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Money Supply and Equity markets

We often here the word “Money Supply” while referring to our economy condition. So today i will try to explain in simple term, what exactly is Money Supply.

Money supply can be defined as amount of money or its equivalent in circulation at any particular time in an economy. Money includes:

  • Coins and Currency
  • Foreign Exchange Reserves with RBI
  • Time Deposits and Demand Deposits
  • Post office deposits
  • Or any such instruments

Supply measure of money in the economy could help monetary policy maker to take a interest rate decision to control inflation. As money supply in the economy increases, so will the purchasing power in hands of public. As public have more and more liquidity to spend, their need would rise which results in increasing demand of all goods and services. This causes inflation. Inflation to some extent is necessary for growth but hyper-inflation is dangerous for the country’s financial system. So with money supply in act with inflation, RBI balances economy by controlling the driving tool Interest rate.

Now going further there are mainly 5 components considered while calculating money circulation.

M0  also known as Reserve Money includes: Currency in circulation + Bankers’ deposits with the RBI + Other’ deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBI’s claims on banks + RBI’s net foreign assets + Government’s currency liabilities to the public – RBI’s net non-monetary liabilities.

M1: Currency with the public + Deposit money of the public in banks

M2: M1 + Savings deposits with Post office savings banks.

M3: M1+ Time deposits with the banking system = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Government’s currency liabilities to the public – Net non-monetary liabilities of the banking sector (Other than Time Deposits).

M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates).

To Sum up M0 is the money which is owned by RBI and its known as systems reserve money. while other all components are owned by public and are in circulation or with banks as deposits or with post office. So higher the money supply with public higher would be the inflation.

Now lets take some example with the graph

in the graph Yellow line is M3 which means its the M1 (Currency with the public) +Banks foreign reserve and lending to commercial sectors and the Blue line is our Nifty index. While Pink line is our Repo rate. Time frame for charts is Monthly


  • 2008-2009: We experienced Lehman crisis because of which markets , which squeezed money from the circulation and foreign reserves which is a part of M3 decreased as FII sold off and took out dollars from the banking sector. So we saw all three leading downside as rate cut also didnt spur buying as FII were not confident yet.
  • 2009 bottom: We saw interest rates bottoming out, which led some money supply in the market and it spur equity market from the low of 2260 on Nifty.
  • Since 2010-2014: We have seen rising repo rates which has squeezed some money from the circulation but still markets performed as FII were buying during the time of post crisis. Banking and financial sector already in having huge NPA’s post 2008 crisis, it has squeezed its lending to commercial sector which is seen clearly with money supply line decreasing YoY on the charts since 2008 
  • 2014-2015 March As Money supply continued to decrease but markets pinched a new high, it was clear that FII money was driving market as there was no money circulation or supply in the domestic market as represented by yellow line which is M3
  • 2015 April-to present: As we knew that there wasnnt domestic buying in the markets as  liquidity was squeezing, our markets were purely dominated by global factors. Since March 2015, crude supply rising spurred crisis fear in the global markets which made FII exit our markets which was the result of the correction in last one year.

But now……..

I Expect that next rally would be surely dominated by the domestic players and that would be strong rally. Points for my support are:

  • We Have seen many banking companies cleaning up balance sheet as per new guidelines and as we have rate cuts now, they will surely start lending to good commercial sectors which have shown confidence.
  • As the money supply to commercial sector rises, it will rise money supply in manufacturing which improve profits which will eventually results in rally on the markets

But ofcourse it will take some time and we cant predict the low exactly as the divergence between domestic money supply and Nifty is the most widened in last 20 decades and it should narrow. I expect markets to stay volatile for next few months. Dont be saddened or fearful, if you are sitting on cash or can arrange some liquidity start shopping from here on..its honeymoon period for you guys…

Hope you guys find this post useful… leave a comment for any suggestion.



Some myths of Inter-market Analysis and Technical Analysis

It is believed that Technical Analysis can only predict equity markets for short term only but this is just a myth. Following are few points to correct your myth on this school of studies:

  • Any Asset Class:  Technical tools can be applied to any asset’s price forecasting which is not possible for Fundamental. For example, if you have price history of say, Vegetables, then we just need to work plot its chart and you can forecast future prices. So today, if you are sitting in India but have chart plotting of US markets, then you can surely predict them as good as some analyst in US.
  • Any time Frame: Technical analysis can be applied on any time frame of charts ranging from tick charts to even yearly charts while Fundamental can only be applied two longer time frame as Fundamentals doesnt change much in Shorter time frame.
  • Economic Forecasting: Technical analyst could predict some economic change earlier than fundamentals such as say rising commodity prices would suggest inflating economy which means economy would grow and interest rates would go down which is vice versa when commodity prices are expected to go down.

So now clarify with simple example myth of Inter-market analysis and technical analysis through a common example…Check out the attached Graph which is the monthly chart for comparison between three asset class of Indian economy WTI Crude (Blue line), Equity Nifty index (Yellow line) and IIP (Pink line). 

Now let me clarify myths :

  • It is believed that lower crude prices are good for economy and markets: As you all could notice that i have circled tops and lows of each index in comparison and we could conclude easily that on broader time frame, Equity, crude and Economy moves in the same direction. Rising crude prices have seen rising Equity markets and Rising IIP while vice versa is also visible.
  •  Most importantly it is believed that Technical analysis can only be applied to smaller time frames and it can only simply predict prices. So now let me tell you that this time frame is monthly time frame and if you could pick up the low or high on monthly chart than you can surely take decision for your portfolio. Interestingly, you can notice that Nifty has signaled reversals on top and bottom before crude or IIP has shown.  So this is surely saying that Technical can Forecast economy prior to Fundamentals through study of various asset class charts. All the three cases circled, you can notice that Nifty (yellow line) has topped and bottomed before Crude or IIP has done

So hope i am able to clarify some myths on Technical analysis and inter-market relations. Its purely just my view and you may differ with my idea.



Technical Analysis and Fundamental Analysis

Another step towards basics of Technical analysis is to understand how it is related to Fundamental Analysis and what does market prices represent. So lets look down at few points.

  • Technical Analysis considers only past price action to forecast future prices price, while Fundamental Analysis takes into consideration Economic factors of demand and supply that causes price to move higher or lower.
  • Fundamental Analysis represents the cause of the current market price of the stock while Technical Analysis studies the effect of such cause.
  • Market prices leads to known Fundamentals which means on crucial market reversal Technical Analysis leads the change as its based on market prices.
  • Market prices have already discounted known Fundamentals which means it moves in anticipation of unknown fundamentals by which Technical take a call through price patterns.

So this was to explain you guys that how are both school of thoughts related and both are important for research of and stock as it compliments one another always. In next post we shall continue further with the Technical Analysis tenant.

Just kissed activation level for the target 6600

Nifty expiry has been the worst this year as it has closed below 7000 level which was last resort psychological level for traders. As i mentioned yesterday that a trade below 6960 would activate 6609, today nifty made low exactly at  6961 which can be termed as ‘kissing support”for the downside breakout.  As you all could notice in the charts, Nifty has taken support exactly retrenchment level which completes a “Regular flat”  of second wave of the recently started rally from 6869. But if at all we close below 6960 tomorrow, then we have to reverse the chart and consider this as Motive wave for the downside. Currently, it seems we should reverse looking at the support from European markets, but you never know what they will end at night. So Wait and watch for tomorrow closing!!

Lets Start with Technical Analysis

A common definition of Technical Analysis as said by John Murphy: “It is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends”.

Technical analysis is basically study of historical prices where underlying asset has traded in past. Study gives more emphasis on the closing price after which Open, High and low are the considered for analysis. As a Support to price for analysis even  Volume and Open interest (For derivative markets) is considered to arrive at a conclusion on our technical research.

Three Rationales which analyst considers while  he carries his technical research are:

  • Market price, or stock price, discounts each and every event whether fundamental, political, psychological, political or any otherwise. It refers that prices are arrived with the difference in Demand and Supply of any factor mentioned Above.
  • Price moves in trend is the second rational which a analyst believes while looking at prices charts. Trend can be either Up, Down or Sideways but stock has to be in either of the trend.
  • History repeats itself:  Though not in the exact sense or prices but it should be in similar patterns or similar type of trend characteristics.

So to start off with what is technical analysis this could be the thumb post for you all. If you have any queries feel free to reply this post and you shall get reply asap. In next post we will try to differentiate between Fundamental Analysis and Technical Analysis.


Gold to glitter which could be a bit bitter

Gold had been the most under performing invest asset since last 4 years since it pinched to new high but in recent past it has outperformed all the equity markets with some quick short term gains. Today i finally managed to get some time to analyse asset from the longer term perspective and just caught hold of a channel on Monthly chart of USD Gold and we could notice that its perfectly trading in that channel since late 2013.  Though the channel is downward sloping which means overall outlook is bearish and this is just a short covering, but look at the indicators. Indicators are highly oversold that too on monthly chart, and are their moving averages are emerging over the indicator. This gives me a bit bitter moment being a equity guy. It is usually believed that Equity and Gold are inversely related because in rest of the world, except india, its just considered as an alternative investment idea!  So if the gold demand is increasing, it simple states that equity money is following to Gold worldwide. But still a long term reversal confirmation is AWAITED. As you all could notice in the chart, gold is approaching resistance on the channel which is at $1258 (100 Months moving average) while another strong resistance is just above it which is at $1300 (Fibonacci resistance and channel resistance). So for confirmed breakout on Gold and a confirmed sell-off in equity, range of $1258-1300 is crucial breakout. Only time has the say now…so lets wait and watch.

Fear of Fall revisits chart

Nifty has finally given a breakout of a wedge on the downside and have seen a close below the same which has meant a bearish mood on the markets for coming days. Though yet we need confirmation for the pattern breakout with 2 more close, we can stay cautious for the long positions. Today after the close, i have tried to mark Nifty into the red channel, suggesting that we could see 6690 levels if we didnt recovered in next two days and closed above 7200. Technically, on weekly chart we need to trade below 6960 which is previous  weeks low to get confirm bears party. So tomorrow being expiry, we can expect a volatile session and Friday can be a crucial close again. So may be we could still avoid trades for next two days and wait for a confirmation weekly close.

So crucial levels for on Nifty remains 6960: Previous weeks close, 6869: 200Weeks average and for the upside anything above 7180 is safe. So just wait and watch!!

My view on Railway Budget

February’s last two weeks each year, newspaper are flooded with the word “Railway Budget” and its always difficult to understand for a common man what exactly it is. So let me explain you guys in some simple words what is it and what shall we expect. To define Railway Budget, ” It is the estimation of Income and expense of Railway department for next financial year”. For the Railway major revenue comes from Sale of passenger tickets and second most source of income is Goods carriage or say freight. On the expense side they have a long list from maintaining coaches, tracks etc to staff expenses.

On the budget day we all wait for new trains to be announced from our home town while companies related to rail industry waits for new tenders and staff wait for rise in salary. But leaving all this expectations aside, i feel this year we also should lookout for some other announcements from the minister which are though minor but will surely improve our travelling experience with railway.

These are some of the points which i personally feel should be focused:

  • Internet on Travel:  Today when we are talking about Digital India and trying to connect more and more Indians through internet, we should think of seamless connectivity with less disconnection. At present, we are not able to get seamless connectivity on 2g/3g on mobile while travelling on trains but if wi-fi connection is available , though at some minimum cost it should surely make our travel more easy.
  • Entertainment on the Go: Entertainment could be by many ways, but on the simpler note we should have a small screen display on each compartment which may display a list of movie just as we have on international flights or may be a common movie should broadcast  across one bogie. This has a minimal cost but requires a lot post installation maintenance.
  • Quality Food: A major step is required for quality food to be served on the train. We have seen some unhygienic food served so i expect some private contract for the catering. Even the tea quality hasnt been maintained.
  • Verified Staff: It has been noticed many times that passenger finds it hard to verify the staff that whether he is a railway appointed or a random guy in the cloths alike railway staff. So may  be some system that could make it easy for passengers to identify railway staff on the go
  • Cleanliness: Of-course to some extent we the passengers are to be blamed  for the dirty coaches but may be we can have a on demand staff to clean our compartment while the travel with some charges, because sometimes in long journey its difficult to travel with dirt around but we dont mind paying few bugs and get it clean. By this way may be we can improve overall conditions.
  • Instant Quota: Though we have a Tatkal Quota, but we should also have some instant quota wherein a last minute travel can be arranged for which booking opens only 2 hours before with some high charges.

Though this all our points which i feel that should be prioritize for the betterment of our travel rather than expecting new travel options. There may be many other such suggestions, keep it coming the comments below.!! Lets discuss and get some idea what other things should helps our railway to improve. Until we dont consider as OUR we can keep it better. Government takes the initiative but we should follow it with true heart.


Disclaimer: All views mentioned are my personal and they are not intended for any one in person.



Unexpected Speed Breaker

Where it was expected that we shall just cross over the bridge of Expiry safely and without volatility, all of a sudden we got a big speed breaker where almost everyone touched its SL. Though yet road hasnt changed for the Nifty’s move, but it has surely gave a sudden jerk which has given a small injury to profits. As you all could notice in the attached graph, we are back on the support line which has been tested for the third time in recent past. A triangle pattern which was expected to be intact, has proved to be false breakout and after redrawing the patter, a Wedge could be marked out which could be brutal on breakout on either side. So again its time be cautious. And tomorrow we could have another volatile session. So after triggering SL of 7180 on my yesterday’s call, i recommend to wait till tomorrows close!!!  Safe traders stay away from the road.

Not a time to rest, traders!

Since many months traders havent made money on either side because volatility has been unpredictable. But since last few sessions, Nifty seems to be giving some signs of clear trend in near future. As i had mentioned before, 6869 support had been crucial as it was on 200 week average and also a support level based on Elliot wave. Now a bounce back is sure but whether this a relief rally or start of new rally, that we shall get a confirmation only when we close above 7500. But till then, for time being we have got a small confirmation for a rally on daily charts.  As you all could notice on the attached chart, blue line outlines a ascending triangle and it has given a breakout at 7204 with a small target of 7460. But for this weekly target we can assume it to be at 7363 where we have untouched gap and also a small resistance line. So for time being stay long on Nifty with tgts of 7363/7460 and stop loss of 7180.