SHORT SELLING

Short selling is a process where investor sells shares without owning it at the time of selling. Normally , an investor buys shares at a certain price to sell it later at a higher price. Coversely, in short sell its assumed by the investor that prices will decline in future. After shortselling , investor waits for the prices to correct and covers the short position by buying back the shares already sold. If the buyback price of the shares is lower then its profit else loss.

Short seller has the option to square off ( by buying the same number of shares as sold) on the same day or carry forward his short position in case the share price rises immediately after the short sell but the investor is convinced that the price will decline over the next few days. In such a situation he'll have to borrow the share from an entity or investor who's willing to lend for a charge. Later on he'll have to buyback shares from the market and return it to lender.

In India the intra day short sell had been the prerogative of individuals only. Institutions were not allowed to short sell because they have huge stakes in companies and hence can influence its share price to their advantage.

Short sell creates more liquidity in the market. Illiquid stocks which would otherwise would have been lying idle finds its way to the market and contibutes to liquidity.

INCREASE IN CRR

CRR stands for cash reserve ratio. Its a specific amount of deposit that banks have to maintain with Reserve Bank of India. An increase in CRR means banks will have to keep more proportion of lending in the form of deposit which is an opportunity loss for them and thereby decrease in earnings.Banks on their part will have to pay more to depositors to attract them to keep their funds with banks.It will push up the cost of funds for banks and to meet this increased cost and margin pressure ,the banks will have to raise the lending rate.

An increased lending rate will mean an increased cost of capital for the corporate sector.This will lead to contraction in activities and a lower demand in various sectors. For instance: the main reason for skyrocketing real estate prices is availability of easy and cheap funds from banks.But if the bank faces fund crunch , they will first cut back on loans to risky sector like real estate.It will dampen demand to a certain extent.

Some banks on the other hand might face the risk of defaulting in compliance to higher CRR rate. An increased lending rate will hurt the borrowers and hence an accumulation of non permorming loans.

To combat the situation the banks might enter into bilateral deals and ask corporate borrowers to seek refinance from other banks. Another option is to raise funds through External Commercial Borrowings (ECB).

RISING RUPEE

Rupee has been touching its peak against dollar since the last few months. Boosted by high interest rate and caused by the tightening of the money market, its posing a threat to the very existence of small exporters. Some of the exporters have started postponing their receivables and are choosing to park funds in the Exchange Earners Foreign Currency(EEFC) accounts. They will convert those funds into rupee once the rupee will stabilise.

Banks too have become cautious while lending to small and mid sized enterprises (SMEs) in export oriented sectors because the result could be an accumulation of non performing assets as they don't use much of hedging instruments.

Exporters on the other hand are seeking concessions in the form of subsidies from the central govt. Few SMEs are trying to renegotiate contracts with buyers in the overseas market.Some large corporates have cut down their export operations and instead are diverting their focus on the domestic market or cutting the production itself.

Stronger rupee has only benefitted the foreign institutional investor.