The Renminbi VS The US Dollar

It's the season of crisis and some more crisis; socio-political-economical; the world is witnessing its share of miracles and news that just make things astonishingly worse or may be good for some.

And when it comes to miracles; how can we forget the nation that taught the world its art of duplicating miracles !

The Red Republic - CHINA - most populous yet the most robust economy of today's world.

The Monarch State's economic growth - when the entire west is under the sulky clouds of debt crises and recession fears; the Dragon continues to roar and just doesn't seem to stop.

And why not;  Chinese products have become the part & parcel of everyone's lives today. 1.3trillion USD Forex reserve - the largest holder of the world's reserve currency; China has it's reasons to outshine every other economy.

And today with the US state of economic affairs in jeopardy, the world's trust on it's reserve currency the USD is slowly declining.

"WHY TRADE WITH THE OTHER COUNTRIES IN A CURRENCY THAT BELONGS TO A THIRD COUNTRY." - that's what the "little eyed dragons" have started thinking !

USD rate high or USD rate low ( wrt to the aborigine currency); the positive & negative impacts on exports & imports are quite obvious.

Let's take the example of trade between India & China:

Today when China has to export or import goods from India ( or vice versa); both countries have to deal in USD; and the market price of the USD ( compared to their native currency) is the deciding factor of the amounts of profits & losses.

So what's the standing of the RENMINBI compared to the USD today.

• The world is losing faith in the USD.
• Chinese economy is the most robust economy of today = RENMINBI can be trusted when it comes to international trade.
• The Chinese are anyways manipulating the exchange rates of the RENMINBI compared to the USD by printing & bringing more currency notes in the market.
• An appreciating RENMINBI compared to the USD will ensure China's stronghold on the world economic platform.
• With RENMINBI replacing USD; the right side nations of the Atlantic ocean will become the leaders of the modern economy.
• Chinese trade with the rest of the world in RENMINBI will make it's already robust economy even more rigid.
• With CHINA leading from the front - it's say in the world economic matters can never be neglected.

The bottom-line of the above write-up is :

USD's reign is slowly diminishing; the dragon's fire product - the RENMINBI in the coming years might very well replace Uncle Sam's green "enviable" piece of paper !

NOTE : All ideas expressed are my personal views. 

For suggestions & queries - contact me : nakul.r90@gmail.com

THE EMERGING INDIAN MARKET - a photographic glimpse

THE INDIAN MARKET

$ The Ailing US Dollar $

The season of economic crises is writing an epitaph for some of the most trusted entities in the world markets. US Dollar - one of the most resilient and the reserve currency of the world seems to be in grave danger. I will present my personal colloquial views on the same very soon. But for the time being, I couldn't help but share this self explanatory article from the 'Wall Street Journal'.

Why the Dollar's Reign Is Near an End


The article explains why the world chose the USD as its reserve currency and gives some of the possible reasons as to why the next decade will see the birth of a new reserve currency.


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'Demand - Supply Cycle' & Effects

Demand & Supply; two very simple words that have been popping up a lot in just about every news or magazine article. Thanks to the current economic doldrums, the words that seemed so simple are actually turning out to be much more than what their literary meanings connote.

So I have analysed some of the most basic yet essential (for an economy) impacts of the 'Demand - Supply Curve'; that are making up news and leading the world markets into a turbulent phase.

I shall make up my own headlines and try to explain them one by one.

• INFLATION - The most searched word on the net !

So what has the demand supply curve got to do with inflation ?

Well the root cause of inflation lies here itself. Discrepancies in the 'demand supply curve' gives rise to Inflation. How? Let's understand in simple words:

Imagine the DEMAND for goods & services increases; SUPPLY of goods & services on the other hand falls short to pacify the demand.

RESULT : To check the increasing demand; price of goods & services increase bringing the DEMAND SUPPLY CURVE in perspective; resulting in INFLATION.

What if the SUPPLY increases and DEMAND decreases - DEFLATION !!! Decrease in prices ! That has been a dream for just about every common man.

• US DOLLAR VS INDIAN RUPEE : The war not won !

Okay, let me put it this way; the price of $1 has been fluctuating a lot of late, mainly between Rs.43-Rs.50 (past 5 yrs).

Reasons for such fluctuations are countless, but again 'demand - supply' plays a good role here. The USD is the reserve currency of the world - implying that the equity floating in the markets is in the form of USD. Considering the Indian market, more the investment in the market, more will be the amount of USD flowing in; more & more USD means SUPPLY is more, when the DEMAND is still the same.

More SUPPLY, less DEMAND - Value of INR appreciates ( eg. from Rs.45 to Rs.43).

Similarly, when the investment is less or the investors start withdrawing their money, USD volume decreases; implies the SUPPLY decreases which eventually means an increase in DEMAND - And INR depreciates (eg. Rs.45 to Rs.49); which is the current status of INR.


With the commotion in the world market and the news of an oncoming recession, FIIs have decreased, resulting in the INR depreciating in value.

• SHARE MARKET : The commotion that never ends !

Alright ! Recession or no recession; the share market plays its fair share of unpredictable Bull & Bear fight. Now what has the 'demand - supply cycle' got to do here ? Well the idea was presented a few lines above, but now I shall elucidate.

Okay, the world market can never be truly understood. What topples it, or what pacifies it; no clear picture ! But one thing's for sure, even the slightest of rumours can lead to a decline in the share prices.

The current economic scenario has done quite a similar thing.

US & EU Crises; JAPANESE earthquake; investors have never felt such risks in the past decade. Eventually, they have started withdrawing their funds from the share markets, selling them to overcome their fear of losing their money. Also, FIIs have decreased; leading to a decrease in the amount of USD floating in the share market.

Now less money = less share prices = the current situation !

SO THE NEXT TIME YOU COME ACROSS 'DEMAND & SUPPLY' (the words); KEEP IN MIND THAT IT'S THE SIMPLE THINGS IN LIFE THAT ARE ACTUALLY THE ONES TO BE CAUTIOUS OF !!

CENTRAL BANKS - The Mainstay of an Economy

RBI INSIGNIA

Central Banks - simple banks for most of us; their complexity and primordial importance in an economy is what most of us tend to neglect, rather not bother about. And there's no harm in not knowing about a Central Bank's function, especially when we are living in a healthy economy.

But what has the recent trend showed us - the recent economic crises, inflation (as mentioned in my last post), financial stalemates et al; all have in some way or the other brought a nation's Central Bank in the picture.
So what is a Central Bank ? Why is it so important ? I shall answer these questions citing the example of the RESERVE BANK OF INDIA (RBI) wherever necessary.
RBI - the Central Bank of India; a bank that controls money flow in our economy, issues currency, controls foreign exchange & controls the interest rates in our economy.
Hard to decipher ?! Let's see this:

• CONTROLS MONEY FLOW & ISSUES CURRENCY : Pick out a currency note from your pocket; saw the name of RBI written everywhere ?! What does it imply? In simplest of terms it means that the note you just saw has been printed & issued by the RBI. Meaning that all the currency in the form of INDIAN RUPEE (INR) in the Indian as well as the world market is printed and sanctioned by the RBI. (not much important a point)
• CONTROLS FOREX : Every nation has certain amount of its wealth in the form of foreign exchange of some other country like US-dollar, Euro, Dinar etc. Example India has around 318,220million USD as forex reserve.(Source: Wikipedia). USD being the universal trading currency, all forex is measured in terms of this omnipresent US-DOLLAR.
• CONTROL INTEREST RATES : One of the most important functions of the central banks (RBI in India) is to control the rates - rates of lending money and rates of receiving money to and fro an economy. Let's understand this is detail...

In an economy, the banking system enables the flow - in and out of the consumers' hands. Where do these banks get money from ? How do the banks gain profit ? The answer : 

Well the money printing machine i.e the RBI lends money to these banks for them to function. Now lending sure comes at a price. This price is in the form of an interest rate - REPO RATE(RR) - the rate at which RBI lends to different banks. The current repo rate stands at 8% i.e if a bank borrows Rs.1,00,00,000/- from RBI, for a period of 2 years compounded annually, it will have to pay back Rs.1,16,64,000/- after 2 years.

Meaning : more the repo rate more strenuous will the task of borrowing become and vice versa.

REVERSE REPO RATE(RRR) - Rate of interest at which RBI borrows funds from other banks. RBI AND BORROWS MONEY ? Well let's say that banks deposit their money with the RBI at this interest rate to get good returns in the future - depending on the Reverse Repo Rate - the current RRR is 7%.

SO IN A WAY, THE CENTRAL BANKS ARE IN TRUE TERMS THE MONEY CONTROL MACHINES OF AN ECONOMY - by balancing the interest rates, central banks ensure that an economy functions smoothly; by controlling inflation(to be dealt in the next post), ensuring economic growth.

TO KNOW MORE ABOUT RBI's FUNCTIONING - refer to this comic book - issued by RBI itself - RBI - MONETARY POLICY - MONEY KUMAR COMICS

INFLATION - The Contemporary Economic Witch

The world today is becoming a sobriquet for Correction; correction in share market, correction in dollar rates, correction in interest rates and very soon as prognosticated by many trade pundits-correction in gold prices ! The logic is simple - a boom in any economic sector is followed by a correction period; after-al "the bubble of health" has to burst someday. That's what we have been witnessing since the past year.

But there's one thing that just doesn't seem to correct itself - INFLATION

Ever rising prices of household items, services, taxes; with just the same income in hand of the middle and lower classes and the exponentially rising anger and dissatisfaction is what the word INFLATION connotes to me in the most basic of terms.

The best example of inflation: The price of petrol :

From Rs.45 in 2008 to Rs.64 in 2011; a whopping 42% increase and rising !

REASON :

Inflation basically finds its roots in the "Money in hand-Demand-Supply Cycle"

More the money in the hands of a consumer --> More will be his/her demand for goods & services

---> Difficult for an economy to meet the growing demands ---> To curb the demand, price of goods & services rise -> INFLATION is born !
As a matter of fact, whatever/whichever event leads to depreciation in the supply of goods & services, becomes a reason for inflation !


SOLUTION : 
Though no particular solution to tackle inflation is cent percent effective; yet to tame this 'witch' few of the steps that our governments have been taking can be listed as :

• ROLE OF CENTRAL BANKS (RBI in INDIA) - The money control machine of an economy aka the central banks or the Reserve Bank of India in our purview; control the supply of money by correcting the interest rates (Repo Rates & Reverse Repo Rates - explained in the above post), hence bringing down the inflation rate.
• MONITORING SUPPLY - Supply of goods in an economy should be effectively monitored to check any discrepancy that might lead to inflation. Example : Indian economy is an agro based economy; bad harvest due to poor irrigation or chemical treatments should be checked by the government to keep the demand and supply of agricultural goods balanced.
• AUSTERITY MEASURES - More the the expenditure, more will be the rise in prices; thus to tame inflation a government should adopt austerity measures for sometime by restricting its spending.
• COLLECTIVE EFFORTS - Do I need to explain that ?!

The above steps can to some extent jeopardize the economic growth of a nation, but for a small period; and in the long run the INFLATION WITCH would face its own sudden death !

                

SAFE HAVEN ?! Let's go "GOLD" !!

As connoted in my last post; when all investment options fail, it's time for investors to GO GOLD ! As promised; let's do a reality check as to why the 'yellow metal' will certainly yield good returns.

GOLD AND DOLLAR - the inverse relationship 

The price of the US Dollar and Gold are inversely proportional. As investors start losing faith in the green currency, they start to invest more in gold and hence lead to the shooting up of the price of gold.

Let's understand this with a simple example ( Source : Economic Times)

"Like most other commodities, gold is priced in US dollars in the international market. And the US dollar has been losing value against other currencies, including the Indian rupee. The rupee has appreciated by around 6.2% over the past two years, and currently quotes at around . 45.6 against . 48.6 two years ago. This has limited the returns in rupee terms. Let us understand this phenomenon through a simple example. Let us say at a certain point of time gold is at $1,000 per ounce. A year later, it is 
at $1,200. The return in dollar terms is 20%. 
    Now, let us say one dollar was worth .Rs 50 
initially. So, at that point of time in rupee 
terms, one ounce of gold was worth 
. 50,000 (. 1,000 x . 50). A year later, one dollar is worth . 48. At that point of time, one ounce of gold will be worth . 57,600 (1,200 x . 48). This would mean a gain of . 7,600 (. 57,600–. 50,000) or a gain of 15.2% (. 7,600 expressed as a percentage of . 50,000). So even though return in dollar terms is at 20%, the return in rupee terms is rather limited at 15.2%. Of course, an appreciating rupee will limit gold returns, but that does not mean that gold is not a good investment bet. "

So here we have it : 

The governments of nations constantly print currency notes to keep an economy running. The idea was and is that with more money in the financial system, banks will lend more. The increased lending will help people buy more goods and services which, in turn, will benefit companies and thus generate more employment and hence more consumption.

However, when anything is suddenly available in excess quantity, it tends to lose value. So, if the US government prints dollars, as it has in the recent past, the dollar will lose value against other currencies. This, in turn, means that other currencies will appreciate or gain value against the dollar, as the Indian rupee has over the past two years. 

Consequently as more and more currency across the world is printed, all the smart investors will head towards gold, driving up prices of the yellow metal.

P.S: This post has been inspired by the "GOLD VS DOLLAR" ARTICLE that showed up in ET a few months back.