep the foreign inflows coming should not reduce the interest rates drastically as done by Ben Bernanke.
Monday, June 2, 2008
six steps to create a blue ocean
1. Look across alternatives
2. Look across strategic group across industries - eg. curves health clubs
3. Look across the usual set of buyers
4. Look across functional and emotional appeal or add one in case of its absence
5.Look across complementary product and service offerings
6. Look across time - how a trend will add value to business years down the line if a trend follows its logical conclusion
a. Understand the strategic profile of the industry
b. Understand the strategic profile of the competitors
c. Understand the strategic profile of your own company
2. Look across strategic group across industries - eg. curves health clubs
3. Look across the usual set of buyers
4. Look across functional and emotional appeal or add one in case of its absence
5.Look across complementary product and service offerings
6. Look across time - how a trend will add value to business years down the line if a trend follows its logical conclusion
a. Understand the strategic profile of the industry
b. Understand the strategic profile of the competitors
c. Understand the strategic profile of your own company
alternatives v/s substitutes
Substitutes: Consider object A that performs some task or has some utility. Now objects B,C and D that have different form as compared to A but perform the same function are called substitute
Alternatives: Now objects E,F and G that have different forms and functions compared to A but perform the same purpose are called alternatives.
eg. of substitutes : A washing machine or a dhobi ghat. Different forms but perform the same functions of cleaning clothes. PURPOSE : to give clean clothes. ALTERNATIVE TO THIS: buy new clothes.
eg. of alternatives: a movie and a family dinner. Both have the function of family outing and enjoyment but are in very different forms and do different functions
Alternatives: Now objects E,F and G that have different forms and functions compared to A but perform the same purpose are called alternatives.
eg. of substitutes : A washing machine or a dhobi ghat. Different forms but perform the same functions of cleaning clothes. PURPOSE : to give clean clothes. ALTERNATIVE TO THIS: buy new clothes.
eg. of alternatives: a movie and a family dinner. Both have the function of family outing and enjoyment but are in very different forms and do different functions
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