Bank Deposits – Forex Academy

Deposits or Forex and stock trading: the choice depends on the trader’s predilection for risk, the desire to devote time to learning, the strategy, and the nature of the trader. Investors who preferred deposits could earn up to 2% in 2019. Gold could generate about 12.5%, stock market indices 14-19%, cryptocurrencies more than 100%. With such a return, deposits may seem less attractive assets, but this is only at first glance. What are the advantages and disadvantages of investing in deposits, on what depends on the choice between Forex, exchange houses, and banks, read more in our summary.

Forex, Currency Exchange, or Bank?

Those who invested money in cryptocurrencies in 2017 could earn more than 1000%. Since January, the main stock indices of the United States, Europe, and Asia have already generated more than 13% to investors and by the end of the year, there are still months and a half. In currency pair fluctuations it was possible to earn more than 100% annually, while under interest rates in the United States 2-4%, in Europe 0.5-1%, in Asia 3-7%. The choice between bureaux de change (OTC) and banks in terms of return on investment at first glance is obvious: banks barely cover the level of inflation. But not everything is so clear.

Deposits Vs. Trading

First, in general, I remember the fundamental difference between Forex and the stock market. The exchange is an intermediary, a platform on which you can buy both a currency and securities in physical or electronic form. The investor concludes the contract on paper or electronically with a broker who has access to the stock exchange platform, deposits money into the account, and starts trading. Investing money in assets through the stock exchange, the investor becomes its true owner.

Forex is an over-the-counter market involving traders, brokers, liquidity providers, and market makers. Here the trader also enters into a contract with the broker (or agrees with the offer) and through the trading platform invests in various assets: currency pairs, metals, commodities assets, cryptocurrencies. There are two working schemes for the trader and broker:

B-Book. A scheme in which the positions of the trader are covered within the broker (internal clearing).

A-Book. A scheme in which the broker acts only as an intermediary, bringing the trader’s operations to the global OTC market.

The providers of quotes are the same in both Forex and stock trading. But in Forex traders invest money in CFD (price difference contract), earning in the difference of the value of an asset. This is the main difference between Forex and the stock market. Both Forex and the stock exchange allow to win in the fluctuations of the exchange rates of the currencies, securities, and assets of raw materials. So, what will a potential investor choose: Forex and stock exchange trading or deposits?

Compare the performance of some 2017 instruments:

-Stock Indices. S&P 500 index grew by 14.39%, NASDAQ 19.6%, Nikkei 14.3%.

-Gold. In metal, it was possible to earn 12.5% per year. However, in March, May, and July the chart showed deep losses.

-Oil. “Black gold” rose by just 11%, but analysts are inclined that the controllers for solid growth are not yet given.

-Cryptocurrencies. In individual cryptocurrencies in 2017 investors could earn between 300-1000 and more percentage. The truth and volatility of cryptocurrency compared to other assets is enormous, in a day investors could lose up to 30% of their deposit. In addition, there are frequent cases of cyberattacks on electronic purses and problems of cryptocurrency exchange houses.

Deposits in national currency. According to deposits.org, the maximum rates of different countries in the world were: Russia 7.5%, India 7.45%, USA 4%, China 3.75%, Canada 2.75%, Italy 2%, Japan, and Germany 0.1%.

Compared to the stock market, deposits may appear more promising due to the relatively lower risk. But don’t forget that in deposits the investor earns a fixed sum, and in stock exchange or Forex, the investor can also make profits in short positions (in lowering the price of an asset).

Advantages of investing in deposits compared to the stock and OTC markets:

Reliability: Banks are closely controlled by a central bank because the probability of losing money is almost completely absent. In the extreme case, there are compensatory funds that will return all or part of the deposit. In Forex there are cases when it is necessary to resort to chargeback, and the so-called regulators do not take any action and report the bankruptcy of the broker after the fact.

No risk: In trading, the risk lies entirely with the investor. Although stock indices show relatively stable growth, for example in 2008 they showed weaknesses in stock markets. The example of January 2015 is also indicated when the Bank of Switzerland canceled the ceiling of the currency and the franc rose compared to the dollar by more than 30%. In one night, many traders’ deposits were set to zero.

Availability: The requirements of banks for a minimum deposit are very loyal, investments are available to all. To trade on US exchanges, you need several thousand US dollars, minimum deposits of European Forex brokers, from 100 USD, but even with such amount trading on Forex professionally is difficult due to the volatility of assets.

Facility: To make the deposit is sufficient 30 minutes, after which the investor only has to wait the end of its term. For successful trading on the stock exchange or Forex, you need to constantly follow the news, be able to apply technical analysis, etc., that is, devote a lot of time to learning and trading.

Diversification: Some banks offer gold deposits. The investor gains not only in interest but also in the price growth of the metal itself.

The disadvantages of bank deposits are twofold:

Low interest rates and the trend towards their subsequent decline. In the United States and Europe, the view is that money should work and not be a burden on bank accounts. The low-rate policy encourages investors to invest money in the stock market or business. In some countries, bank deposit rates do not even cover inflation.

The probability of entering the field of vision of the tax services. For the investor it is almost impossible to know about the existence of broker accounts, the bank accounts can be monitored. This situation could become a major obstacle for those who do not want to make the availability of money public.

Conclusion

Bank deposits are a type of investment for those who do not have time to understand the peculiarities of stock trading or currency pairs. For conservative investors, deposits are preferable, even if their return is 3-4 times lower than the return on stock or gold indices, but risks are almost excluded. For the most active traders and who are also available to dedicate time to learning and trading, earning on asset price fluctuations in both directions, it is better Forex or stock exchange. And, of course, we must not forget the diversification of risks: it is a good thing that at least 10% of the investment portfolio is a deposit.

Introduction to Cash Reserve Ratio

The cash reserve ratio (CRR), also called the reserve ratio, is the minimum amount of deposits of the clients that are to be held by the commercial banks as cash or deposits with the central bank of the country. It is expressed in terms of a percentage. However, the rest can be used for investment and lending purposes. This is primarily done for two reasons; one, to maintain liquidity in the banks, and two, to not let the banks go bankrupt when they need to pay their depositors when demanded.

The amount deposited by the commercial bank into the central bank is unlike depositing into debt and equity funds. That is, the central banks will not pay any interest to the commercial banks for it.

How is the Cash Reserve Ratio Calculated?

The Reserve Requirement times the Bank Deposits yields the Cash Reserve Ratio.

Cash Reserve Ratio = Reserve Requirement x Bank Deposits

Where,

Reserve Requirement is a percentage value determined the central banks by considering factors such as supply and demand, inflation rate, spending rate, trade deficits, etc.

Bank Deposits is the Net Demand and Time Liabilities (NDTL), which is the deposits made by the customers into commercial banks.

To understand this clearly, let’s take an example. Let’s say a depositor deposits the US $5000 into his bank account. This amount is referred to as Net demand and Time Liability (Bank Deposits). Also, consider the reserve ratio (reserve requirement) to be 6%. Now, the bank will have to hold 6% of the depositor’s amount (the US $5000) as reserves; that is, US $300 is given to the central bank as cash reserves. The leftover amount (US $4700) can be used for investment as well as for lending loans. If we were to assume that the lost out of $4700, then the bank will have will still $300 safe with the central bank.

The Measure and Impacts of Cash Reserve Ratio

The Cash Reserve Ratio is an important tool in the monetary policy. As its primary use, the reserve ratio is used to control the money supply of an economy. It also regulates inflation rates and keeps in the liquidity flowing in the markets.

The Reserve Ratio typically measures the change in the interest rates and inflation in an economy. Now, let’s vary the CRR and check on the changes in the inflation rates, interest rates, and the money supply.

Case 1: Decrease in the Cash Reserve Ratio

The CRR is the part of deposits of the customers that are held by the central banks. Now, if there is a decrease in the CRR, the amount held by the central banks is lesser, which implies that the commercial banks will have more amount in their hands. In such scenarios, the banks typically reduce the interest rates on loans they provide. Also, the decrease in the reserve ratio increases the money supply in an economy, and this, in turn, increases the inflation rate.

Case 2: Increase in the Cash Reserve Ratio

The implication when the CRR increases is the opposite of the above case. An increase in the CRR means that the amount held by the central banks is higher, which reduces the amount held by the commercial banks. Now since they have less money in hand, they compensate it by increasing the interest rates on the loans they provide. The money supply, in this case, decrease, which drops the inflation rates as well.

Impact of Reserve Ratio on the Currency

The Reserve Ratio does have an impact on the currency, but indirectly. It does help in determining the demand for the currency. In the previous section, we saw that an increase or decrease in CRR affects inflation and interest rates. As a matter of fact, an increase in the interest rate increases the demand for the currency, given all other factors are kept in favor of the currency. Also, the increase in the interest rates attracts more foreign investors, which creates more demand for the currency. On the other hand, the decline in the interest rates, in general, brings down the demand for that currency. Foreign investors, too, don’t have their eyes here anymore.

Note that, Reserve Ratio or the interest rate for that matter alone does not determine the demand for that currency. There are several other considerations that must be made along with this—for instance, the relationship between interest rates and inflation. Higher interest rates with a decent and feeble increase in inflation can prove a positive effect on the currency.

Cash Reserve Ratio: The Stats

There are portals over the internet where one can find the historical data as well as the forecast data. One can also analyze them by the different types of graphical representations they provide.

India | Brazil | China | Russia

How often is the data released?

The frequency of release of the reports is the same for most of the countries. In countries such as China, Malaysia, Russia, Brazil, etc. the data released every month, while it is released daily in India.

Effect of Cash Reserve Ratio on the Price Charts

Now that we’ve fairly got an idea about the reserve ratio, let’s see how the prices are affected after these reports are out. Precisely, we will see how the volatility of the market has changed as well as the effect in volume.

For our example, we will be taking the Indian Rupee into account to analyze the charts. The frequency of release of data of Reserve Ratio in India is daily. The reports are published by the Reserve Bank of India.

Note that the Cash Reserve Raito data has a feeble impact on the currencies. Since the CRR is indirectly impacted on the currency, the level of impact is pretty low compared to other fundamental indicators such as interest rates, GDP, inflation, etc.

Consider the below announcement made by the Reserve Bank of India. We can that the announcement was made on February 6th at 6:15 AM GMT, and the value reported was 4%, which was the same as the previous month as well as forecasted value.

Now, since the actual values are the same as the previous and the forecasted value, we cannot expect any high volatility or a shoot up in volume as such. However, let’s analyze a few charts and see its impact.

USD/INR | Before the Announcement – (February 6, 2020)

Below is a chart of USD/INR on the 15min timeframe just before the news was released.

USD/INR | After the Announcement – (February 6, 2020)

Consider the chart of USD/INR on the 15min timeframe after the release of the news. The news candle is represented as well. We can see that the news favored the US dollar but not the Indian Rupee. However, the movement wasn’t as gigantic as such. The volatility was above the average, and the volume was quite low. From this, we can conclude that the reports didn’t have any massive impact on the USD/INR.

EUR/INR | Before the Announcement – (February 6, 2020)

EUR/INR | After the Announcement – (February 6, 2020)

Below is the chart of EUR/INR in the 15min timeframe. The news candle has been marked in the box, as shown. We can clearly infer that the news candle barely made a drastic move in the market. Nonetheless, the volatility was above the average mark. So, news traders cannot expect any high volatility during the release of the news. And traders who stay away from the markets during the news can now trade fearlessly as the news doesn’t have a major impact on the currency.

GBP/INR | Before the Announcement – (February 6, 2020)

GBP/INR | After the Announcement – (February 6, 2020)

Below is the chart GBP/INR on the 15min timeframe after the release of the news. The news candle is illustrated in the box, as shown. Similar to the USD/INR and the EUR/INR, this pair, too, has not shown any rise in the volatility as such. In fact, the volatility of this pair is at the average line. So, with this, we can conclude that the Cash Reserve Ratio barely has an impact on the currency.

Conclusion

The Cash Reserve Ratio is the amount of money that is deposited by the commercial banks into the central banks. This is primarily done to maintain the volatility in the banks. The reserve ratio is an important monetary policy tool. Moreover, it determines and maintains the interest rates, inflation, as well as the money supply of an economy. A rise or fall in the CRR brings a change in the previously mentioned indicators. Hence, this is a vital and very helpful fundamental indicator for both economists and investors. But comparatively, it is less helpful for the day traders, as the impact is feeble.