Invest In India » Central Banks

India to be the third largest FDI recipient

Ziaulla Namani — Sun, 15 Aug 2010 03:59:37 +0000

As per the United Nations Conference on Trade and Development (UNCTAD) Indian has the potential to be the third largest recipient of the foreign direct investment (FDI) in 2010- 2012.

The investment report by UNCTAD says, “If the situation continues to improve, India is likely to be among the most promising investor-home countries in 2010-12 as well as the third highest economy for FDI in 2010-12.

In the year 2009, India received FDI worth $34.6 billion, while the outward FDI was $14.9 billion, said the report. Also India remained in the list of top ten countries in 2009 to have the highest FDIs in the world.

The report further said that “FDI flows worldwide are expected to recover slightly this year… FDI flows to South Asia have experienced their largest decline since 2001, but they were the first to bottom out from the current downturn.”

UNCTAD maintained that “inflows from developed countries contracted the most, while intraregional FDI gained ground.”

“FDI outflows are expected to rebound in 2010, sustained by mergers and acquisition (M&A) opportunities associated with Indian and Chinese firms’ persistent pursuit of natural resources and markets,” it says.

UNCTAD made a forecast that the world economy is expected to grow by 3 per cent in 2010.

It also forecasts that central banks are expected to maintain low interest rates till the end of 2010 and commodity price increases are likely to remain modest.

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Where is the money going?

Tushar Mathur — Thu, 16 Oct 2008 06:21:00 +0000
Its Global Liquidity Crisis ! We all have been listening to this for a while now and are adversely affected by this. the global markets are down and money is flowing out of the emerging economies.
I am being asked a very valid question time and again. If money is flowing out of (say) India, it must be going somewhere. For every outflow of money, there must be a corresponding inflow somewhere. But that's not the case. the whole world is facing this liquidity crisis. A gentleman (he invested a lot in the equities and has lost millions due to fall in the market; "the FIs are selling") came up with an answer that the FIs are sitting on cash. OK! lets take this for a while. But are they hold currency notes. Nopes. This money shud then be deposited in the bank accounts. But again this liquidity crisis is most faced by banks. the banks dont have money to lend, the interest rates are shooting up. So is it that the banks are holding money with themselves are not willing to lend. Nopes; not possible.

First let me tell you the cause of liquidity crisis. Liquidity crisis occurs when the borrowers fail to repay. Remember the subprime crisis last year? The banks and other financial institutions lent to low-creditworthy borrowers huge sums of money and they defaulted. It all started from here.

Now let me explain how this non-payment of loan affects liquidity.
Lets go back to the basics of economics that we read in high school. the process of creating money by banks. We read that banks create money using the deposits it gets from the account holders. We know the concept Cash Reserve Ratio [CRR] (known by different but similar names in different countries). Central banks require banks to maintain a minimum percentage of deposit as reserve to meet withdrawal needs. This minimum percentage is called Cash Reserve Ratio. The banks lend the balance of the deposit to borrowers.
I'll explain in detail.
Assume that the CRR is 9% (as was in India about 15 days ago)
Mr. A deposits Rs 100000 into his bank account (Bank A). Based on the liquidity requirement, Bank A is required to hold 9% of 100000 = 9000 and lend the balance Rs 91000.
The bank lends this Rs 91000 to Mr B who deposits this money in say Bank B (even if he uses for any purpose, it ultimately goes to a bank account). Bank B again holds 9% i.e. 8190 and lends the balance (i.e. Rs 82810) to C Ltd and the money goes to Bank C and the process continues.
So we see that Rs 100000 deposited by Mr A in Bank A has already created (or circulated) money worth Rs 100000+91000+82810 = 273810. Mind you, the process continues and there is more money that is generated with this Rs 100000.
Mathematically, Maximum money that is generated with this Rs 100000 given 9% CRR is;
1 / CRR x Initial Money Deposited i.e.
1/0.09 x 100,000 = 1,111,111

Though there were various other related factors, the subprime itself let to writedowns of $501 billion in the US. Assuming a 10% reserve requirement, the banks lost $5010 billion of money creation.
Since there has been huge defaults, the banks are unable to generate money and are thus unable to lend too. Again, the increased demand for loans (and short supply) has led to increase in Interest rates as well.

This is indeed the main reason why the RBI has been trimming the CRR rates (6.5% from 9% in a matter of 10 days).

The policies are being put in place. Lets hope things shape up well !!!
As for the people who are wondering where has the money gone; I hope I have answered to an extent.
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Should I invest in Gold ?

Tushar Mathur — Mon, 25 Feb 2008 06:54:56 +0000

Looking to invest in Gold funds but don’t know too much about them? Here are some basic facts to get you started.

What are Gold funds?

Gold funds are similar to mutual funds except that they invest in gold instead of debt instruments or equity shares. A unit of a Gold fund is nearly equivalent to a gram of physical gold.

How does it work?

A Gold fund collects money from investors and uses it to buy gold in physical form. Of the total money collected, a major portion is used to buy gold and the rest is invested in low-risk debt products such as bonds and money market instruments. It does not invest in equities. As the major portion of funds is invested in gold, the performance of the fund depends on the price movement of gold. The performance of the fund is reflected in its Net Asset Value (NAV). This gives you a chance to make fresh investments even after the initial offer closes.

Is it suitable for all?

Till date investment in gold has always been through jewelry or coins. But there is a physical limitation to the actual amount of gold you can store. Besides, you cannot take advantage of the price variation in gold. But with Gold funds, you do not have these problems. All that you have to do is buy units in a Gold fund and these units will be credited to your demat account. It is advisable to allocate 5-10% of your savings towards investing in gold, as it has been shown that after equity and property, investment in gold yields the most returns – around 7-8% over the long term.

Reasons to say YES to Gold

* The dollar is weak and getting weaker due to national economic policies which don’t appear to have an end.
* Gold price appreciation makes up for lost interest, especially in a bull market.
* The last four years are the beginning of a major bull move similar to the 70′s when gold moved from $38 to over $800.
* Central banks in several countries have stated their intent to increase their gold holdings instead of selling.
* All gold funds are in a long term uptrend with bullion, most recently setting new all-time highs.
* The trend of commodity prices to increase is relative to gold price increases.
* Worldwide gold production is not matching consumption. The price will go up with demand.
* Most gold consumption is done in India and China and their demand is increasing with their increase in national wealth.
* Several gold funds reached all-time highs in 2007 and are still trending upward.
* The short position held by hedged gold funds is being methodically reduced.
* U.S. government economic policies over the past decade have systematically projected the U.S. economy down a road with uncontrollable federal spending and an uncontrollably increasing trade deficits. Both will cause the dollar to lose in international value and will increase the price of alternative investments, such as gold.
* With the recent devaluation of many international currencies, the U.S. dollar was the international safe haven of last resort. We are seeing signs of this ending due to many financial factors, the most important one being a falling dollar.
* There are over One Trillion dollars ($1,500,000,000,000) of U.S. debt owned by foreigners which could be repatriated under certain conditions. This could cause a major decline in the value of the dollar and a soaring gold price.
* If you believe in ‘buy low, sell high’, gold is still low, but climbing.

What is the tax treatment?

Though Gold funds are similar to mutual funds, they are not treated at par with equity schemes. So you don’t enjoy the same tax-free treatment. Both short and long term capital gains tax, with indexation benefits, become payable.

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