If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market. True or false? Answer in comments with logic..
True.
Depreciation of currency for a country may lead to imported inflation
So, RBI will have to sell dollars in market to arrest the depreciation of rupee. So as to strike a balance between the supply of rupee and dollar in the market and stabilise the currency. (via selling forex reserves or boosting NRI deposits)
#tickleyourgreycells - 4
Inflation indexation of wages (meaning if #inflation goes up, wages go up and if inflation goes down, wages go down too at a predefined formula) will lead to demand side inflation or supply side inflation? Answer in comments with logic.
Ans - Supply side inflation
Inflation indexed wages nullify the impact of inflation on wages and thus effectively keep the wages "same". Therefore keeping the demand in check, whereas simultaneouly they may result in increase of cost, leading to "supply side inflation"
#tickleyourgreycells - 7
Look at the news clippings below. Equity markets generally rise with good economic numbers as it means firms’ profits will go up. Why do you think markets are falling here after good employment numbers?
Market are influenced by various factors :-
1) Worry of continued Fed rate hikes - prolonged inflation may push the bank to push rates further higher
2) Higher rates, make yields attractive, so shift of traders to debt market
3) Domino effect on share markets world over (herd mentality of selling)
4) Recent SVB, Credit Suisse crisis ->lack of investor faith due to bank run
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.
Thank you for the explanation sir
