Ajay Profile picture
Dec 28 11 tweets 5 min read
The Rupee is in a free fall against the US Dollar.

However, the RBI is intervening to cushion INR's fall.

Ever wonder how the RBI does it?

Let's learn it here:

#USDINR #USD #forex #India #Rupee
First, let's understand why RBI intervenes to defend the rupee in the first place.

A weak currency worsens our fiscal deficit, fuels inflation and slows down international trade.

Clearly, RBI has a mandate to improve the situation on behalf of the GoI and the citizens of India.
Forex market is highly volatile and a breeding ground for speculators. This is why the FX market is the most liquid in the world with around $7.5 trillion (with a T!) in daily turnover.

So, RBI has to control speculation in the USDINR segment to ensure stability of the Rupee.
Towards this RBI does four things:
- Limit borrowing by banks
- Increase interest rates
- Increase Cash Reserve Ratios
- Selling USD in the NDF and Spot Markets

The first three are long-term measures and the last one, the most interesting, is a short-term measure.

#trading
Our banks love to borrow money from the RBI. Cheap credit fuels expansion in the economy, but at a cost.

So RBI makes this more difficult by increasing costs and capping the borrowings.

This makes banks look at market borrowings for funds, and discourages speculation.

#USDINR
Increasing interest rates makes it more attractive for foreign investors to #invest in India. This means they will buy more INR to invest in Indian securities and bonds by selling their dollars.

Higher demand for INR = Better value against the USD => USDINR pricing stabilizes
Increasing CRR of banks also helps to make sure the banks don't speculate on the markets with spare cash/foreign currency.

Remember that RBI allows exemptions to this requirement on NRE deposits, thereby encouraging NRIs to send more money to India in foreign currency.

#NRI
Finally, the RBI sells USD from its FX reserves in Non-Deliverable Forwards (NDF) and Spot markets, both onshore and offshore.

NDF markets are highly speculative (think Nifty F&O) and offers high arbitrage opportunities between onshore and offshore markets.

#trading #Arbitrage
NDF offshore FX rates trade at a premium to onshore markets (e.g., GIFT City) so speculators bet heavily against the INR to arbitrage trade. RBI sells USD to ensure the arbitrage doesn't exist.

It also sells USD in the spot market to create an artificial demand for the Rupee.
As demand is created for INR in this way by the RBI, spot markets and NDF markets stabilize to cushion the fall of the Rupee in the short term.

Interesting isn't it? Forex markets are cool like that :)

However, this is not enough:
India need to expand its export base & find alts to oil to really stop the fall of the Rupee and have a stable currency.

Until then RBI will fire fight for us :)

If you liked this insight, consider liking and RT the first tweet to educate more people 🙂
themoneymemo.substack.com

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More from @ajay_invests

Dec 26
The US Dollar stands at INR 82.82 as of today.

Ever wonder why the Rupee always depreciates against the Dollar?

Let’s find out in a 🧵:

#USD #Dollar #forex #investing Image
One of the major reasons for INR depreciation is India’s massive exposure and dependence on one single commodity:

OIL.

Almost 70% of our imports in value is just crude oil, as we’re the third-largest consumer globally.

There are two ways this affect our economy and currency.
1. Global crude oil market is denominated in USD.

This means we have to sell INR to buy USD in the Forex market first, and then pay the same to OPEC to import oil.

As demand for USD rises, and supply being controlled by The Fed, its value too rises against the INR.

#oilprices
Read 9 tweets
Dec 14
Net Cash Flow is an important metric many investors look at when researching companies.

But do you know that cash flows can be easily manipulated?

Let's see how:

#investing #finance #FinancialFreedom #Accounting
The Cash Flow Statement is one of the three most important financial statements of a company.

The other two being P&L Statement and the Balance Sheet.

Balance Sheet shows us the assets and liabilities of the company and is very important to look at when analyzing cash flows.
Cash position of a company has an inverse relation with Assets and a direct relation with Liabilities.

For e.g., you BURN cash to acquire an Asset. So when Assets increase, the cash position DECREASES.

On the corollary, an increase in Liabilities INCREASES the cash position.
Read 7 tweets
Dec 6
How Return on Equity (RoE) can be manipulated:

A short 🧵:

💰💰🔥🔥

#invest #Financial
First, let’s take the formula to calculate Return on Equity (RoE):

RoE = (Net Profit/Shareholders’ Equity) x 100

Here, we need to understand what shareholders’ equity stand for in the Balance Sheet:

#stocks #investing
If the company has assets worth ₹1000/- then liabilities also need to be ₹1000/-.

With no debt, in a simple world, the liability would be the shareholders’ equity. Let’s say Net profit is ₹100/-

And RoE would be :

(100/1000) x 100 = 10%

But everything changes with debt.
Read 6 tweets

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