r2i forum

Now that the Fed has cut by 50 bps it may be better to start looking now to locking in rates for any short term money invested in money market funds. Over the last 17 years when the Fed started changing rates they invariable went on to increase or decrease rates much larger and longer than anyone anticipated when they first made a change in direction.

They cut the rate gradually from 8.25% in early 1990 to 3% in late 1992, then increased it gradually to 6% by early 1995, then down to 4.75 by 1998, up all the way to 6.5 in 2000, down all the way to 1.0% in 2003 and up all the way to 5.25 in 2006. Only once in 1997 they broke this "pattern" of smooth incremental change. This may not hold this time but better to start looking at options to hedge this risk.

Vinod

yes, also the dollar declines when the rates go down. so thats another reason to park your money in foreign stocks !!

[quote]
Can anyone please enlighten me on why the dollar would decline following a fed rate cut. I also heard this on a couple of finance channels today. Thanks!
[/quote]I guess that is because the demand for $ would reduce due to its lower rates, so the value of $ would also reduce. This assumes there are better rates (risk-adjusted) available elsewhere.

Question: Does this mean US Tourism industry would see increased revenue
as more tourists find $ affordable? What other domestic industries would benefit?

I don;t think tourism would be big as security concerns are also big, I think the housing industry has dug a deep hole which would start sucking other areas

>>> What other domestic industries would benefit?

Lot of foreign companies are accelerating their expansion plans in US due to cheap dollar. I read BMW had plans to invest some xyz million of dollars spread over next seven years. They are now in fast forward mode and trying to do it within next 2-3 years. US will see increase inflow of FDI.

The exports from US will be competitive and increase due to declining dollar. This will shrink the trade deficit. Cheap dollar seems to be attractive to US economy.

Let us play this game of forecasting..

When int rate goes down or fed bump liquidity to boost the economy, the inflation get life back. Mortgage/personal loans will be cheaper. Helps consumers. Business loans become cheaper, companies can expand.

US$ depreciates, due to money supply. Imports become expensive for US. US$ denominated exports would increase.

Bank, Money market rates go down. Investors are encouraged to take more risk for better return. So, equities does well. Bond NAV will go up to compensate for yield loss.

What happens in India ?
If RBI does not step in, depreciating US$ affects IT, BPO, Textile sectors that are export oriented. INR appreciation helps new money to come into India. There is also int rate differential to help smart money flow. Good time for Indian equities and indian bonds.

It is only 6 weeks back, RBI tried to reduce liquidity further by increasing CRR. It is not good time for RBI to change to reverse gear. RBI will be in dilemma. They have to take the cue from US Fed and reduce the rate to reduce money in-flow. But Indian inflation is not conquered yet. India still has some lag. We are behind the curve, in following Fed.

In short term, this will increase the new money flow into NRI accounts and from their money will find its way to Fixed deposits, small savings accounts, equities and real estate etc

Real Estate will benefit. RE Companies will borrow from overseas or raise fresh money from equity market, avoiding govt hurdles for cheaper loans. Infrastructure and Construction business, finance stocks will be good. Metals, industrial sector stocks also will go up.

IT, ITes, BPO sectors will be the one to watch carefully. Due to cheaper US$, US companies may try to spend more on IT. But due to INR denominated salaries and other expenses, Indian IT companies will find it hard to compete with IT companies from other countries. They have to be more innovative and try to find ways to reduce costs. Operations setup in other countries will help them a lot. I guess we will see them expanding in big ways in next 12 months overseas. Appreciating INR and cheaper US$ will help them in their expansion plans.

uh ! we got power cut, could not read the crystal ball any more..

Aaaaaah! :-)

I wanted to bring this up as a way to hedge the risk of MM fund yield going down and staying low for a while like it did the last time. Not to forecast how rate cut impacts stocks or your relationship with your girlfriend.

Vinod

SO for potential R2i people/ or people who have r2i and still have money in US CD ... should we move money to India as the prediction is dollar price will go down, probably 35 Rs?