Discounts were everywhere. Everybody was bleeding money, but nobody cared. “Capture market share” was the mantra. The period in question here is roughly 2015 to 2020. Ride hailing apps like Uber and Ola had become mainstream. To tempt passengers, Uber gave discounts after discounts. To keep cab drivers happy, they gave enormous incentives, based on the number of rides they completed. Their goal was short and simple: capture the cab market. They did not care about losing money. They wanted to get their customers habituated to taking cabs using their app. Uber’s biggest competitor in India, Ola, was doing the same. They too were bleeding money to gain customers and drivers. Losses were okay. Not just cabs, this phenomenon was visible in other industries too. Besides cabs, many were discovering food delivery. Swiggy and Zomato were fighting against each other using practically the same strategy. Discounts and incentives. In the hospitality industry, Oyo was busy tying up with hotels. For a few years, they offered rooms at discounted rates. In the e-commerce space, Flipkart was fighting Amazon to gain the loyalty of Indian customers. Items were available at rates unheard of. For many products, people moved to buying online only. It was impossible for the brick-and-mortar shops to compete. Some curious minds wondered how was it even possible? How could companies keep losing money? That’s not how businesses works. It did not take much searching. The answer was easy. They were willing to lose money to gain customers. And where was this money coming from? The money came from investors called venture capitalists. They invest in start-ups. But where do they get money from? This is the part that’s less known. We will get to that part later. US Fed Rates Last Friday, a man named Jerome Powell made an announcement. He is the chairman of the US Federal Reserve. His announcement was that he was cutting interest rates by 0.5%. Investors all over the world watch announcements by the US Fed closely. It is critical. That interest rate impacts the world economy. How? Let’s break it down into parts. Interest Rates The US Fed is the central bank of the US. Similar to how we have RBI in India. They decide the interest rates. Banks borrow money from the US Fed. This money is then used by banks to give out loans. So, if the US Fed increases interest rates, the banks also increase their interest rates. Which means, anyone taking loans from the banks will have to pay a higher interest rate. It also means that people who keep their money as deposit (FD), get higher interest rates. This is an important tool the central banks have – they can influence the country’s economy using interest rates. How? Loans Loans – many people takes loans for all sorts of things. Think about home loans. If more people take home loans, more people will buy new homes. When new homes are made, there are many people working on it. Contractors, electricians, plumbers, carpenters, decorators, and the list goes on. That many people are earning an income because one home is being built. Now multiply that. Car loans, business loans, education loans. So on. All these loans allow more people to spend more money and buy more things. That creates more jobs. That’s one major way the interest rates control the economy. Lower interest rates means more people taking loans. More loans mean more spending. More spending means more economic growth. Deposits Now think about deposits (FD). They are extremely low risk. So people like to invet in them. But there’s a downside. Their returns are usually low. Whenever the interest rates are increased, FD rates also go up. More people invest in FDs. When interest rates are lowered, people are unhappy with the returns. They are willing to take more risk and invest somewhere else – to be able to earn higher returns. Institutional Investors Most of us are used to thinking about loans and FDs in terms of people. Individual borrowers and investors like normal people. There are large firms that also do exactly the same things. They borrow money. They store money. Large companies borrow money to grow further. And if they have excess money, they store it in different kinds of investments. In fact, there are institutions that invest. Think of hedge funds, mutual funds, pension funds, banks, etc. They have billions of dollars in investment. And like any investor, they want higher returns while taking the least possible risk. Interest Rates: Lowered Let’s take a case where the US Fed has lowered interest rates. Suddenly, loans are cheaper. But FD rates are also lower. You have to achieve your target return. What will you do? You might move some money out of the FD. The interest is too low there. You might invest it in riskier assets – like stocks. At the same time, everyone is borrowing money – because it is cheaper. So the economy is growing faster. Interest Rates: Lowered Let’s take a case where the US Fed has increased interest rates. Suddenly, loans are more expensive. But FD rates are higher. What will you do? You are able to earn more money while taking less risk. And therefore, you might take out some money from stocks and move it into FD. Flow of Money This is essentially what happens with all kinds of investors – on a gigantic scale. Whenever the interest rates are increased, they take out money from risky assets and invest them in FDs. Whenever interest rates are lowered, large institutional investors take out billions of dollars and invest them in riskier options like stocks. Riskier options – that’s what gives higher returns. But even that has many types. Invest in big US companies stocks. High risk. But potentially higher returns. Invest in small US companies stocks. Higher risk. But potentially, even higher returns. Invest in stocks of countries that are developing fast. Even higher risk. But potential to get even higher returns. Invest in start-ups – much higher risk. But the chance of getting even higher returns. Us-based large institutional investors allocate some part of their investment to all assets. It might look like this: FD: 20% of all their money
US stocks: 50% of all their money
Emerging markets stocks: 20% of all their money
Start ups: 10% of all their money This is just an example. Always Low? Quick question: why not just keep interest rates lower all the time? Why increase interest rates at all? Isn’t that good for everybody? More money borrowed, more economic growth. Yes, but then, when there’s too much economic activity, inflation shoots up. Everything starts becoming expensive. Nobody likes that. So, interest rates are increased to temporarily slow the economy – and to bring inflation under control. Putting It All Together And that’s why everyone watches the US Fed rates. The US is the world’s biggest economy. They just have a ton more money than any other country. And so, they also have investors with lots of money. Lots of money that they can invest in companies all over the world. Whenever the US Fed lowers rates, money starts flowing into emerging markets or developing countries. India is considered one such emerging market. This shows itself in the form of more money coming to stock markets. Next time you read headlines like ‘FII invest Rs XYZ in Indian stock markets’, you can assume a lot of it is coming from institutional investors in the USA. This also means that more money is allocated to ‘extremely risky’ options like investing in start-ups. They mostly invest in venture capital firms that in turn invest money in start-ups. In the 2015-2020 period, US Fed had kept interest rates slightly above 0% – incredibly low. That was a time when institutional investors were desperate to getter higher returns. And thus, a ton of money flowed into emerging markets and start-ups. That’s why Indian start-ups were extremely well funded. So well funded, that long periods of loss was acceptable. Uber and Ola give discounts and incentives. Oyo gives out rooms for rock bottom prices. So on. The above is an extremely simplified explanation of how US Fed interest rates affect all sorts of economies. The US Fed lowering interest rates does not always mean Indian stocks markets will go up. Nor does it always mean we Indians will get heavy discounts on cabs and online shopping. Economies are complex. There are many factors acting at any time. US interest rates are certainly a big factor. But do remember: it is not the only factor.
🔢 Quick Takes +TRAI’s latest data on telecom subscribers showed a shift in trend. BSNL added 29.47 lakh subscribers in July (first addition in around 2 years). Jio lost 7.58 lakh subscribers, Airtel lost 16.94 lakh subscribers, Vodafone-Idea (Vi) lost 14.14 lakh subscribers. Private players had recently increased their charges. +India has extended emergency financial support to the Maldives. The Indian government has subscribed to its $50 million treasury bill. +Start-up 'Physics Wallah' raised $210 million. Its valuation now stands at $2.8 billion. +India's 3rd domestic-built 700 MWe nuclear power reactor is expected to start commercial electricity generation soon: NPCIL. +The US Fed reduced its interest rate to 4.75%—5% (from 5.25%—5.5%). The UK’s central bank kept its interest rate unchanged at 5%.+Western Carriers IPO was subscribed 30.57 times. Retail subscription: 25.95 times. +Northern Arc IPO was subscribed 110.91 times. Retail subscription: 31.08 times. +Arkade Developers IPO was subscribed 106.83 times. Retail subscription: 51.39 times. +The government has approved the development of India’s first space station ‘Bharatiya Antariksh Station (BAS-1)’. It aims to develop its first model by 2028. In addition, it also approved the Venus Orbiter Mission, and Chandrayaan-4 Mission.+The government has reduced the windfall tax on crude oil to Rs 0 from the previous rate of Rs 1,875 per tonne. +India’s trade deficit (net imports) increased by 22.50% year-on-year to a 10-month high of $29.65 billion in Aug. Exports fell 9.3% to $34.71 billion, while imports rose 3.3% to $64.36 billion: Commerce Ministry.+India’s annual wholesale price inflation was 1.31% in Aug (down from 2.04% in July). Fuel & power inflation was negative in Aug at -0.67%. Manufacturing inflation was 1.22% and food inflation was 3.26%: DPIIT. +Air India will invest $400 million to upgrade 67 of its old airplanes. It includes 27 narrow-body Airbus planes and 40 wide-body Boeing planes. The company has begun the process with one of its Airbus A320 Neo planes. +P N Gadgil Jewellery IPO got listed at a 72.92% premium (compared to its IPO price). +The PM launched the first Vande Metro rail between Ahmedabad and Bhuj. The metro train has been renamed ‘Namo Bharat Rapid Rail’ and will cover 360 km in 5 hrs 45 mins. +Bajaj Housing Finance IPO got listed at a 114.29% premium (compared to its IPO price).
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📊 Markets this week
| MON | TUE | WED | THU | FRI | | 25384 | 25419 | 25378 | 25416 | 25791 | ▲ 0.11%
| ▲ 0.14%
| ▼ 0.16%
| ▲ 0.15%
| ▲ 1.48%
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How markets compare to the previous week's end: | SENSEX 🇮🇳 | 84,544.31 | ▲ 1.99%
| | NIFTY 🇮🇳 | 25,790.95 | ▲ 1.71%
| | GOLD 🥇 | Rs 73,930 | ▲ 0.91%
| | SILVER 🥈 | Rs 89,860 | ▲ 2.57%
| | DOW JONES 🇺🇸 | 42,063.36 | ▲ 1.62%
| | NASDAQ 🇺🇸 | 17,948.32 | ▲ 1.49%
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What are Sensex and Nifty?
፧ Quick Poll Which SIM service do you like?
-Airtel
-Jio
-Vodafone-Idea (Vi)
-BSNL ANSWER HERE
6-Day-Course
Theme: crude oil’s importance We’ve reached the end of this week’s course that started on Monday. Here’s a test you should take. Get pen and paper! Question 1:
India imports more than ____ % of its crude oil demand.
-50
-80
-75 Question 2:
Apart from petrol and diesel, crude oil is also used to make items like hardware, cosmetics, and fibers like nylon, polyester, etc.
-True
-False
Question 3:
Countries that have high crude oil reserves like US, Russia, etc, produce __________ amount of crude oil to control market prices.
-Maximum
-Minimum
-Limited
Question 4:
Among Brent, WTI, and Dubai benchmarks of crude oil, which is the most commonly used benchmark?
-Brent
-WTI
-Dubai Question 5:
Countries prepare for emergencies like crude oil shortages due to international politics, often by storing crude oil as a precaution.
-True
-False
Answers:
Q1: 80
Q2: True
Q3: Limited
Q4: Brent
Q5: True
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