Currency Corner by Kotak Securities

🌍 Two Fundamental Misconceptions in Economic Analysis

Many fail to connect the dots and see the larger picture due to two critical misunderstandings:

The Reality of Banking: Money Creation, Not Fractional Lending

Myth: Banks lend out deposits under a "fractional reserve" system.

Reality: Banks create money and deposits via lending—they do not lend pre-existing deposits.

Understanding the Hierarchy of Money

The monetary system is a hierarchy.

Gold is the only true money—it is not anyone’s liability.

All other money (central bank reserves, deposits, credit) is someone’s debt or liability.

Implications of a Fiat System

Money supply expands only when balance sheets expand.

When balance sheets collapse (defaults, crises), money supply contracts.

Economic contractions are not just liquidity issues—they are structural contractions in the money supply itself.



Balance of Payments: Capital Flows Drive Trade, Not the Other Way Around

Myth: Trade balances determine capital flows.

Reality: Capital flows dictate trade balances.

How It Works

Capital flows = net purchasing power.

Countries with capital inflows can:

Use the power to consume and import.

Transfer it abroad, enabling others to import from them.

Trade is the effect of how nations utilize this purchasing power.

Real-World Impact

Capital flows predict trade imbalances before they happen.

Countries with capital inflows tend to run trade deficits; those with outflows run surpluses.


🔗 Connecting the Dots: The De-Dollarization Process

Trade Wars = De-Dollarization

Trade conflicts are a realignment of global monetary power.

US trade barriers force nations to seek alternatives to the dollar.

Fiscal Discipline = De-Dollarization

Reducing fiscal deficits weakens dollar hegemony.

Cutting spending on global programs reduces dollar dominance.

Understanding the Dollar’s Role

Dollarization = US as the sole printer of global prosperity.

The US could print unlimited dollars backed by nothing, while others traded real goods/services to earn dollars.

A unipolar world order protected this dollar monopoly.


What De-Dollarization Actually Means?

Not the end of the dollar, but its dilution in a new global order.

Future global reserves: a basket of currencies backed by gold, commodities, and digital assets.

Capital flows and trade realign:

Manufacturing: China + 10.

Services: Bharat + 10.

Linguistic dominance: English + 20.

🌐 The Emerging Multipolar World Order
The global power structure is shifting from a unipolar US-led system to a multipolar world.

The New Power Centers: BRICA

Bharat, Russia, Israel, China, and Allied Nations will dominate geopolitics, trade, and finance.

Other countries will align with their nearest economic and political centers.

🚨 Conclusion
By understanding these two misconceptions—how banking truly works and how capital flows drive trade—we can clearly see the global transition unfolding. The world is moving toward a multipolar order, where economic and monetary power is shared across multiple centers rather than concentrated in the US dollar.

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Potential Impact on Iran’s Oil and Gas Production During a Conflict with Israel



In the event of an all-out war between Iran and Israel, Iran’s oil and gas production and exports could face significant disruptions, with wide-reaching implications for the global energy market.


Oil Disruptions:


Key Infrastructure Vulnerability: Iran's major oil export terminals, such as Kharg Island and Sirri Island, are critical to its export operations. These could be prime targets in a conflict, potentially halting up to 1.6-1.7 million barrels per day (bpd) of crude oil exports. Damage to these facilities could dramatically reduce the country's ability to supply oil.


Refining and Storage: Attacks on refineries in Bandar Abbas or Abadan could cripple Iran’s refined product exports, which contribute 240,000-300,000 bpd to its total oil-related exports.


Strait of Hormuz: This vital shipping lane, through which 20% of the world’s oil passes, could become a focal point of the conflict. Any disruptions here would not only impact Iran but also global energy supplies.


Gas Disruptions:


Pipeline Vulnerabilities: Iran's major gas export pipelines, such as the Tabriz-Ankara pipeline to Turkey, could be targeted. This pipeline carries 9-10 bcm/year of natural gas, a significant share of Iran’s total exports.


Domestic Gas Supply: The South Pars gas field, which powers much of Iran’s domestic energy needs, could also be disrupted, impacting 1 bcm/day of natural gas production, leading to power outages and industrial slowdowns.


Total Potential Disruption:


Oil Exports: Up to 100% of Iran's crude oil exports (1.6-1.7 million bpd) could be jeopardized.


Gas Exports: Around 17-20 bcm/year of natural gas exports, especially to Turkey and Iraq, could be halted.


Domestic Supply: Iran’s internal energy consumption could also suffer due to damage to key gas fields and refineries, causing widespread energy shortages.


This potential disruption would have significant consequences not only for Iran but for the global energy market, especially if conflict escalates to affect the Strait of Hormuz.


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Israel-Iran

China

US Fed

The trio to rock Commodity markets till the US elections in November. It can be interesting place for Professional Traders.

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China’s grand plan to revive its economy hinges on a fundamental miscalculation: the idea that sparking a bull market will magically boost domestic consumption.


Here's the problem: Chinese households are already under immense financial strain, squeezed out of the nation’s $20 trillion GDP pie like they’re not even invited to the table. And let’s not forget, domestic consumption as a share of GDP is directly tied to households' share of national income—which, by the way, is abysmally low for a country of this size. It’s hard to fuel an economy on spending when households are barely scraping by.

After years of disastrous investments in failed private lending schemes, bank collapses, and a property bubble that burst with all the subtlety of a detonated minefield, it's no surprise households are reluctant to open their wallets.


The government's corporate crackdowns only further eroded confidence, leaving households squeezed even more.

So, what's Beijing’s brilliant idea? Instead of fixing the root problem—actually transferring wealth from corporations and the government to the people—Chinese policymakers think they can kick-start consumption by inflating stock prices and hoping for a "wealth effect." Because apparently, who needs real money when you can just make people feel rich, right?


This stimulus package is woefully vague on any real wealth redistribution mechanisms. Instead, it’s all about optics—put the cart before the horse, inflate stock prices, and see if households magically start spending.


After all, nothing screams "financial stability" like an artificial bull market. What could go wrong?

Of course, the influx of foreign money is fueling this delusion for now. But when the cash tap inevitably dries up, both local and foreign investors will find themselves in a high-stakes game of musical chairs, where most are guaranteed to lose.

And, as usual, households, the very group that should have been at the center of economic policy, will be left holding the bag.

If this is China’s grand economic strategy, they might as well start printing "Pipe Dreams of Prosperity" on their next set of stimulus checks.


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In the 2019 Bimal Jalan Committee report on the RBI’s capital framework, it was highlighted that during the 2008 financial crisis, the RBI had more than adequate reserves to cover India’s external debt. The report stressed the importance of monitoring this ratio to ensure sufficient foreign exchange (FX) coverage for external liabilities.

As of March 2024, India’s external debt stands at approximately $664 billion. Assuming a 5-6% increase since then, the current debt could be close to $700 billion. With the RBI’s current FX reserves at $693 billion, these reserves now cover nearly 100% of the external debt.

Since 2019, we have been tracking this metric to gauge the RBI’s capacity for intervention. We recommend that you also monitor this ratio, as it serves as a key indicator of financial resilience. While other factors—both global and domestic—can influence the situation, maintaining a strong reserve-to-debt ratio is crucial for managing external risks.

In September, the Indian capital markets recorded their highest-ever monthly Foreign Portfolio Investment (FPI) inflows in 2024, with 60% directed toward equities and 40% into debt.

While the Indian Rupee has strengthened marginally against the US Dollar, it has weakened against several other currencies.

This divergence is largely due to the Reserve Bank of India (RBI) intervening to absorb the inflows, either directly or indirectly, through spot or forward market operations.


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We have long held a bearish outlook on China, recognizing that its economic model was unsustainable—similar to others that followed the Asian Growth Model. The key difference is that China took this approach to an extreme, stifling household income while fueling unprecedented levels of debt to build unproductive infrastructure, property, and factories. China’s GDP is largely driven by two key sectors: investment in property and infrastructure, which it can no longer absorb, and exports, which the world will increasingly resist.

While many were captivated by China's rise, it is now the Chinese citizens who are beginning to pay a heavy price. Future generations are likely to face even tougher times. The country now contends with the "3D" problem: Debt, Demographics, and Deflation.

If Japan was the "mother of deflation," China is rapidly becoming the "grandmother" of that trend. Watch carefully as this situation unfolds over the coming decade.

The irony of economics is that you can fool almost everyone for a long time, but not forever. Eventually, the payback comes, and for China, that moment has begun.

The next 7 to 10 years could be exceedingly painful for China and its people.

https://www.reuters.com/world/china/china-dairy-farms-swim-milk-fewer-babies-slow-economy-cut-demand-2024-09-20/

when household consumption is in such dire straits... and focus in on more industrial output via govt support and subsidy, the natural consequence is bigger trade surplus.

Trade surplus is just a difference of production minus consumption. No brainer.

Means more trade war...

Fed lowers rate by 50 bps and commits to lower by 25 each over Nov and Dec.

Gold and silver rallies. Dollars takes dip

https://x.com/michaelxpettis/status/1834153939349983296

The biggest problem with China's industrial might is that it is not born out of largely free market principles but proximity to Govt.

This creates a weak and very lop sided private sector, where industries produce things not necessarily where they are good at, but where they can arm twist policy makers to earn maximum favour.

This is dangerous for long term

A house of cards

https://think.ing.com/articles/chinas-data-dump-shows-that-time-is-running-out-to-achieve-this-years-growth-target/


For the past 10 years as a China bear, I have consistently argued that the only way to bridge the gap between consumption and production growth is either through increased investment—which the economy struggles to absorb due to its unprecedented levels of debt-fueled, unproductive investments—or by expanding the trade surplus, which the rest of the world is becoming increasingly unwilling to accommodate.

MCX Commodity Options volumes surge

Oil Crash: A Boon for India

( Anindya Banerjee)


The global oil market is experiencing a seismic shift, with Brent crude prices plunging to 22-month lows. This dramatic decline is a double-edged sword for nations around the world, but for net oil consumers like India, it's a much-needed windfall.


Lower oil prices directly translate into reduced inflation, effectively acting as a tax cut for Indian households. With more money in their pockets, consumers are likely to increase their spending, boosting demand for goods and services across various sectors.


This increased consumer activity will benefit businesses, particularly those that are not directly involved in the oil industry, as they will experience higher sales and improved operating margins.



The Indian government also stands to gain from this oil price slump. By strategically managing the pass-through of lower prices to consumers, the government can potentially increase its fiscal space, allowing for increased public spending or debt reduction.


The extent to which these funds are utilized will determine the immediate economic impact on households and businesses.
While the declining oil prices are generally positive for the Indian economy, their impact on the rupee is less predictable.


The lack of speculative activity and arbitrage in the Indian currency market has limited its responsiveness to global economic developments.


As a result, predicting the exact movement of the rupee based solely on oil prices is a challenging task.

The RBI appears to have achieved complete stability in the USDINR exchange rate, potentially making Rupee FX consultants obsolete 😂😂😂

https://think.ing.com/snaps/chinas-august-exports-defied-slowing-orders-data-to-hit-a-17-month-high/?utm_campaign=September-10_chinas-august-exports-defied-slowing-orders-data-to-hit-a-17-month-high&utm_medium=email&utm_source=emailing_snap&M_BT=1185820906

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