Here is the solution to yesterday's #tickleyourgreycells - 2 ...@AzadHindFauz got it spot on!
If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market. True or false? Answer in comments with logic..
Solution to#tickleyourgreycells #3
The question was: If the rupee is rapidly depreciating, RBI is likely to buy or sell dollars in the market.
The question was: Do you think#RBI can do anything about supply side inflation?
(Since answer involves multiple images, so sharing the instagram post link here as it gives the best user experience)
https://www.instagram.com/p/CqEu_8LByfT/?utm_source=ig_web_button_share_sheet
Solution to #tickleyourgreycells - 7
The question was: Equity markets generally rise with good economic numbers as it means firms’ profits will go up. Why do you think in the news clippings below, markets are falling here after good employment numbers?
solution 7 employment and stock markets-compressed.pdf
Solution to #tickleyourgreycells - 8
Look at the news clipping below. Why did Liz Truss’ tax cut plan spook the markets so much that she had to resign?
#economics
Solution to #tickleyourgreycells - 9
The question was: Why are banks getting into trouble these days?
#economics #banking #yieldcurve
Instagram link (multiple photos):https://www.instagram.com/p/CqUKY4nPpls/?utm_source=ig_web_copy_link
Banks typically engage in carry trade on the yield curve. Normally longer duration rates are higher than short term rates. This means that the yield curve is upward sloping.
So banks lend for longer duration at higher rates. and finance it by borrowing for a short term at lower rates and earn profits. When the short term borrowing comes up for repayment, they just borrow again for a short term.
The party continued happily until the recent times when due to Fed printing too much money post covid and the Russo-Ukraine war, inflation hit the world with a vengeance. This forced the Fed (and other central banks) to raise the interest rates at breakneck speed.
Now central banks only control short term rates (generally overnight rates) directly. So their actions impact short term rates more than the long term rates. Long term rates are influenced more by inflation expectations. So because of Fed action, the short term rates rose rapidly but the long term rates remained anchored because the inflation expectations remained in control.
And thus the yield curve inverted! This spelled doom for the carry trade. The mother of all trades turned loss making now and banks started bleeding. Naturally the weaker ones are facing the music first.
Inverted yield curve always signals an upcoming recession. The US 2 year-10 year yield curve turned negative to the tune of -1% in March this year! This is why we say there is an inflation - growth tradeoff. This is the pain central banks have to engineer to control #inflation.
