Manmohan Singh's Magic

Indian Economy was growing at a reasonable 6%-7% with petrol prices at Rs 50/- even when the crude oil prices hit USD 145/- during 2008. After 5 years, the oil prices are around USD 100/- but petrol prices in India has gone up by 20% to Rs 70/- thanks to poor foreign currency rate management by RBI. This resulted in imported inflation in a country with net imports.

Manmohan Singh and team, along with back seat driver (Congress President) made a mess of everything.

RBI Governer played a huge role - he started hiking interest rates when inflation was 9%. But the inflation continued to climb while Indian growth rate fell to 5% from 7%. http://www.financialstrategyonline.com/2013/03/discussion-on-rate-hikes-that-killed.html

I cannot help adapting a cartoon from the internet sources, which is given below

 

Are bank deposits safe? or are they high risk assets?

If you ask any financial advisor, they will classify fixed deposits as one of the safest financial assets that earns low returns. Well, low risk, low returns - as the theory says.

Those who support equity market related investment schemes would be quick to point out that the bank deposits are losers eventually - in terms of purchasing power. This is because of the fact in most cases the bank deposit interest rates are lower than the inflation and hence in the long run, the purchasing power of the bank deposits goes down.

But ask Cypriot depositors - they will tell you that the bank deposits are 'low return assets; but with high risk' - you can lose the principal invested in the deposits.

Yes, now-a-days the bank deposits have become high risk assets!!

Deposits of more than €100,000 at the banks of Cyprus would lose 37.5 per cent in money which would be converted into bank shares, according to a recent finance ministry decree. Depositors get some near worthless bank shares - usually it is the Governments who bailed out banks. Now it is passed on to the depositors.

Additional 22.5% cannot be withdrawn as it will be parked in a special reserve without earning any interest income till the banks complete the financial restructure.

This is a big warning sign - this new trend of asking the depositors to rescue banks will change how financial system works in many countries. Any deposits over and above the sums insured by 'desposit insurance' is liable to be confiscated. Let us have a quick look what is the maximum amount covered by deposit insurance in a few countries:


USA                       : USD 100,000
European Union     : EUR 100,000
India                       : INR  100,000

In your Scenario analysis, you may wish to add the following

- What would you do if your country's finance ministry confiscated your hard earned deposits to bailout the banks?
- What is the logic of asking you to take personal responsibility for poor lending practices of the  those banks?

At least it is better if they read and understand the principles of good credit (lending) risk analysis and management.
http://eu.wiley.com/WileyCDA/WileyTitle/productCd-1118604911.html