current account deficit | wealthymatters

Location Swap

July 2, 2014 Leave a comment

The Reserve Bank of India (RBI) has sounded out large lenders and international bullion banks to strike `location swap’ deals to swap some of the old gold lying in RBI’s Nagpur vault since pre-Independence times -and whose quality is not exactly top grade -with purer gold.The move would ease the supply of gold, even if temporarily, in the local market where duty barriers have given rise to smuggling.This is the first time RBI will carry out such swaps. Better known as loco swaps in the global bullion market, it’s a mechanism whereby gold in one location is ‘swapped’, or exchanged, for gold in another location without physically shipping the yellow metal.

Here’s how the proposed swap scheme between RBI and banks would work: RBI will give delivery of gold from its Nagpur vault to banks in India while taking delivery of gold from banks in London.But the gold that RBI would give to banks in India could be of a slightly inferior quality compared with the ‘London deliverable’ purer gold that it would receive from banks in London. The banks will deposit the gold in London in RBI’s account with Bank of England. Read more of this post

Filed under Precious Metals Tagged with currency market, current account deficit, earnings on forex reserves, forex reserve management, forex reserves, Gold, gold bricks, gold bullion, gold import restrictions, international bullion banks, location swap deals, loco swaps, postaday, RBI’s account with Bank of England, RBIs Nagpur Vault

Anticipating The Asian Financial Crisis -II

August 29, 2013 2 Comments

wealthymatters Swaminathan S A Aiyar is always well worth listening to,This piece by him is superlative and well worth reading,Do pass it around.There are too many people pretending that everything is fine or will be so in the near future.Unless we accept that there is a problem and a serious one,we are unlikely to go looking for solutions.

Make no mistake, a second Asian Financial Crisis is on its way. This storm will not blow over soon. It originated in the US, when the Fed proposed to taper and end quantitative easing. The frightening thing is that this will happen in stages over the next 12-18 months, and each turn of the liquidity screw can cause a fresh financial storm. Nothing Chidambaram or Raghuram Rajan say can avert the storm.

Learning from the 1997-99 experience, all Asian countries (including India) have built up large forex reserves, reduced leverage compared with 1997, and shifted to floating exchange rates. This makes them far more resilient, so they should not collapse as in 1997-99. But they will suffer severe damage regardless. Depreciation raises the price of all items that can be exported or imported. Estimates differ, but a 10% depreciation probably sucks out 1-1.2% of purchasing power through inflation. At . 68 to the dollar, currency depreciation is around 25% since May, implying a loss of purchasing power of 2.5-3% of GDP. That is hugely recessionary. It will be reflected in much higher prices of petroleum products, fertilisers, most commodities, and knock-on transport and material costs. Read more of this post

Filed under Paper Assets Tagged with 1997 Asian financial crisis, current account deficit, fair value of the rupee, Fiscal Deficit, fiscal stimulus, liquidity, monetary stimulus, postaday, Raghuram Rajan, recession, rupee depreciation, subsidies, US ending quantitative easing

The Results Of A Duty Hike

August 14, 2013 Leave a comment

wealthymatters

The government continues to scapegoat precious metals.If you are coming in late,do read this previous post to catch up,Link.Today the government increased import duty on gold, silver and platinum to 10 per cent ostensibly to arrest the declining value of Indian Rupee and contain the fiscal deficit to 3.7 per cent of the GDP.The customs duty on standard gold and platinum has been raised from 8 per cent to 10 per cent and on silver from 6 per cent to 10 per cent.

The results of this action in the domestic price of these metals is to be found in the picture.

Gold prices might have fallen in Dollar terms,but the falling Rupee has ensured that domestic gold prices are rebounding.And the duty burdens are helping elevate prices.

Its common sense that a relentless price rise,creates its own market.So even if the government is right in believing that gold is the cause of our misery,pushing up its price in Rupees is unlikely to lead to a fall in gold demand.

Also do read what Jim Rogers says about the price of gold here:Link.If he is right in his assessment of price rise,and he has a habit of being right about trends,just not timing.Is discouraging gold purchase by Indians such a good Idea?And is the government going to be able to prevail?Or will this be as useless as the RBIs attempt to prop up the Rupee?And is it really worth incentivizing people to attempt to smuggle gold and consume smuggled gold?