Trading Nifty as global liquidity dries up…

This Could Evaporate Liquidity From Markets...

Yesterday the European Central Bank (ECB) announced the key rates and as the streets expected, they were unchanged.

There was no positive out of the press conference from Trichet, the only thing he did was subtly pleading to the world that “EURO is a stable currency’ and reiterated again the same things that the ECB would leave no stone unturned to save the real economy. This lead to over 200 points rally in Dow Jones and more than an 1.5% gain in Euro. I believe that it is more of a short covering bounce back and the only direction the Euro is headed is southwards.

I expected July to be a calm month for the markets, and the biggest reason is that the China AG Bank is coming up with the world’s biggest IPO of all time. On July 16th it is coming up with an IPO of $30 billion and this could really suck huge liquidity from the markets even if it is just fully subscribed. One should wonder what if, the issue gets oversubscribed by two times and three times. It could evaporate the liquidity of the size of two times Reliance Industries total market capitalization which is around Rs 3 lakh crores.

In history too IPOs of high magnitude from good companies have lead to a dearth of liquidity in the Secondary Markets and this time also I expect the same Ag Bank, whose 350 million customer base is bigger than the population of the United States, had $US7.1 trillion in assets as of 2008, its last public financial filing, is a bank which even the institution would love to own and hence the liquidity could dry up.

Hence a good trading strategy for Traders could be to establish position in put options in Nifty expiring in the month of July, as the VIX has also come down significantly. For Investors the best is to stay out of any extravagant short term positions and continue their SIP.

Happy Investing…!!

Author:Rahul Sonthalia, Research Head, Kredent

Auto Sector Review

 Friends we are very happy to post the 100th post on In a short time we have got great response from readers and investors like you. Thanks for your appreciation for our research of Economy and Markets. We will continue our endevour to serve you with quality content via MoneyBol.


Our analysts update you regularly on the developments in sectoral outlook so as to enable you to take better investment decisions. Following is an update from our analyst Rahul Sonthalia on automobile sector

  • A reduction in excise duty helps to make car cheaper
  • Sale of passenger vehicle grew at 25% in FY2009-10
  • Although Tata Motors is delivering Nanos but Maruti 800 leads the market
  • Hyundai become the second-highest selling car by overtaking Maruti Wagon R market
  • Overall, Tata Indigo sales have risen in the last quarter of 2009-10
  • On the otherside Mahindra-Renault Logan sales fall by 60%
  • The UV major Mahindra & Mahindra’s share shot upto 55%,Armada grew 31.3%,scorpio grew 25%,but newly launched Xylo sold 28558 units which is 50% of its past
  • The second highest selling utility vehicle, Innova grew at 23.8%

Author: Rahul Sonthalia, Research Head, Kredent

Sugar Decontrol

Sugar Free: Move to decontrol the sweetner comes amid differences
Our analyst Rahul Sonthalia updates our readers regularly on the sectoral updates. Here are his views on the recent updates in sugar sector.
  • The move for sugar decontrol i.e removing levy quota has once again gained momentum because of dip in sugar prices aided by both improved domestic forecast and higher production in Brazil, the world’s biggest exporter
  • Currently there are several restrictions imposed on sugar industry
  • Mills are expected to surrender 10% of their production to the government at prices below the market rate. This is called levy system
  • Levy sugar goes to meet the needs under the public distribution system
  • The remaining 90% is sold by mills in a restricted marketing environment
  • In present sugar control regime, the government decides the distance between two sugar mills and takes decisions with regard to sugar import and export
  • If the system of imposing levy quota is removed, government may have to buy at the prevailing market price
  • If prices rise, the government will then have to take on a subsidy burden, if it wishes to sell cheap
  • There have been suggestions that to compensate for this additional cost on government, a tax in the form of ces can be imposed on the industry
  • The sugar industry is divided into – Private sugar mills, under Indian Sugar Mills Association and co-operative sugar mills represented by the National Federation of Co-operative Sugar factories
  • ISMA wants the government to announce the decontrol decision at the earliest as they think it would be very beneficial for the industry as mills will be in a position to release floating capital after sale of sugar
  • On the other hand co- operative mills fear that decontrol will lead to crash in sugar prices
  • Still there are many issues which need to be resolved before decontrol can be implemented


Author:Rahul Sonthalia, Research Head, Kredent

Weekly crude oil update June 5, 2010

  • From the close of $73.97/ barrel last week, crude oil started the week with modest growth, but on Tuesday, prices fell $1.86 to $72.58 due to weak Chinese manufacturing data which raised concerns that crude demand from the world’s fastest growing economy might be slowing.
  • On following days, with the release of weekly oil inventories which showed a drawdown in oil reserves and good housing and auto numbers from US provided support to the market.
  • But the last day, saw crude prices plunging $3.10 with weaker than expected addition to non-farm payrolls and warnings of Hungarian economy. Weekly close of crude oil was at $71.51, 3.3% lower than last week’s close.
  • Crude oil prices very recently have rebounded from the lows of $67 and now seem to be consolidating at this level. We expect further drawdown in inventories in the coming weeks due to strong fuel demand. Thus unless we see any negative developments in the Eurozone, crude price are expected to rise in near term.

Author name:Praveen Bajaj

Weekly currency update June 5, 2010

  • USDINR Update
  • The partially convertible rupee ended at Rs 47.27 per dollar, depreciating about 2% for the week. The rupee weakened as the euro’s weakness triggered a bout of dollar buying by importers, but a stronger performance of the stock markets limited the local currency’s losses.
  • Earlier on Tuesday, the rupee fell the most in at least 15 months, tracking declines in Asian stocks, as weaker- than-expected manufacturing data from China spurred concern that Europe’s financial crisis could derail a nascent global economic recovery.
  • The rupee closed 1.7% lower at 47.155 against the dollar on Tuesday, the biggest decline since 17 February 2009. It slumped 4.3% in May, the worst performance among Asian currencies after South Korea’s won.
  • The euro traded close to a four-year low as the euro zone’s financial problems weighed on sentiment and the dollar rose because of expectations of a strong US employment report.
  • The rupee had fallen 4.3% in May on foreign fund outflows of $2 billion in the month. Foreigners are still net buyers of $4.5 billion worth of shares so far in 2010.
  • The rupee is expected to trade in the 46.75 to 47.00 range during the next week considering no major disturbance in the Euro region and local equity markets remain stable.

Author name:Abhijeet Ahir

Weekly equity update June 5, 2010

Dear readers, we have been publishing weekly review of major market movement to enable our readers to take better investing decisions. I hope these reviews are informative.

Markets gained for a second consecutive week to reach 17,117 on Friday, rising 1.5% over the last week. The week saw a lot of good news for the markets. In the beginning of the week, better than anticipated GDP data set the bullish tone. But on Tuesday, week Chinese industrial production combined with negative global cues pushed the markets to the extent of 372 points or 2.2%. However, post that, positive global cues, good auto and cement numbers kept the mood upbeat in the market for the rest of the week. Sensex touched 17,000 mark on Thursday, first time since May 18. The BSE auto index jumped 4.4% to 7,894, it was followed by FMCG, PSU and healthcare. Fact that monsoon reached the coast earlier also added to positive sentiments.

Markets should open weak under the influence of weaker than expected US Employment numbers and weak closing of US markets on Friday. For next week, key events to watch out will be the meeting of empowered group of ministers (EGoM) on Monday, 7 June 2010 regarding the decontrolling of oil prices. Also IIP data for the month of April will be released which is keenly watched. 

Author:Praveen Bajaj

Banking terms explained

Friends, in many of the posts on this website, our analysts have used terms like repo rate, reverse repo rate and host of other ratios which might not be easily comprehensible to many of us. I have been receiving some queries regarding them as well. So here goes my small bit on few of these important ratios. I have also tried to explain in brief how these ratios are used by regulators to control inflation-

Repo transaction

The term Repo has been derived from the word repurchase which literally means selling today and buying back at a later date. To be specific, in money market terms, it means a repo trader sells securities, gets funds for a certain specified time, and after this time period, purchases back the securities by paying the previously taken (read borrowed) funds along with some interest for the said period. The securities in question basically act as an insurance against borrower’s default. A forex money market also repo works on similar terms.

Repo rate

In the above transaction, if the lender of the funds is RBI, it I termed as a repo transaction with RBI. Following may be noted-

  • Whenever the banks have any shortage of funds they can borrow it from RBI.
  • Repo rate is the rate at which banks borrow rupees from Reserve Bank of India (RBI).
  • A reduction in the Repo rate will help banks to get money at a cheaper rate.
  • When the Repo rate increases borrowing from RBI becomes more expensive.
  • The rate charged by RBI for its Repo operations is 5.25%.
  • When RBI lends money to bankers against approved securities for meeting their day to day requirements or to fill short term gap, it takes approved securities as security and lends money. These types of operations are generally for overnight operations.
  • Repo rate is the medium through which RBI infuses funds in the system. Recently, in view of the decreased (read tightening) liquidity conditions, RBI has allowed a second Repo facility which means that RBI is giving banks to borrow money from RBI and thus RBI is looking to infuse more money into the system
  • A bank’s money market trader typically can use RBI’s LAF and money market for arbitrage opportunities sometimes

Reverse repo rate

If the borrower of the funds is RBI, it is termed as reverse repo transaction.

  • Reverse Repo rate is the rate at which RBI absorbs money from the system.
  • Banks are always happy to lend money to RBI since their money is in safe hands with a good interest.
  • An increase in Reverse Repo rate can cause the banks to transfer more funds to RBI due to attractive interest rates.
  • It can cause the money to be drawn out of the banking system.
  • The rate charged by RBI for its Reverse Repo operations is 3.25%.

Cash Reserve Ratio (CRR)

CRR is the amount of funds that the banks have to keep with RBI. It is calculated on the total deposits that the bank has as on the date. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. In order to understand this, consider following example-

  • Suppose RBI says the CRR as 5%. Now if a bank A receives Rs.100 as deposit then it can lend Rs.95 as loan and will have to keep Rs.5 as balance in Deposit account.
  • Now the Borrower who has received Rs.95 as loan will deposit the same in his bank, borrower’s bank will now lend him Rs.90.25 and keep Rs.4.75 in deposit account.
  • This process continues in the banking system resulting to expand its initial deposit of Rs.100 to maximum of Rs.2000.
  • Similarly if suppose RBI says the CRR as 10%. Now if a bank A receives Rs.100 as deposit then it can lend Rs.90 as loan and will have to keep Rs.10 as balance in Deposit account.
  • Now the Borrower who has received Rs.90 as loan will deposit the same in his bank, borrower’s bank will now lend him Rs.81 and keep Rs.9 in deposit account.
  • This process continues in the banking system resulting to expand its initial deposit of Rs.100 to maximum of Rs.1000.
  • Higher the CRR, the lower the money available for lending, resulting into reduction in credit expansion by controlling the money that goes out of loans.
  • Thus RBI increases the requirement of CRR whenever they feel the need to control money supply.

Central bank of any country uses a combination of these 3 rates to influence the lending rate in the economy and thus contain inflation and stimulate growth. This adjustment of the 3 rates (commonly known as policy rates) is known as monetary policy.

Relation between Inflation and Bank interest Rates: How does inflation affect rates?

Inflation, in simple terms is a sustained increase in general price level. In other words, it can also be described as a situation in which excess money chases fewer goods, causing increase in demand of goods and thus leading to an increase in price. Thus if this demand created by excess money can be curtailed, inflation would be contained. This is the genesis behind controlling inflation through monetary policy.

If inflation is high, interest rates are increased. If repo, ie rates at which banks borrow from RBI, is increased, such borrowing will become costly and banks would thus either borrow less or pass on this increased cost to their borrowers. Again if reverse repo is increased, banks would divert more funds towards RBI and excess liquidity will be absorbed by RBI rather than going at cheaper cost in the economy. In either of the cases, actual lending will be less and demand for goods and services will be less

In the case of CRR, if the rate is increased, it affects in two ways. First, immediate liquidity in the system is absorbed to the extent CRR is increased as more money needs to be placed with the regulator. Second, in the incremental lending, potential capacity of banks to lend is curtailed. This again leads to less lending by banks.

Another ratio which does not directly affect inflation but is important for banking is statutory liquidity ratio.

Statutory Liquidity Ratio (SLR)

SLR is the amount a commercial bank needs to maintain in the form of cash or gold or approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI in order to control the expansion of bank credit. SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their anytime demand. RBI ensures the solvency of a commercial bank from SLR. It is helpful to control the expansion of Bank Credits. By changing the SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in government securities like government bonds.

Currently, in India, banks have to maintain a SLR of 25% which means that 25% of the value of demand and time liabilities has to be invested in approved securities. SLR of banking system in India has a SLR of about 27% ie above the statutory SLR because due to the economic crisis, banks were conservative in lending and invested in sae heaven Government securities.

Hope this article would be useful and help you in understanding the economic scenario better.

Author: CA Shalini Tibe

Mutual Fund Analysis-May 2010

Friends, we all saw equity markets diving about 3.5% in May, its first monthly decline since January. As I saw this, I wondered what would be the scene in mutual funds and did some analysis. Results, as expected, showed that all the equity markets based mutual funds resulted in negative yield for the month of May. Debt funds (both short term and Long to medium term) as well as Gilt funds yielded good returns with top funds in both the categories giving 35 and 40% returns respectively. I would lile to share the names of some top mutual funds (as per 1 month yield as on May 26) for selected types of funds with you which might help you in investing your money in mutual funds accordingly-

Type Fund / Benchmarks AUM (Rs. Cr) NAV (Rs) Yield       (1 Month)
Large Cap JM Large Cap 5 17.19 -3.32
Principal Large Cap 474 25.42 -4.04
Quantum Long Term Equity 53 18.69 -4.55
General Equity Benchmark Equity & Derivative Opportunities 40 11.53 0.35
Templeton India Pension 202 54.54 -1.84
FT India Dynamic PE Ratio FoF 556 36.69 -2.43
Capex Infrastructure Canara Robeco Infrastructure 177 20.87 -5.78
Principal Services Industries 123 13.39 -5.97
HDFC Infrastructure 1539 10.87 -6.21
Tax Saving Schemes Fidelity Tax Advantage 1162 18.83 -3.78
HDFC Taxsaver 2470 201.14 -4.18
Religare Tax Plan 100 15.37 -4.65
Balanced-Equity Oriented HDFC Prudence 3945 184.32 -1.75
UTI CCP Balanced 2831 14.28 -2.15
HDFC Balanced 157 47.22 -2.53
MIP – Moderate DWS Twin Advantage 249 15.7 0.45
DSPBR Savings Manager Moderate 157 19.01 0.16
Magnum Income Plus Inv 161 15.6 -0.13
Debt  (Medium-to-long-term) Kotak Bond Deposit 165 25.36 35.22
IDFC Dynamic Bond Plan A 130 18.46 28.31
JP Morgan India Active Bond Retail 9 10.63 20.45
Debt Short Term JM Short-term Reg 16 18.2 8.45
Canara Robeco Short Term Ret 270 10.71 6.98
Taurus Short Term Income 14 1570.64 6.39
Gilt Funds Birla Sun Life GSF Long-term 48 27.38 40.15
DSPBR Government Securities 68 32.57 31.65
IDFC GSF Investment Plan A 12 17.72 29.67

In terms of market size,  Reliance MF was the market leader managing Rs 118,973 cr accounting for about 14.8% of the total Asset Under Management (AUM) of the MF industry. Reliance was follwed by HDFC and ICICI Prudential MF. Total AUM of the industry was Rs 803,559 cr.

Hope this analysis will be useful to you. In case you have any suggestions to improve this article please write in to us…happy investing…

Author:Praveen Bajaj

Book review: A Colossal Failure of Common Sense


Friends, I have just finished reading a really nice book discussed below. This is the first time I have tried my hand on writing a book review. I have tried to be very objective and honest. Please let me know your views by posting a comment below.

Background: A Colossal Failure of Common Sense

A Colossal Failure of Common Sense

A Colossal Failure of Common Sense

One date that any person across the world would like to forget in recent times would be September 12, 2008- the day when Lehman Brothers, one of the mighty Investment Banks on Wall Street filed for bankruptcy and set in motion sequence of events which led to one of the most severe recession the World had ever experienced. One question which has still not been answered is what conspired inside such a huge investment bank which led to its dramatic fall?

“Colossal Failure of common sense: The inside story of collapse of Lehman Brothers” is an attempt in that direction.

About the Author

Lawrence G McDonald, until 2008 was vice president of distressed debt and convertible securities trading at Lehman Brothers and was considered as the firm’s most profitable traders.

About the Book


The book very well describes the causes of crisis and how the seeds of the crisis were sowed with the repealing of Glass-Steagal Act and watered by the subsequent developments in financial markets like wide-spread use of instruments like CDS, MBS etc. One thing for which I really liked the book was the simple way in which such instruments have been explained.

As the title claims, the book does give a good insight into the inside culture and happenings at Lehman Brothers. Different people involved in the decision making hierarchy and their roles have been apt fully described which gives the reader an understanding of what might have happened. For instance, Lehman’s former chief executive, Richard Fuld, who, on reading the book appears to be arrogant, stupid, greedy, reckless and a cause which led Lehman in the mess. Mr. Fuld appears to have supported many others who led to a concentration of risk in the then highly profitable segment of CDOs etc which ultimately led to huge losses and MTM write offs.

It also gives a good account of how Mr Mc Donald and others realized that Lehman might be out in troubled waters early on and how they tried to bring it to the notice of seniors but where put down.


What might disappoint readers are initial few chapters which describe the early life of the author which have no connection what so ever with the Lehman failure. Also, at some points in the book, there has been a considerable room for ambiguity but there are only few of them.

My Personal Opinion

Overall, I would say this would be a good read for people who either have no knowledge or just a basic knowledge of the financial world. If you are an expert, looking for some high profile details of what transpired, you might be disappointed.

You can buy this book from FlipCart at 10% discount and free shipping here : Buy A Colossal Failure of Common Sense

Author name: Praveen Bajaj

Indian Depository Receipts (IDRs) explained

Recently we saw Standard Chartered Bank becoming the first foreign company to issue IDRs in India to raise capital. The issue was subscribed 2.2 times and will be listed shortly on Indian bourses. I am sure many of us would have doubts regarding IDRs. Following are some of the basic facts about IDRs which investors should be aware-

Q:What is an Indian Depository Receipt (IDR)?

A:An IDR is a mechanism that allows investors in India to invest in listed foreign companies, including multinational companies, in Indian rupees. IDRs give the holder the opportunity to hold an interest in equity shares in an overseas company. IDRs are denominated in Indian Rupees and issued by a Domestic Depository in India. They can be listed on any Indian stock exchange. In other words, what ADRs/GDRs are for investors abroad with respect to Indian companies, IDRs are for Indian investors with respect to foreign companies.

Q:What does an IDR represent?

A:Each IDR represents proportional ownership interest in a fixed number of underlying equity shares of the issuer company. For example, in the recently concluded IDR issue of Standard Chartered Bank, 10 IDRs represent 1 equity share of the the Bank.

Q:What are the parties involved in IDR issue and what are their roles?

A:The principal parties in the IDR issue are the issuer company, the Overseas Custodian, the Domestic Depository and the Registrar & Transfer Agent.

Issuer Company is the foreign company which wants to raise money through issue of IDRs. It must be listed in its country of incorporation.

Domestic Depository is an Indian entity appointed by the issuer company and registered as a custodian of securities with SEBI. Domestic Depository issues IDRs representing underlying equity shares of the issuer company to investors in India and acts as a trustee on behalf of the IDR holders. Its rights and obligations are specified in the Deposit Agreement signed between the issuer company and the Domestic Depository.

Overseas custodian is the holder of equity shares on behalf of the Domestic depository and is appointed by Domestic Depository.

Registrar and Transfer Agent (R&T Agent) provides services to the issuer company, the Domestic Depository and the IDR holders in India primarily being registration and transfer of IDRs in India. Examples of services include keeping records of the IDR holders, coordinating corporate actions and handling investor grievances.

Q:Who is eligible to subscribe to IDRs and in what proportion is an IDR issue allocated between different categories of investors?

A:Similar to an IPO in India, Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NII) like Corporate, high networth Individuals (HNIs) and Non-resident Indians, retail Individual Investors and employees can participate in IDR issue.

Minimum 50% of the issue should be allotted to QIBs whereas 30% of the issue should be offered to retail individual investors. Balance 20% to be apportioned between NIIs and Employees at the discretion of the issuer company. Under-subscription in any of the categories other than the QIB category can be adjusted against oversubscription in other investor categories.

Q:What are the minimum and maximum limits of bids in an IDR issuance?

A:Retail Investors: Minimum of Rs 20,000 and maximum of Rs 100,000.

NII: Non-institutional investors have to invest above Rs 100,000 up to the issue size.

QIBs: Institutional investors above Rs100,000 up to the issue size.

No IDR holder can individually own more than 5% of the total IDRs issued except for QIBs which can hold up to 15% of the IDR issued.

Q:What are the rights of and IDR holder?

A:An IDR holder is entitled to rights similar to an equity share holder like voting, bonus and right issues, dividends and other rights as other equity shareholders are eligible. In any case, rights and obligations of the IDR holders will be specified in the Deposit Agreement.

Q:How does investing in IDRs differ from investing in shares of foreign company listed on foreign exchanges?

A:Indian individuals can invest in shares of foreign companies listed on foreign exchanges only upto $200,000 and the process is costly and cumbersome as the investor has to open a bank account and demat account outside India and comply with Know Your Customer (KYC) norms of respective companies. It also involves foreign currency risks. IDR subscription and holding is just like any equity share trading on Indian exchanges and does not involve such hassels.

Q:What is the tax treatment on IDRs?

A:Trading of IDRs- Securities transaction tax (STT) is not applicable on trading of IDRs and thus capital gain transfer of IDRs will be applicable.

Dividends-The issuer company doesn’t pay dividend distribution tax and hence dividends received on account of holding IDRs will be payable by IDR holders.

Q:Why would foreign companies come to India and list themselves in India?

A:Companies could have different objectives for listing in India like:

  • It provides enhanced local branding and target business opportunities in India.
  • It gives access to the large Indian capital pool and creates opportunities for future fund raising.
  • It provides a currency for any acquisition in India which otherwise would be possible only through cash.

Q:Can IDRs be converted into equity shares and can the issuer company issue further IDRs in the future?

A:Under present regulations, conversion of IDRs to equity shares is not permitted.

An issuer company may issue further equity shares based on which additional IDRs may be issued in the Indian markets. This may happen in the case of bonus issue, rights issue or issue of shares in case of any change in the par value, sub-division, consolidation or other reclassification of underlying equity shares or upon any reorganisation, merger or consolidation of the issuer company.

Hope this information is useful. If you have any questions relating to IDRs please feel free to write in to us.

Author name: Praveen Bajaj

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