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Dear all, In my latest article with Bernardus Doornik, Rafael Guerra, Jon Frost and Alexandre Tombini we study how the investor base and the size of hedging markets affects the liquidity of EME government bond markets. We find that a larger presence of domestic banks reduces the deterioration in liquidity after adverse shocks, especially in times of stress. By contrast, a larger share on non-bank investors tend to amplify the deterioration in liquidity. Larger derivatives markets also help liquidity in EME government debt markets weather external shocks. Also check out the other articles in this issue of the BIS Quarterly Review. They cover the natural rate r* after the pandemic, the design and adoption of fast payment systems, sectoral price dynamics and the last mile of disinflation, and a view of international finance through the lens of the BIS statistics. https://lnkd.in/g54vAd3W

NHNN: Plenty of room for credit growth this year On March 14, in Hanoi, Prime Minister Pham Minh Chinh will preside over a conference to implement the monetary policy tasks for 2024, focusing on resolving difficulties for production and business, promoting macroeconomic growth and stability. The conference will be attended by leaders of ministries, sectors, and leaders of large businesses to openly exchange and discuss solutions to remove obstacles for production, business, and contribute to economic growth. The headquarters of the State Bank of Vietnam in Hanoi Multiple challenges Leading up to the conference, the monetary policy body, the State Bank of Vietnam (SBV), shared information about its flexible credit management activities aimed at resolving difficulties for production and business, and promoting economic growth. The SBV representative stated that in 2024, the global economic outlook is expected to continue to be complex, with economic growth projected to remain low, inflation showing signs of slowing down but still high, and many central banks beginning to consider interest rate cuts. However, there are increasing risks of financial instability, high exchange rate pressures, and unpredictable fluctuations in global commodity prices. Domestically, the economy is showing signs of recovery but still faces challenges. In this context, closely following the resolutions and directives of the Government, the Prime Minister, the SBV has resolutely implemented key measures and tasks. Specifically, flexibly managing monetary policy tools to ensure abundant liquidity for the credit system of financial organizations to meet the credit needs of the economy; rational management of interest rates and exchange rates in line with market conditions, macroeconomic developments, and monetary policy goals. The SBV maintains its current interest rate levels, flexibly manages exchange rates to absorb shocks, and limits large short-term exchange rate fluctuations. It instructs financial organizations to reduce costs, simplify lending procedures, and continue to strive to lower lending interest rates. It requires financial organizations to report and publicly disclose lending interest rates; many financial organizations have already publicly disclosed lending rates on their official websites. The average lending interest rate has decreased by more than 2.5% in 2023 and continues to decrease in the first month of 2024. Currently, the average deposit and lending interest rates for new transactions have decreased by about 0.2% per year and 0.7% per year compared to the end of 2023. The foreign exchange market operates smoothly, and legal foreign exchange demands are fully and timely met. Based on the economic growth and inflation targets set by the National Assembly and the government, the SBV aims for a credit growth rate of about 15% for the entire system in 2024, adjusted to be in line with developments, actual situations, and by December 31...

That same "misstep" in Fixed Income has been made by many fund managers, banks, and insurance companies in our country, despite numerous signals that those "market-promised" interest rate cuts were neither so immediate nor so evident. Just look at the returns of their Pension Plans, Fixed Income Portfolios on Balance, and Fixed Income Investment Funds to realize the widespread error among the "experts". In general, management decisions are influenced by what the "majority" is doing, biased by not wanting to deviate from the predefined Benchmark to avoid significant deviation risk: not downward, but certainly not upward either. Thus, in the long term, we find the disappointing returns of Fixed Income Funds and Plans that have been very easy to beat—with some criteria and without taking great risks—beyond the reinvestment risk (that by investing in the short term, upon maturity, you cannot reinvest at the same rates, but at substantially lower ones), which in any case is an opportunity cost, not a material cost (unless you need to cover long-term liabilities, which is another matter). What do you think? 🤔

Most investors and borrowers know about the impact of interest rate cuts. For investors, particularly those on fixed incomes, an interest rate cut means lower returns. Meanwhile, for those taking on debt—whether through bond financing, vehicle purchases, or higher purchase agreements—the cost of borrowing will decrease. However, less is understood about how an interest rate cut affects everyday investors' portfolios, particularly through government bonds. With the South African Reserve Bank (SARB) poised to cut interest rates by 25 basis points to 8.00% on September 18, 2024, investors are already speculating about the broader market impact, particularly on government bonds. https://lnkd.in/dsAYEg-i

Revised Economic Capital Framework Has Transformed The Way Of Transferring A Dividend To The Government By RBI For the year 2023-24, Reserve Bank of India has transferred a record dividend of ₹2.11 trillion to the Govt as against transfer of ₹87,416 crore in the previous fiscal year thanks to a high income from the liquidity management operations, investment in foreign securities, profit on sale of foreign currencies & profit on currency printing. 🟦 Revised Economic Capital Framework The RBI in consultation with the central government, had constituted a Committee (Chair: Dr. Bimal Jalan) to review the current economic capital framework, in Nov 2018. The existing economic capital framework was developed in 2014-15, & was operationalised in 2015-16. The economic capital framework provides a methodology for determining the appropriate level of risk provisions & profit distribution to be made under Section 47 of the RBI Act, 1934.  Economic capital of a central bank includes its capital, reserves, risk provisions & revaluation balances.  Revaluation balances are unrealised gains, net losses resulting from movement of exchange rate, gold price or interest rate.  The committee noted that revaluation balances are the major component of RBI’s economic capital (73%). Realised equity is the component of RBI’s economic capital comprising its capital, reserve fund and risk provisions. The risk provisions comprise of: i) Contingency Fund: It includes provisions for unforeseen contingencies arising from depreciation of securities or monetary/exchange rate policy risks, and ii) Asset Development Fund : It is the amount set aside for investment in subsidiaries and internal capital expenditure. iii) Contingent Risk Buffer : The risk provisioning made from economic capital to cover monetary, fiscal stability, credit and operation risks is cumulatively referred to as the Contingent Risk Buffer. The committee recommended that the RBI should also include its revaluation balances as part of overall risk buffers.  However, given their volatility, these balances should be treated as limited purpose risk buffers to be used against market risks only. 🟦 Surplus Distribution Policy The current surplus distribution policy targets only the total economic capital. The Committee recommended that the target should also include realised equity.  ▪️The size of the realised equity, in the form of CRB, must be maintained between 5.5% to 6.5% of the RBI’s balance sheet. ▪️The total economic capital should be maintained between 20.8% to 25.4% of the balance sheet. If the realised equity is above the required levels, the entire net income of RBI is to be transferred to the government. If it is lower, risk provisioning is to be made to the necessary extent and only the residual net income is to be transferred.  This framework is to be reviewed every five years. Thanks for reading…

What is your financial resolution for 2025? 2024 has flown by, with only three months left. Now is the time to start planning your goals for the next year. Currently, the global economy is experiencing uncertain and volatile times due to a combination of geopolitical conflicts such as: 👉 The Russia-Ukraine war 👉 Tensions between Iran and Israel 👉 Instability in Bangladesh 👉 The yen carry trade issue in Japan 👉 Economic slowdowns in the USA, UK, and China ✔️ Fortunately, the Indian economy is booming. Industries like Pharma, Solar, and Tech are significantly contributing to economic growth, while Banking remains one of the few sectors undervalued from a valuation perspective. Between Sept 2023 and Sept 2024, Nifty 50 grew by approximately 26.49%, and Sensex by 23.17%. Mid-cap and small-cap valuations are expensive compared to large-cap, which remains close to its three-year average level. The long-term India growth story remains intact. However, as the Iran-Israel conflict escalated, fuel prices rose by 5% in the international market, causing a market correction at the beginning of this month. Amid this uncertainty, how can you ensure portfolio growth? ✔️ The answer is asset allocation. Your goal should be to maintain a diverse portfolio across various asset classes. 👇 Here are some mutual fund categories you should consider while setting your financial goals for 2025: 1️⃣ Dynamic Asset Allocation Funds (aka Balanced Advantage Funds) BAFs are ideal for balancing equity and debt exposure. The risk-return ratio of these funds varies based on allocation. Some BAFs are aggressive, with the majority of the allocation to equity, while conservative BAFs offer a debt-fund-like experience with some equity exposure for growth. 2️⃣ Multi Asset Funds MAFs offer instant diversification across stocks, bonds, gold, international equities, and real estate. While equity will drive growth in this category, gold has outperformed this year (YTD 2024), delivering 16% year-to-date returns and surpassing the Sensex. If global economic conditions remain volatile, gold will continue to act as a safety net. Therefore, having exposure to gold can enhance your portfolio’s overall growth. 3️⃣ Flexi Cap Funds Flexi Cap funds provide flexible allocation across market capitalizations and sectors/themes. Currently, small-cap and mid-cap segments are expensive, whereas large-cap is reasonably valued, as shown in the Indian market outlook. Rather than deciding between categories, Flexi Cap funds offer a balanced mix of all three. 4️⃣ Large Cap Funds In the coming years, fresh inflows from FIIs and DIIs are likely to favor the large-cap category due to its relatively reasonable valuations. This category is ideal for your 5-year goals. P.S. Don’t forget to take a risk-profiling quiz to ensure your portfolio aligns with your risk appetite. #marketoutlook #personalfinance #mutualfunds #investments

A joint survey by the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) on the sales of non-exchange-traded investment products by licensed corporations and registered institutions showed a 14% increase in total transaction to $4,338 billion in 2023 from $3,799 billion in 2022. Respondent firms saw an improvement in overall market sentiment in 2023 amid market recovery from the pandemic, easing of inflationary pressures and anticipation of the end of the monetary tightening cycle in major economies. Against this backdrop, the number of firms engaged in the sale of investment products grew to 380 in 2023 from 371 in 2022. About 68% of these firms reported year-on-year increases in transaction amount, and about 29% of them expanded their sales force by 50% or more to meet growing business needs. The number of participating clients also grew by 15% to over 940,000. The solid sales growth of investment products was fuelled largely by an increase in the sales of collective investment schemes (up $394 billion), debt securities (up $80 billion) and structured products (up $59 billion). According to the survey, sales of money market funds increased in 2023 and accounted for 76% of the total transaction amount of the top five CIS reported by the large firms, up from 61% in 2022. Sales of sovereign bonds also rose, representing 44% of total debt securities sold in 2023, up from 29% in 2022. The rise in popularity of money market funds and sovereign bonds was attributable to investors’ preference for lower risk products with more stable yields amid the persistent high interest rate environment. Other major observations from the survey included: 🔹 Structured products continued to be the top product type sold by the respondent firms, representing 46% ($1,980 billion) of the total transaction amount in 2023. CIS and debt securities rounded out the top three spots, accounting for 29% ($1,278 billion) and 17% ($728 billion) respectively. 🔹 The transaction amount of equity-linked products stood at $1,206 billion, representing 61% of all structured products sold in 2023, up from 53% in 2022. The major underlying equities of the top five products sold by the large firms were from the internet (29%), automotive (27%) and technology (20%) sectors. 🔹 There was an upward trend in utilising online platforms for distributing investment products. The number of firms distributing investment products online increased by 11% to 92 in 2023, up from 83 in 2022. Online sales accounted for 12% of the aggregate transaction amount of all respondent firms, as compared to 7% in 2022. CIS represented 72% of all online sales, followed by debt securities, which accounted for 25%.

India's sovereign bond market has recently witnessed a significant surge in foreign institutional investor (FII) inflows, following the announcement of their inclusion in the JP Morgan emerging market index. From a modest ₹94 thousand crore in September 2023, FII ownership of Indian government bonds has soared to ₹2.29 lakh crore by August 2024, representing a remarkable 144% increase in just 11 months. While this influx of foreign capital is generally positive for the bond market, it has led to an intriguing phenomenon - a notable reduction in long-term yields. The 30-year yield has plummeted from 7.5% to 7.1% since the index inclusion announcement, while the 10-year yield has dropped from 7.3% to 6.9%. This compression has brought long-term yields perilously close to short-term rates, with the 2-year yield now hovering around 6.8%. This flattening of the yield curve occurs as increased demand for long-term government bonds has driven up prices, thereby bringing yields down. However, this flattening yield curve presents challenges for the economy, starting with the banking sector. Banks typically borrow short-term and lend long-term, so a compressed yield curve squeezes their Net Interest Margins (NIMs) - the difference between the rates at which they lend and borrow. This makes lending less profitable, even though lower long-term yields could theoretically represent favorable borrowing conditions for industries. As a result, industries may struggle to access this credit, as banks become more reluctant to lend at these reduced margins. Adding complexity to this scenario is the excess liquidity in the banking sector. In August, this surplus stood at a staggering ₹2.86 lakh crore. The Reserve Bank of India (RBI) has since engaged in aggressive liquidity absorption operations, bringing this figure down to ₹2.23 lakh crore. These interventions have ensured effective monetary policy transmission, aligning the upper end of the Weighted Average Call Rate (WACR) spread close to the repo rate of 6.5%. The WACR, which represents the interest rate at which banks lend to each other in the overnight market, is a crucial indicator for the RBI. Keeping it aligned with the repo rate ensures that the RBI's policy decisions effectively influence market interest rates. However, the RBI's non-accommodative stance risks further flattening the yield curve, potentially even leading to an inversion, which could limit capital availability and stifle economic growth while straining the banking sector. To mitigate these risks, a reduction in the repo rate is essential. Lowering short-term rates would enable the system to absorb inbound FII liquidity more effectively, support economic growth, and ensure the banking sector remains healthy. #IndianEconomy #BondMarket #BankingSector #RBIPolicy #FIIInflows #InvestInIndia #JPMorganIndex #YieldCurve #RepoRate #EconomicGrowth #Liquidity #Banks #MonetaryPolicy

From 'Once a Darling, China turns 'Radioactive' for Big Foreign Money' to 'China’s Policy Reversal Sparks ‘Mind Boggling’ Stock Rally', how the headlines changed their tune? Welcome to the story of how the 'BIG SHORT' became the 'BIG SQUEEZE' Imagine a hypothetical scenario where an asset class builds upto 30% of a nation's economy, in which, 70% of the household's net-worth is invested. Gradually, demand for that asset falls & nobody is ready to invest in it. The companies providing those assets are getting debt-ridden and hence those assets, remain unfinished. Well, this isn't a hypothetical situation anymore, it's the classic case of 'CHINA'S REAL ESTATE MARKET'! China is facing an issue of what we call as 'Deflation'. As there is a tremendous decline in demand for Real Estate in China, there's been a fall in property prices, lower consumer spending, slow-down in production and hence layoffs. Hence, here comes to it's rescue, the People's Bank of China, with it's STIMULAS PROGRAM. Layman's terms: infuse more money. And why is it crucial for the global markets, oh boy, we are talking about China, world's 2nd largest economy (18.5 Tn $). And, when they sneeze, rest of the world catches cold! 1. 7-DAY REVERSE-REPO rate cut by 20 bps, from 1.7% to 1.5%. It's the rate at which banks lend money to each other. Hence, a direct increase in the liquidity in Chinese market. 2. A 50 bps cut in the RESERVE REQUIREMENT RATIO. It's the ratio of money that a bank needs to keep in reserves, to the amount it has in it's deposits. Now that the banks got extra bucks, lending to the CONSUMERS & biz increases. Did I say, consumers? Aren't they already stressed? PBC got a plan for them too. 3. CONSUMERS: China's banks to cut existing mortgage rates. China's 4 big banks, will cut down rates by 30 bps below the BM loan prime rate. So, consumers will avoid early loan repayments, continuing with reduced EMIs, will have surplus money, resulting in an increase in spending & INVESTMENTS. INVESTMENTS, now that brings me to my favorite, EQUITY MARKETS! 4. A 500 Bn CNY SWAP FACILITY to aid stock market. By providing cash through this, short-term needs are met without selling the stock holdings. Hence, this excess cash can be used to purchase stocks & fulfill other obligations. 5. A 300 Bn CNY to support COMPANY STOCK BUYBACK program. PCB lend 300 Bn CNY to commercial banks (@1.75%)-Banks will lend that money to Companies (@2.25%)-Companies will buyback their own shares-increase in shareholding! Coup de maître, right? Is this a first time a nation announced its stimulus program? No. 2008: USA launched it's own bailout program. 2012, ECB got a aggressive M.P. to rescue Greece, Italy & Spain. 2013, Japan launched it's own program. And guess what, whenever a major economy did this, others benefited. 2012 ECB: S&P 500 (+17.6%), Nifty (+26.6%) 2013 Japan: S&P 500 (+29.60%) Do you think that this program will be a game-changer? Comment box's open for the discussion!

Domestic equity markets fell as market participants exercised caution and remained on the sidelines as they awaited the outcome of the general elections for 2024. Sentiments were also dampened by worries that the rate cut by the U.S. Federal Reserve in 2024 will be delayed. Losses were extended due to concerns about global geopolitical tensions as Gaza ramped up its attacks in Rafah, southern Gaza. However, further losses were restricted after India’s consumer price index-based inflation eased to an 11-month low of 4.83% on an annual basis in April 2024 which led to expectations of a rate cut by the Reserve Bank of India. Sentiments were further boosted after the Reserve Bank of India decided to transfer a record surplus of Rs. 2.11 lakh crore for FY24 which is expected to strengthen the fiscal position of the government. Bond yields fell in tandem with the U.S. Treasury yields after the U.S. Federal Reserve maintained interest rates as expected but sounded less hawkish than anticipated in its Monetary Policy concluded on May 1, 2024. Yields fell further as the Indian government decided to continue pumping money into the banking system in the upcoming weeks after reducing the supply of Treasury bills for the first quarter of FY25. Gains were extended after the RBI approved a record surplus transfer of Rs. 2.11 lakh crore to the government for the fiscal year ended on Mar 31, 2024. However, gains were restricted following an increase in U.S. Treasury yields that rose back toward the 4.50% mark. Following are the trends spotted in the Equity Mutual Fund category in this month: · All categories witnessed positive returns across all time periods namely 1-month, 3-months, 6-months, 1, 3, 5 and 10-years · Small cap funds gave maximum returns over an investment horizon of 3, 5, and 10 years · Mid-cap funds gave maximum returns over an investment horizon of 1 month, 3 months, and 1 year · Over the last 1-month, equity funds remained under pressure as market participants remained on the sidelines and awaited the outcome of the general elections Following are the trends spotted in the Debt Mutual Fund category in this month: · Credit risk funds gave maximum returns over an investment horizon of 1 week, 1, and 3 years · Gilt Fund with a 10-year constant duration gave maximum returns over an investment horizon of 5 years and 10 years · Floater Fund and Long Duration Fund gave maximum returns over an investment horizon of 3 months and 6 months respectively Read the full article on #mutualfund category performances for May 2024 👇https://lnkd.in/dJ2b-EjE #ICRAAnalytics #MFI360 #SmallCapFunds #LargeCapfunds #StockMarket #mutualfundresearch #equityfunds #AMFI #Mutualfund