PLR - affecting the micro economics and the macro economics

Macro Economics

If the prime lending rate is increased, the borrowing cost would increase. This would slow down the production of the companies. This is would result in slower growth of the industry. The GDP would be affected. Because of lesser revenue and lesse profits, the tax to the government would decrease.

This will decrease inflation

Micro Economics

From microeconomics perspective, high PLR will hit the production. High lending rates will also hit the consumer demand. The company may then have to cut down on the production, lay off staff, take care of the inventory and other things in the purview of micro economics.

Greeshoe Option

The explanation for greenshoe option has been taken from investopedia.

Greenshoe option gives the underwriter an option to increase the allotment of shares.

In case the issuer feels there is a need for more capital or even to stabilize the price of the security it may be decided to over-allot the securities.This could also be done in case the demand for the security increases far more than expected.

Greenshoe option may allow the underwriter to issue 15% more shares than the original decided number

Difference between Bonds and Debentures

Bonds and Debentures are very similar to each other in the sense that both are fixed income instruments that offer a very safe route of investment. However there are certain differences between the two which this blog will try to clear

1. The first major difference between the two is that the bonds are secured by some underlying assets. This means that in case a company defaults on the payment of principle and interests, the investor can claim on the asset. In simple terms no collateral is offered for debentures.

2. Bonds are generally issued by the government whereas the debentures are issued by the corporates

3. Because debentures are unsafe compared to bonds, interest rates offered are higher on debentures.

http://www.fimmda.org/useful_links/faq.asp#p3

Participatory Notes

Participatory notes are issued to the foreign investors by the brokerages, fund houses, hedge funds that are not registered with SEBI.

These brokerages buy listed Indian securities and then issue Participatory Notes to foreign investors. This is almost like informal ADRs. Any dividend, capital gains generated on the underlying securities is given to the investors.

Since investing in Indian markets is limited to the registered FIIs, PNs provide the alternative though ineligible route for foreign investors to enter Indian markets.

The hedge funds are not registered directly with the SEBI but can operate through sub-accounts in FIIs. These funds are said to operate through issuance of PNs. SEBI is not happy because it does not know who is the underlying owner of the security.

How the Government bowled SLR to stump SBI

I feel it would be best to explain this story in points.

1. SBI releases a rights issue.
2. Government is interested in buying the issue and makes payment in the form of government bonds (G-Secs)
3. The value of the bonds is 9996 crores.
4. Now these bonds do not enjoy the SLR status, which means as per the Indian banking regulations these cannot be held till maturity.
5. Only the G-Secs that have SLR status can be held till maturity and all the other bonds are callable before their term expires.
6. Since these bonds do not have SLR status, they cannot be held till maturity and there value is assessed using mark-to-market method.
7. For for bonds, the yield and price are inversely related. Due to the tough economic conditions the interest rates of the G-Secs have risen and the price has fallen.
8. So, the bonds that are held by the SBI, according to M-to-M method, have fallen in value.
9. This fall in value is around 700 crore.
10. SBI is now reuqesting government to give these bonds the SLR status so that they are held till maturity and theire value does not fall.

Statutory Liquidity Ratio (SLR)

SLR is the amount of money that the banks need to maintain in the form of cash , gold or other securities. This amount is expresses in the form of percentage and generally depends on the demand and banks liabilities.

SLR is used to help
1) in containing inflation
2) to secure the solvency of banks
3) augment more bank investment in G-Secs' ( by not keeping enough cash at hand)

Fiscal Deficit

Fiscal deficit simply means that government expenditure is more than the earning. Expenditures include the plan expenditures and non-plan expenditures. Plan expenditures can also be said as the capital expenditures and non plan expenditures can be said as the revenue expenditures.

Fiscal expenditure is taken care by either by borrowing or printing money.

When the government borrows money by issuing bonds, in long term, as per the macroeconomic policy, the bond prices fall and interest rates rise. This affects growth.

When the government chooses to print money, it causes inflation.