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Saturday, April 25, 2009

How much reserves is required for insurance purposes?

I have an article in Financial Express today titled How much reserves is required for achieving safety?


  1. Ajay, "relatively few" reserves were used because rupee in the 50 range is acceptable to GOI. and India was NOT the epicentre of the financial crisis (it is too tightly regulated to have the extent of off balance-sheet subprime junk htat Morgan, CIti, Merrill etc had).

    As your earlier analysis pointed out here it was a liquidity crunch based on Libor increases, broken hedges at Indian corporates, and knockon effects on FCCBs etc. which still continue.

    However, in 1997 asian crisis, Thailand, Indonesia BURNT through more than 50% of their reserves.

    Under a speculative attack by HEDGE FUNDS, India is NO MATCH for the leverage the blue eyed boys from Wall Street can muster.

    Again, India needn't worry on this front because while the financial press TALKS A GOOD GAME, it is a tightly REGULATED market. Cant short rupee like that. SO yes excess reserves are being wasted.

    I have a question on development (or lack thereof) of the indian gormint: IF gormint PRINTS money ONLY to build new a/c buses, trains, and sidewalks and that inflationary? I think indian gormint is SCARED of inflation to an extreme...due to village vote banks...and as a result GROWTH is held hostage!

    what is the difference between GROWTH and INFLATION...that is a better question for gormint

  2. Ah, "Anonymous" beat me to it.

    India has been way better off in this crisis so far as compared to other countries (developed and emerging) + the rupee was allowed to depreciate 25% from peak levels (39 vs 50 against the dollar) in the last year.

    It doesn't seem like the last few months should be considered more than an average case crisis for India??

    About your point 2: "rupee depreciation is a good thing" - maybe in a deflationary crisis with a beggar thy neighbor short term advantage of competitive devaluation. Unclear to me what happens in an inflationary crisis?

    About your point on cheaper ways of insurance: How about insurance by locking in long term contracts on commodities when the environment is favorable to do so?

  3. Ajay,
    You say
    If insurance is desired, it can be obtained frontally using derivatives.
    Who pray would be a good counterparty for this insurance ? What currency should this insurance be denominated in ?

  4. "Hi Ajay! Thanks for the link. It's good & infomative. But I think that the insurance comapanies must launch online tools which helps them plan their insurance according to their needs & budget. That can give the benefit to both the customer & the company. Have a look :-)"


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