RBI Q3 Press Release-2008-09- Part 1

SIMPLIFYING THE Q-3 PRESS RELEASE OF THE RBI

RBI Q3 Press Release-2008-2009/1164

Despite all initial rejection of any theory on the global crisis impacting India any way, we saw the world's a small place- A disease in one place spreads easily to the other places. In this case, the disease was passed onto the emerging markets by the developed nations. Nonetheless, we know now that no Nation- however big or small is insulated from the turmoils that the world is witnessing. If there is anything that is surprising, it is the magnitude of the impact and the uncertainty over how deep will the sword cut through before it is put back into its sheath!

The RBI has, to begin with, acknowledged that since its Mid year review, the world financial markets have come a long way. It says that while there has been a cyclical moderation in growth, there is scope for further downside as a consequence of the events plaguing the global markets. The repo and Reverse repo were unchanged, but the stock markets had already factored this in and hence did not react much to this news at the time.

• An interesting thing that is worth mentioning is the Govt's announcement of setting up a Special Purpose Vehicle[SPV] to bail out the cash strapped Non Banking Finance Corp [NBFCs].

• The SPV would issue govt guaranteed securities to the RBI. Then it would with these funds buy investment grade products and non convertible debentures of NBFCs, thereby providing them with the the much needed liquidity, but at the same time also ensuring these funds are NOT USED FOR EXPANSION. The below diagram i made should help understand the flow of liquidity.

In recessionary times, liquidity of domestic currency is of prime importance and every country's Central Bank ensures the same is taken care of. Our RBI is obviously not an exception.

• To ensure that banks have sufficient funds, RBI has been reducing the CRR over the past quarter. The CRR or Cash Reserve Ratio is the amount of bank's cash parked with the RBI. Reduction of this ratios naturally frees up the funds for lending, creating a liquid base for the rupee.
• The Repo Rate[rate @ which RBI lends money] was brought down from 9% to 5.5% in just one quarter. The Reverse Repo was brought down from 6%to 4%. What this does is induce banks to borrow more from the RBI as rates are lower, lend more consequently improving the liquidity situation.
• RBI is also allowing banks a special refinance facility without any collateral.
• The Statutory Liquidity Ratio [SLR] is reduced by one percentage point

What does the reduction in SLR hold for us? Well, it is the percentage of deposits that banks must invest in govt or govt approved securities. So, reducing SLR frees up more money for credit deployment.

Whew! I am tired, am sure if u have been reading till here, so are you![ unless u follow Latha Venkatesh on CNBC TV18 or are an avid follower [by force or choice] of government and RBI policies.] I touched upon the steps RBI had taken to ease the domestic liquidity situation.

BUT What has RBI done to manage forex liquidity? What about sector specific credit that is now facing the heat with Capital Markets drying up and NBFCs themselves in deep trouble?

On my next post....

Satyam- Part II

A-Satyam- auditors' insights !!

I happened to meet a friend who works at one of the Big Four [i dun wanna term it Big Three so soon].. So here we were at CCD, and sharing a conversation over hot coffee. I personally thought it to be weird for a guy to discuss finance with a woman at a coffee shop!
Nonetheless, we arrived at the point of Satyam, and I got to know what the auditor circle actually thinks of this whole saga. Here's a bit of that auditor gyaan for you [grab a coffee, u may fall asleep]

" PwC as auditors had to verify every FD receipt as per the regulation. "
Something Mr Vadlamani and Co apparently did not seem to find important while handling the onerous task of fudging the already fudged books.
" Now Raju went and got a FD receipt for a paltry Rs.1000 crore. When auditors ask for it, Lo and Behold! " But wait, did miss something, Raju was riding the Tiger worth 7000crore,right?

"Raju and Co went to the bank,told them -'Oh you know what, we lost our receipt, can u issue a duplicate?'-the bank obliges to the request of a prestigious client. Gives them another receipt. "

This my friends was the second Rs1000 cr. Thats how they turned it into Rs7K Cr.

Question, What did PwC do here? "they did not check for TDS that the banks should have cut on interest earned on every Rs1000 Cr deposit."


Hmmm... with some insight, i bumped into another auditor friend [this guy works for a decent auditing firm, though not exactly of Deloitte or E&Y stature] This time, it was over Beer! And when all job related frustrations were puked out, we returned to some sanity and discussed..of many things...u guessed it...Satyam.
His view : Satyam had cash. So there was no artificial cash as told by my friend from the Big 4.

" They siphoned out money to fund projects in many of their group companies- Maytas included"
Ok but what about the missing cash?
"Satyam jacked up its headcount by almost 13000 employees, imagine where all this money must have been going.. and to show that you had cash, they might have done the needful to forge bank documents too"

The rest, most of us already know- The proposed Maytas deal was, as admitted by Raju, an attempt to plug the hole in the Balance Sheet, as real estate valuations are difficult to arrive at.

When Enron Collapsed, Arthur Anderson became a thing of the past too. The Big Five became Big Four. But soon after, we learnt of the Worldcom scandal. Maybe I am one of the sceptics, but I am keeping my fingers crossed- The Satyam PwC saga may unleash bigger names. Rumour has it that Reliance may be in the news for all the wrong reasons pretty soon.

Like David Fleischer at Goldman Sachs asked post Enron bankruptcy, I ask "What's next?"