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Aug 21, 2022

Markets are slaves of earnings and liquidity. Liquidity has taken prominence after the coronavirus outbreak. At first, central banks across the world increased liquidity by cutting rates and helping their populace to live through the pandemic. Then the after effects of increasing liquidity hit – increased inflation.

Now, the same banks are sucking out liquidity by increasing interest rates to counter inflation. The looming after effect of increasing rates is the “r” word that is too pious to speak loudly.

In this podcast, Deepak & Shray discuss the two central banks that impact us the most – RBI and Fed (Federal Reserve System, USA). What makes this podcast interesting is that we are looking at everything from the lens of who does better – Fed or RBI?

Refer to the show notes to see the wide range of things discussed and start listening.

Show notes & references:

02:00 - Why RBI will buy dollars to keep the rupee from appreciating?!

Refer: What the Fed's Big Balance Sheet Unwind Means for Markets

05:00 - What happens when RBI sells dollars?

07:00 - How does it control the liquidity of the markets?

14:00 - How have banks run out of liquidity?

17:30 - If banks need money, why don’t they increase their FD rates?

“Government is now a better bank than all banks. It’s also safer”

19:30 - RBI has taken out liquidity, you want to protect the status quo now. How does RBI do it? What are the consequences?

“RBI owns 3X more of US government bonds than it holds Indian government bonds. But things are changing.”

25:00 - But is the Fed doing now?

26:30 - The interplay of treasury and Fed in the US government monetary environment

"RBI hates to buy government bonds because it knows the government is fiscally irresponsible. The US would buy their govt bonds knowing that their government is even more fiscally irresponsible."

28:30 - Mortgage backed securities and agency guaranteed debt.

“Fed reduced their balance sheet by ~0.5% while RBI has already reduced the balance sheet by almost 10% in the same period”

35:00 - How increasing interest rates will impact different sectors & industries?

37:00 - If US interest rates go to 4% it will impact India and the world

38:15 - What makes India be in a bright spot as compared to the west?

43:30 - UPI is 10X the size of credit cards in terms of transactions. It’s massive.

47:00 - We have screwed up much earlier and recovered. West is starting to experience the fruit of its irresponsible policies.

“We might just be the single largest self dependent economy that’s worth investing in right now. With a local market which we have mostly given away to foreign players.”

53:00 - Domestic investments in equities by Indian investors have absorbed the highest ever FII selling spree.

56:00 - Our neighboring nations are falling apart mostly due to foreign dept - isn’t that a concern for us to open foreign investment?

“If you don’t have the freedom to fire people, you won’t hire them at all. That’s how human psychology works”

01:02:30 - Summarising Where India is right now in the economic scene

“If we don’t screw up, we will do really well. Because the world seems to have screwed up.”