Small money, big friction

We visited the beautiful and divine town of Thiruvannamalai and the beautiful Arunachaleswar temple. Later we did the Girivalam (going round the mountain using the path around – approx. 14 km). Typically, one encounters many sadhus and others on the way, and it is a practice to give them something – cash usually. Even though we were prepared and had collected the small notes before our departure from Bangalore, we were running out of these small notes (denominations of Rs 10, 20, and 50).

This is a different world and a real one, not the digital world.

We had a similar experience during our recent visit to Haridwar and Rishikesh – the need for cash for small things, purchases, tips, and also alms.

There is a large section of people in India for whom there is  friction in small money availability and becomes an issue for them. This is not to take away from the success of digital payments in India, driven by UPI. The success of UPI and digital payments in India is well known and remarkable.

Key points that stand out

  • Successful adoption (see growth in volumes and value)
  • Ease (smart phones, many providers, new methods for using UPI 123Pay)
  • Link to bank accounts (Jan Dhan ensuring the setup of new bank accounts)
  • Zero cost – so one can use it to pay Rs 10 or Rs 50,000, at no cost

This note is not about digital payments. It is about the small cash (paper and coin) payments and make it more available.

As seen in many of our travels, I note that small cash availability and usage will have a positive impact on a large number of people, and is also more convenient. This is usually needed for buying small items, tips, donating alms, etc. Digital is not a viable substitute in this situation.

The ease with which one can pull out a 10, 20, and 50 rupee note is unmatched. Coins (5,10 Rs) have lost their relevance though.

I wonder if the RBI and Ministry of Finance have done any estimation of those who don’t use a smartphone (even if they have a bank account)?

From my observation, many also don’t use UPI, including urban folks because of security and fraud concerns (irrespective of the protections UPI offers).

What I see missing in the flow is the volume of small money and availability (Rs 10, 20, 50). These are not so easy to get in a good number and one has to plan for this (like we did when we visited Thiruvannamalai).

This is not to suggest anything to be done on the digital front, but that we need to have enough small note cash circulation so that it makes it easier for those who don’t use UPI or those not digitally savvy (smartphone, UPI, and bank account linking).

There is friction in the small money world and one should look to address this.

The “Stuff”

There’s this wonderful 2006 movie called “The Devil wears Prada”, starring Meryl Streep and Anne Hathaway. A lovely and thought-provoking movie set in the fashion world.

I strongly recommend it for the insights that the story provides into a different world. The post is about one of these insights.

Miranda (Meryl Streep) is a fashion guru who is a demanding manager and a caustic boss.

Andy (Anne Hathaway) is a new second assistant. Andy has no interest or knowledge of the fashion industry but wants to work for a year and get enough connections to become a journalist.

Miranda thinks Andy is another person who will pass through and will not amount to much.

Coming to the main point, there is a scene where a couple of jacket belts are displayed for Miranda’s opinion as they are different (from a fashion context) though the colors look similar.

Andy is taking notes and then sniggers at this display while Miranda is talking to the assistants helping her.

Miranda hears her laugh, turns to her, and asks what’s funny?

Andy blurts out and says the belts look the same and that she is still learning about this “STUFF”.

All in the room go silent. They are shocked and wait for Miranda’s response.

Miranda looks at Andy’s blue-looking sweater and gives her a strong retort of how the choice Andy made of her sweater and color comes from such similar decisions made in the room a couple of years ago by herself and the team.

Andy is chastised.

The scene is noteworthy – do watch the scene (2′ 20″) on the link below before you read ahead.

Scene from “The Devil wears Prada”


The key point is we work in industries and are always exposed to new lines of business or fresh areas of expertise.

It is important we be aware of this, understand the context, and not immediately dismiss it away as “stuff”.

This happens if it becomes an ingrained way of dealing with complexities, new experiences, new perspectives, or from an institutional bias.

Yes, this other “stuff” is usually different expertise and is convenient to think is not going to be of value to us in our daily jobs or lives, but it is something that we can choose to pay some attention.

We may be Developers / Technical architects and thinks Business is other “stuff”.

We may be in Marketing and think Sales is some “stuff”.

We may be in Operations and think Strategy is exotic “stuff”

We may be fundamental stock analysts and think technical analysis is boring “stuff”

This “stuff” doesn’t need to be material to our careers, but we need to be conscious of such bias. We may shut out new perspectives that actually will broaden our thinking and could help us down the road.

Do watch this movie and enjoy it and also think about the lessons. Please write about this post or comment

Money – A philosophical view

What is money or cash?
A philosophical view

We all know (at least these days) money as cash as legal tender (notes and coins) or as bank balances, credit limit on a card, digital currency (that is equivalent of money) or anything that stores value.

Typically money is liquid and fungible (1000 in your wallet is the same as the 1000 in my wallet, even if they are different serial number notes)

so how does one receive or pay money, in any form?
Cash – we hand over or receive the notes
Cheque – we instruct our bank to pay someone else or deposit a cheque drawn on us
Bank transfer – we authorize the bank to make a transfer
Credit cards – we are authorized by the issuer and hence entitled to pay for a purchase as we have been given authority up to a certain limit

The key point is money is nothing but the power of instruction over a store of value and is used to convert one store of value by using that instruction to purchase another store of value such as an asset (gold, property, stock, bonds, art, vehicles, etc.)

Theoretically if we want money the easy way is we instruct our bank to increase our balance! Unfortunately the bank will not accept our instruction 🙂

That is the key – money gives one the power to instruct. Cash notes are nothing but bearer cheques with the instruction provided by the central bank (e.g. RBI, Fed Reserve, Treasury, etc.)

Keeping this concept in mind, we can understand any currency, digital or bank based.

So e-wallets give one the power to instruct (for a transfer) after one has generated a balance by transferring from a bank or thru a credit card, etc.
E-wallets themselves may actually store the value in a bank !

The power to instruct comes from a bank (or the central bank), the wallet or the credit card issuer.

So all of us work to get more power to instruct !! 🙂

Cashflows and Liquidity Management

Cash flows and Liquidity management – Securities Products

Each security has by its structure a set of associated cashflows. Most common products are cash securities.

Cash Securities

These typically have a set of cashflows that are created during the product life cycle. Some examples are:

  • Foreign Exchange (FX) – where there is a promise to exchange foreign currency cashflows
  • Fixed Income / Bonds  – the issuance of a bond and receiving cash, payment of periodical cashflows (coupon interest) and the repayment of the bond at maturity (just like a loan)
  • Equities – Issuance of equities by subscription and payment of cash and then the optional distribution of dividends. In case of buyback, payment of cash. Buy/Sale of equities result in cashflows (net of commissions, fees, exchange taxes, brokerage, etc.)
  • Loans – Lending / borrowing of a principal amount and payment of periodical interest and finally the repayment of the loan amount

Derivatives

Cashflows in derivative contracts are determined by the specific type and the underlying assets and are linked to events. There is a difference in the nature of  Exchange Traded and OTC derivatives.

  • Forward Rate Agreemnet (FRA) –  usually the cashflow will be settled based on the difference between the fixed rate and the floating rate that is determined on the specified date.
  • Futures – cashflows in exchange traded futures are typically the posting of initial margin and then the daily variation margin (based on mark-to-market MTM). Closing of the contract will also result in the cashflow in or out.
  • Options – The main cashflows are the premium cashflows at the start of the contract. On exercise there can be a cashflow, if cash settled, for the difference between strike price and market price
  • Swaps – fixed cashflows and floating cashflows (which are determined when the rates are fixed for each period). Swaps are derivatives and hence the notional face values do not result in cashflows. However, there could be collateral cashflows

What this means is that for every trade or contract the bank enters into, it can generate the future projected cashflows for the securitiy or contract – hence projected cashflows.

Let take a look at a few examples related to Cash Securities

Example

  1. Bonds

A bond is a borrowing and is a promise to repay it at maturity. In a simple bond, the interest payments are paid regularly (e.g. Six montly payments).

So once there is a bond contract, the projected cashflows are the remaining coupon interest cashflows (interest rate X principal amount) and the maturity amount cashflows (principal amount).

So at given time, all the open bond contract have associated future cashflows and all these can be stored and can be aggregated. The dates of these cashflows are know and hence can be aggregated by dates and currency.
image_thumb.png

  1. Fx Spot

An FX spot contract is a contract for the exchange of two foreign currency cashflows at settlement date. A spot contract settles in T+2 days (trade date + 2 business days)

Lets have the bank enter into a spot contract to buy USD vs GBP.  Let say the spot rate is 1.41. The bank will receive 1.41 USD and deliver 1 GBP. If the total contract is for 1 million GBP, then on T+2 the bank will receive  $1.41 million and delivery GBP 1 million

The projected cashflows will then be

T+2

+1,410,000 USD

– 1,000,000 GBP

These entries are the actual  cashflows that will happen in the future. In this case in T+2 days

These cashflows are usually stored in a cashflow database.

All Fx spot contracts done on T will all be generating projected cashflows and the cashflow database can provide a collective view of all the cashflows that are to be paid / received on T+2 after netting.

 

MCX (Multi-commodity exchange of India) – A snapshot

The Multi Commodity Exchange of India Limited (MCX), is a commodity derivatives exchange that facilitates online trading, and clearing and settlement of commodity futures transactions. The Exchange, which started operations in November 2003. It is listed on the BSE. Currently with a market capitalization of ~Rs 5448 crores.

Most active products are

  • Crude oil
  • Zinc
  • Silver
  • Copper
  • Natural Gas
  • Lead
  • Crude Palm Oil
  • Cotton

Key commodities futures product are as below. Options on these are expected to be introduced soon.mcx products

 

Options on Commodities Futures

Sebi has allowed Derivative Exchanges to allow Options on Commodity Futures as per a circular on their website (13 June 2017).  See link  Sebi circular

In India there are four exchanges were commodity derivatives are traded.

Most contracts are futures (or forwards but since on exchange are futures 🙂 ).

Sebi now allows Options on the futures contracts. This allows for hedging. Also speculation.

Basic criteria is that the futures should have been in the top 5 in trading value over the past 12 months. Basically only liquid futures contracts are eligible.

There is also average daily turnover criteria for the futures over the past 12 months (agricultural Rs 200 crore, other 1000 crore)

Key features

European style exercise

Settlement will be to take the underlying long or short position.

Example

Long call will result in a long position in the future; Long put will result in short position in the future

Short call will result in a short position in the future; Short put will result in the a long position in the future

Position limits for options are separate from futures limits. Margining will be separate.

Due to exercise, the position limits of futures maybe breached. Two working days are allowed to bring these under the limit threshold levels

More on this.

India 10 year Govt bond yields

Bond yields in India

What this graph shows the interest yield on the 10 year Indian Government bond over the past 5 years. We can clear see that yields, after a bottom near 2013 of about 7.3%, have now (~2017) come to a value of 6.5% after hitting highs of 9%. This means that overall interest rates are down and is because of significant lower rate of inflation

india govt bond 10 y

Cricket (off topic)

Rambling thoughts

The recent loss to Aus by 333 runs at home 

is a big blow. We were deceived by the current team’s performance, largely at home.

Weaker or not is not  the issue. 
Australia is not the strong team they were, 

lost to SA at home recently

Pakistan fought well there but lost to Australia.

NZ beat them too. 
Overseas – we have had some bad bad losses
We have had some horrendous performances over the last 30-40 years.

42 all out – India vs England 1974 (Wadekar led)

England thrashing us 3-0 in that series
Home

We lost badly to Pakistan (2006), Australia (2007), South Africa 

at home
We did not have strong teams always.

It took a long time to build one – a lot changed after Kapil came into the scene
Kapil won in England 2-0

Dravid won in England 1-0

Dravid won in Pakistan and West Indies.
No other captain has won in England – not even Dhoni !

We got thrashed in England and Australia (Dhoni led!!)
The team of Sachin, Dravid, VVS, Sehwag, Ganguly have seen lots of defeats and showed great mental strength to fight – Kumble, Harby, Srinath, Prasad did their part
2001 Calcutta was the turnaround – Amazing performance by VVS and Dravid. And Harby

This was like 1983 world cup win.

Steve Waugh’s team had 16 wins in a row !!
Sadly there is a lot adulation around Sachin not enough appreciation of Dravid, Laxman
Virat is a great batsman yet as a captain he needs to show the transformation

Secondly why not make Ashwin vice-captain? 
We may come back in the series but the team is still brittle. This is where captaincy matters.

Virat is not a Brearly or a Waugh. 

His own performance will come under pressure. 
This is also a mental game. 

Our opponents are traditionally stronger in that department, at least as things stand.