"We sow bad loans in good times " a old proverb now seen in light with the subprime lending problems in US .
Subprime lending is done to customers who dont have any prior credit worthy history with tha bank , this state of lending is called predatory lending , in the late 90s US economy saw a growth in real estate and a boom in the sector which lead to banks giving loans to people who were not credit worthy at low interest rates . As US has a ARM system , that is adjustable rate mortgage system , which changes with fluctuations in the economy , this was pegged in the form of 2/28 i.e for 2 yrs a market rate of 1.1% was fixed as interest and after 2 years a increased interest rate i.e (1.1% + 300basis points) for a period of 28 years but in 2005 this changed to 3.3% and now it had touched around 8 times more than the original rate .
As the people who have taken loans for a house have also taken loans, on the basis of the house itself as mortgage , now this gave rise to a crisis where there was no records for the credit history of the people , people were reluctant to pay back the debt and houses were auctioned at the market price ,as supply was more than demand in the housing sector .. this led to huge losses accumulating to $2.5 trillion .
Now its global implication , as FIIs have invested in global markets such as Japan , India and to offset the losses in US market they are selling their shares and liquidating it ,leading to fast outflow of money from a country . Globally stock markets are sensitive to changes in the US market , markets are apprehensive and investors are selling their shares so there is decrease in share prices globally , indexes in Japan and India have fallen marginally. Now this resulted in a shortage of liquidity in US , a start to a recessionary phase in US economy , for the time being the federal reserve has intervened by reducing the loan rates by 500 basis points to bring about liqiduity in the US economy , thus leading to outflow of dollars into emerging markets like India .
Now it is to be seen when global markets stabilize though subprime lending will remain a achilles heel to US mortgage firms for a long time now.
Friday, August 24, 2007
Thursday, August 2, 2007
REDDYNOMICS
Rupee appreciating , IT exports hit , Indian service sector' s profitability decreasing , inflation in control , Growth to be sustainable or not .
These are the headlines found nowadays on every newspaper dailies and magazines . Now
lets know the intricacies and the dynamics of Indian economiy by having a glance at the latest monetary policy made some days back .This year monetary policies was reviewed by Dr Reddy , the governor of RBI , in his policies he has tried to balance inflation with growth .
India is thriving on a huge influx of FDI , FIIs and forex reserves at US$ 206.9 billion , growth at 8.5% but inflation has been Mr reddy's archilees heel for a long time .
He realizes that we are currently going through a catch 22 situation where increase in growth will result in increase in inflation and vice versa.
In his present policy measures to control inflation he has hiked the CRR rate( cash reserve ratio is the amount of money that a bank has to give to the RBI) by 50 basis points thus flushing out 16000 crores of money out of the market , He has also increased the reverse repo rate ( the amount that the bank gives to the RBI as loan ) , his main objective is to take out money from the market curbing spendings and investments. The irony of this measure is that as inflation reduces , growth also reduces . The shortage of money will curb the growth in real estate and retail sector as the money for investments are curtailed .Another aspect of money taken out from the market is that there is now shortage of rupee in the market which is resulting in the appreciation of the rupee against the dollar.
Dr reddy cannot allow excess money to flow in the market and as well cannot curtail the growth rate which is presently pegged at 8.5% , in his recent policies he has smartly not increased the interest rates on Loans but has chosen to decrease the interest rates on savings so that the bank reserves are not affected.
Dr reddy cannot continously take out money from the market as it will lead to rupee being appreciated below 40 thus making the Indian service sector lose its competitive advantage . IT companies like Infosys and TCS have forward hedged all their export earnings to save itself from huge losses but if the rupee continously appreciates , we lose significant portion of foreign earnings .
In Indias quest for developement Dr Reddy has to play a pivotal role in striking a right balance between growth and inflation .
These are the headlines found nowadays on every newspaper dailies and magazines . Now
lets know the intricacies and the dynamics of Indian economiy by having a glance at the latest monetary policy made some days back .This year monetary policies was reviewed by Dr Reddy , the governor of RBI , in his policies he has tried to balance inflation with growth .
India is thriving on a huge influx of FDI , FIIs and forex reserves at US$ 206.9 billion , growth at 8.5% but inflation has been Mr reddy's archilees heel for a long time .
He realizes that we are currently going through a catch 22 situation where increase in growth will result in increase in inflation and vice versa.
In his present policy measures to control inflation he has hiked the CRR rate( cash reserve ratio is the amount of money that a bank has to give to the RBI) by 50 basis points thus flushing out 16000 crores of money out of the market , He has also increased the reverse repo rate ( the amount that the bank gives to the RBI as loan ) , his main objective is to take out money from the market curbing spendings and investments. The irony of this measure is that as inflation reduces , growth also reduces . The shortage of money will curb the growth in real estate and retail sector as the money for investments are curtailed .Another aspect of money taken out from the market is that there is now shortage of rupee in the market which is resulting in the appreciation of the rupee against the dollar.
Dr reddy cannot allow excess money to flow in the market and as well cannot curtail the growth rate which is presently pegged at 8.5% , in his recent policies he has smartly not increased the interest rates on Loans but has chosen to decrease the interest rates on savings so that the bank reserves are not affected.
Dr reddy cannot continously take out money from the market as it will lead to rupee being appreciated below 40 thus making the Indian service sector lose its competitive advantage . IT companies like Infosys and TCS have forward hedged all their export earnings to save itself from huge losses but if the rupee continously appreciates , we lose significant portion of foreign earnings .
In Indias quest for developement Dr Reddy has to play a pivotal role in striking a right balance between growth and inflation .
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