The Curious connection between stock trading and street photography

May 21, 2019

Tejsway Nandury has this fun piece:

Much like a trader, a street photographer is an artist, traipising on the high wire of chance.



Modern Monetary Disasters (Examples from Latin America)

May 21, 2019

Prof Sebastian Edwards of UCLA in this piece:

MMT, or some version of it, has been tried in several Latin American countries, including Chile, Argentina, Brazil, Ecuador, Nicaragua, Peru, and Venezuela. All had their own currency at the time. Moreover, their governments – almost all of which were populist – relied on arguments similar to those used by today’s MMT supporters to justify huge increases in public expenditure financed by the central bank. And all of these experiments led to runaway inflation, huge currency devaluations, and precipitous declines in real wages.

Four episodes in particular are instructive: Chile under President Salvador Allende’s socialist regime from 1970 to 1973; Peru during President Alan García’s first administration (1985-1990); Argentina under Presidents Néstor Kirchner and Cristina Fernández de Kirchner from 2003 to 2015; and Venezuela since 1999 under Presidents Hugo Chávez and Nicolás Maduro.

In all four cases, a similar pattern emerged. After the authorities created money to finance very large fiscal deficits, an economic boom immediately followed. Wages increased (helped by substantial minimum-wage hikes) and unemployment declined. Soon, however, bottlenecks appeared and prices skyrocketed, in some cases at hyperinflationary rates. Inflation reached 500% in Chile in 1973, some 7,000% in Peru in 1990, and is expected to be almost ten million percent in Venezuela this year. In Argentina, meanwhile, inflation was more subdued but still very high, averaging 40% in 2015.

The authorities responded by imposing price and wage controls and stiff protectionist policies. But the controls did not work, and output and employment eventually collapsed. Worse still, in three of these four countries, inflation-adjusted wages fell sharply during the MMT-type experiment. In the periods in question, real wages declined by 39% in Chile, 41% in Peru, and by more than 50% in Venezuela – hurting the poor and the middle class.

In each case, the central bank was controlled by politicians, with predictable results. In Chile, the money supply grew by 360% in 1973 alone, helping to finance a budget deficit equivalent to an astonishing 24% of GDP. In Peru in 1989, money growth was 7,000%, and the fiscal deficit exceeded 10% of GDP. In Argentina in 2015, the deficit was 6% of GDP, with the annual rate of money creation surpassing 40%. And Venezuela currently has a deficit of 32% of GDP, with the money supply estimated to be growing at an annual rate of more than 1,000%.

As inflation increased in these countries, people greatly reduced their holdings of domestic money. But because governments required taxes to be paid in local currency, it did not completely disappear. Instead, the speed at which money changed hands – what economists call “velocity of circulation” – increased dramatically. No one wanted to be holding paper money that lost 20% or more of its value every month.

When the demand for money collapses, the effects of money growth on inflation are amplified, and a vicious circle develops. One serious consequence is that the currency depreciates rapidly in international markets. MMT supporters conveniently ignore the simple fact that demand for local money declines drastically when its value tumbles. Yet this is perhaps one of the theory’s biggest weaknesses, and one that makes it extremely risky for any country to implement.

The experience of Latin America should serve as a clear warning for today’s MMT enthusiasts. In a variety of countries, and at very different times, fiscal expansions that were financed by printing money resulted in an uncontrollable loss of economic stability. Economic-policy ideas are often as dangerous in practice as they are flawed in theory. MMT may be a case in point.


One key thing which MMT bashers miss is the context. MMT is being suggested in countries such as  US where despite record deficit levels, interest rates on government bonds have been low. Another point is this whole governance bit. In Latin America kinds of cases lot of this money was used not for any economic gains but for politicians gains and was a very different political game. Third, it is unlikely US Dollar will depreciate as sharply as it did in these economies. Most of US borrowings are in their own currency and depreciation will not effect them as much as it affected all these Latam countries.

MMT has its limitations for sure. But so is it the case with mainstream macroeconomics. Infact, both have similar diagnosis. The mainstream macroeconomics guys also say despite record debt levels, interest rates remain low. Hence, fiscal policy can be expanded to take advantage of this situation with central banks playing a supporting role.  MMT folks say the same and bring central bank directly into the picture.

Why do central bankers buy and collect art?

May 21, 2019

Jens Weidmann of Bundesbank in this speech:

It gives me great pleasure to join you here today in opening this exhibition of artworks from the collections of the National Bank of Belgium and the Deutsche Bundesbank. I must say, this is an impressive and exceptionally pleasing space for an exhibition of this kind. We jumped at the chance of sending exhibits from our collection on a journey to Brussels, to our friends at the National Bank of Belgium in the capital city of Europe. It’s a premiere for us – never before have we shown our works outside Germany.

Both the National Bank of Belgium and the Bundesbank have been avid collectors of art for many decades now. Over the years, we have each gathered quite sizeable collections which shed some light on how art has evolved in Belgium and Germany. But why do central banks collect art in the first place? There are two reasons for that. First, because we’re looking to engage with society at large. As public institutions, we have a sense of commitment to the arts and culture in our respective countries. Second, we also feel that it is crucial to incorporate art into working life, because that brings our colleagues, and our guests and visitors, too, face to face with artistic expression. So over the years, collecting and exhibiting art has become part of our institutions’ DNA.

Encountering artworks on an everyday basis makes art part of our routine, a commonplace occurrence in our daily lives. Not just that: art also has the ability to surprise, challenge and inspire us. It lets us see things from a different angle and opens up a world beyond our own horizons. And in my experience, it can quite often be a cue for some fascinating conversations.

This exhibition now marks our own attempt to spark a special type of dialogue. Not just between visitors and the artworks, but also between two art collections which have evolved at two similar institutions in neighbouring countries. And that’s what makes the title of this exhibition – “Building a Dialogue” – so apt.

In this day and age, it’s certainly not a question of finding out what aspects of the collections are “typically Belgian” or “typically German”. Not least because artists in Europe, as we know, have been seeking to build a dialogue across national borders for centuries now. And yet for all that, it’s interesting to observe how well the works from the respective collections complement each other, and how the individual artistic statements interact.

Well, central banks also have the money!

Fiduciary duty and the market for financial advice

May 20, 2019

Interesting paper by Vivek Bhattacharya, Gaston Illanes and Manisha Padi:

Recent regulatory debate in the financial advice industry has focused on expanding fiduciary duties to broker-dealers. Proponents of this reform argue that it would improve the advice given to clients and limit losses from agency problems, while detractors counter that such regulation would increase compliance costs without directly improving consumer outcomes. This paper evaluates these claims empirically, using a transactions-level dataset for annuity sales from a major financial services provider and exploiting state-level variation in common law fiduciary duty.

We find that imposing fiduciary duty on broker-dealers shifts the set of products they sell to consumers, away from variable annuities and towards fixed indexed annuities. Within variable annuities, fiduciary duty induces a shift towards lower-fee, higher-return annuities with a wider array of investment options.

We develop a model that leverages the distributional changes in products sold to test the mechanism by which fiduciary duty operates. We find evidence that fiduciary duty does not solely increase the cost of doing business but that it has the intended effect of directly impacting financial advice.

A really important paper and finding given the crisis in practices of financial services…

Venezuela crisis leading to food shortages in Cuba…

May 20, 2019

One usually sees how financial crisis in one country moves to other.

This article shows other kinds if interlinkages working. Venezuela’s economic crisis is leading to a food crisis in Cuba:

At first, flour was missing. So by the end of 2018, buying bread or cookies was hugely difficult. Around Christmas, red flags were waving about continuing shortages. The price of pork, the symbolic Dow Jones of Cuba’s domestic economy, skyrocketed, and by last month it had reached 70 Cuban pesos (CUP) per pound (€2.30; $2.60), two days worth of wages for the average Cuban professional.

Chicken and typical dishes such as Cuban picadillo — made with ground meat — hamburgers and hot dogs all rose in price. Hot dogs have been a regular meal for hundreds of thousands of families for years, since at a little more than one euro for a package of 10 hot dogs, they offered the best value for money.

The government has attributed the lack of food to problems with international providers, the poor state of the milling industry, which processes imported wheat, and has blamed hoarders for making it harder for everyone to have enough goods. It avoids using the word “crisis” and has also censored the national media’s use of the term “Special Period,” the euphemism under which the economic disaster that followed disintegration of the socialist model in the 1990s was known.

Fridges remain empty as the ideological discourse has intensified. Incendiary rhetoric seeks to blame the shortages on the US embargo, even as economists and analysts agree that the real cause is Venezuela, which has cut back significantly on its oil shipments to the island.

Havana used to resell a portion of that oil on the international market for cash, which meant a lifeline for an economy with little productivity and an excessive state apparatus that is inefficient and expensive to maintain.


‘Sholay’ to ‘Darbar’: This man is responsible for shining a light on four generations of actors

May 20, 2019

Lot goes behind making the movies and development of stars.

Rajendran (72) is one those several people behind movie making. He flashes light at the actors and holds till directors say cut.

Really nice profile of the man who has seen 4 generations of actors.

Evolution or revolution: What next in macroeconomics?

May 20, 2019

Olivier Blanchard and Lawrence Summers have edited a book: Evolution or Revolution?  Rethinking Macroeconomic Policy after the Great Recession.

They share the afterword on voxeu:


History of India’s NBFCs: 70 Years Of Potholes And Repair Work

May 20, 2019

New piece in Bloomberg Quint.

I explore how NBFCs and its regulation have evolved over the years in India.

It is useful to get opportunities with BQ to write on various aspects of Indian financial history. One learns a lot writing these pieces.

The pieces written so far:

Earlier pieces for Mint on Sunday (which was suddenly stopped):

Hope many more to come…

Who wants a central bank job?

May 18, 2019

Debut piece for Business Standard.

I discuss how and why central bankers’s positions and authorities are being undermined in interesting ways across the world..

Why the World needs National Development Banks? (though India did away with NDBs…)

May 16, 2019

I don’t know but quite a few ideas which were rejected by Indian policymakers are making a comeback in global policy.

I blogged about how BIS is advising EME central banks to engage in forex markets. Now Stephany Griffith-Jones and and Jose Antonio Ocampo in this piece advocate national development banks, again an idea which took shape in India. Post-independence, we had development banks such as IFCI in 1949, ICICI in 1955 and IDBI in 1964. This was followed by NABARD in 1982, IDFC in 1997 and so on. In India, we called them Development Financial Institutions or DFIs.

Griffith-Jones and Ocampo say NDB’s offer following advantages:

Read the rest of this entry »

Can the three musketeers click? Finance, technology, trust

May 16, 2019

Ravi Menon, Managing Director of Monetary Authority of Singapore in this speech names Finance, technology, trust as the three musketeers:

  • Set in the 17th century, the novel recounts the journey of D’Artagnan, who left for Paris to join the Musketeers of the Guard, and how he overcomes all adversities.
  • Together with him are three musketeers with contrasting personalities:
    • Athos who is intelligent;
    • Porthos who is adventurous; and
    • Aramis who is true and faithful.
  • But together they form a well-balanced trio that supports D’Artagnan on his journey.

The three musketeers today are Finance, Technology, and Trust, corresponding to Athos, Porthos, and Aramis.  Society is D’Artagnan. 

  • Can the three modern musketeers work together to support Society? 
  • Can they complement one another?  Can they click?

Finance is Athos, Tech is Porthos and Trust Aramis:

Like Athos, Finance is wise but can be complicated, and to some extent, mysterious and non-accessible to many people.  As a result, Finance – at least in its traditional form – is losing its appeal.

Technology is akin to Porthos, the fearless musketeer who is eager to try new ways for a better future.  In a similar vein, Technology presents us opportunities to revitalise Finance.

Trust is similar to Aramis, the third musketeer who is faithful and values friendship. Trust is a key attribute for the success of a financial ecosystem.

Hmm..Nice way to present the complex ideas…

Glass skyscrapers: a great environmental folly that could have been avoided

May 15, 2019

Glass skyscrapers are all over the place in hot Indian cities. It becomes really hot inside leading to full blast AC and then one has to sit with a jacket!

Henrik Schoenefeldt (Senior Lecturer in Sustainable Architecture, University of Kent) in this piece looks at history of glass skyscrapers:

New York Mayor Bill de Blasio has declared that skyscrapers made of glass and steel “have no place in our city or our Earth anymore”. He argued that their energy inefficient design contributes to global warming and insisted that his administration would restrict glassy high-rise developments in the city.

Glass has always been an unlikely material for large buildings, because of how difficult it becomes to control temperature and glare indoors. In fact, the use of fully glazed exteriors only became possible with advances in air conditioning technology and access to cheap and abundant energy, which came about in the mid-20th century. And studies suggest that on average, carbon emissions from air conditioned offices are 60% higher than those from offices with natural or mechanical ventilation.

As part of my research into sustainable architecture, I have examined the use of glass in buildings throughout history. Above all, one thing is clear: if architects had paid more attention to the difficulties of building with glass, the great environmental damage wrought by modern glass skyscrapers could have been avoided.


Some lessons from cricket to tackle development constraints

May 15, 2019

Niranjan in Mint writes on how fast bowling has emerged and risen in India.

He compares the rise to development economics:

The dominant view in India during our long decades of fast bowling drought was that it was a lost battle. All sorts of pessimistic explanations were bandied about. The Indian weather is too hot for fast bowling. A country where meat eating is uncommon will be unable to produce the muscular young men needed to hurl the ball at opposing batsmen. A culture rooted in the principle of non-violence does not have the attitude needed to bowl a bouncer aimed at the head. Indian soil is too loose to have pitches that support fast bowling.

Many of these cultural or geographical explanations may have seemed convincing back then, very similar to how experts were pessimistic about Asia’s development prospects after World War II. A couple of American academics even wrote in 1967 that the US should send food aid only to countries that could be saved; it was prudent to let overpopulated countries such as India starve. This was just years before India broke the hunger barrier with the Green Revolution.

The Indian fast bowling renaissance in recent years would have been impossible if the cultural or geographical explanations had indeed been so potent. An editorial published in this newspaper in May 2018 rightly pointed out that the turning point was the emergence of Kapil Dev—the sort of historical accident that economists write about when thinking about economic development. He proved that it was possible to match the best in the world.

Then policy took over. One important milestone was reached when the MRF Foundation got Lillee to coach young fast bowlers after 1987. Think of this as technology transfer. Many of the best Indian fast bowlers after 1990 came from within this system. Suddenly, you had Indian opening bowlers who could make good batsmen duck in a hurry. More youngsters followed the path as they saw Indian quickies getting their due. The pitches in some recent Ranji Trophy seasons got greener. The IPL opened another window of opportunity for young fast bowlers in India.

An entire ecosystem is now in place to nurture Indian fast bowlers. The role of cultural or geographical factors are indeed important—but they can be overcome if there is effective policy support, the spread of new ways of doing things and an initial big push to overcome the older path dependence. The broader lessons of development economics are actually not very different from the broader lessons from the Indian fast bowling renaissance.

Just hoping we don’t lose sight over our potent weapon of spin bowling…

RBI’s once used multiple indicator approach is becoming preferred approach for EME monetary policy…

May 15, 2019

BIS chief Agustin Carstens in this speech reviews monetary policy framework in emerging markets.

He says it was thought that have an inflation target and allow the currency to float and find its own level.  However, this approach is not what emerging markets have strictly followed:

Read the rest of this entry »

Selecting the next ECB chief: Avoid the song contest..

May 15, 2019

Stefan Gerlach (Chief Economist at EFG Bank in Zurich and Former Deputy Governor of the Central Bank of Ireland) in this piece:

Choosing the next president of the European Central Bank should not be like picking the winner of the Eurovision Song Contest. Instead, Europe should ask which criteria candidates must satisfy to be an effective ECB president, and then search for the person who best meets them.

He says following should be followed:

First, the president must be a team player. Journalists and commentators who have disagreed with the bank’s unconventional stance under Draghi often forget that the ECB president does not set policy, but rather chairs the Governing Council meetings at which policy decisions are taken.

Second, the ECB president needs a solid economics background. 

Third, the new ECB president must reflect the diversity of the eurozone.

Finally, one would hope to see several women among the main contenders for the position. But unless IMF Managing Director Christine Lagarde throws her hat in the ring, there may be no leading female candidates. That would be deeply regrettable, and out of tune with the tenor of the times.

Last bit of not having leading female candidates for the job is really disappointing…

Bank Deposits in India: Underlying Dynamics

May 15, 2019

Harendra Behera and Dirghau K. Raut and Arti Sinha of RBI in the monthly bulletin for May-2019 research analyse the recent trends in bank deposits:

Bank deposits remain an important part of the financial savings of households and key to the financing of bank lending.

Deposit growth is picking up in recent months in a cyclical upturn since December 2018, which is overwhelming a trend lowdown that has been underway since October 2009. The latter warrants policy consideration since deposit mobilisation is fundamental to India’s bankbased system of financial intermediation.

Empirical evidence puts forward several interesting facts about the behaviour of bank deposits.

First, it underscores the income as its most important determinant, both in the short-and in the long-run.

Second, interest rate matters for deposit mobilisation but only at the margin.

Third, financial inclusion has a boosting effect on deposit mobilisation over the long-run suggesting expansion of bank branches in unbanked areas.

Fourth, substitution effects associated with Sensex returns for deposit growth are limited to the short-run, warranting a careful appraisal of regulatory reforms and tax arbitrage, even as efforts need to be intensified to make both more market determined.

Finally, similar to Sensex return, small savings substitute bank deposits in the short-run but supplement deposits in the long-run, reflecting that limits on income tax exemption eventually evens out substitution effects and allow income to be the key determinant of both in the long-run.

In the final analysis, therefore, accelerating the rate of growth of the economy and disposable incomes holds the key to higher deposit mobilisation by the banking system.


What differentiates central bank approach of monetary policy from financial stability policy?

May 14, 2019

Sir Jon Cunliffe in this speech speaks about Brexit risks to UK.

In the speech he serves this useful reminder on what differentiates mon policy from financial stability policy:

It cannot be repeated too often that the Bank’s approach to its financial stability objective is, in one key respect, very different to its approach to its monetary
stability objective. For the latter, the Monetary Policy Committee makes the best forecast we can of the path of the economy and the path of inflation – the central case. We set out clearly and graphically the risks around those forecast, but it is the central case – what we think most likely to happen – that informs our policy decisions.

For financial stability, the focus of the Financial Policy Committee (FPC) is not on the central case – on what is most likely to happen; rather it is on the risks – on what could happen even if it is not the most likely scenario. It is the risks, what could happen, that inform our policy decisions.

A colleague of mine recently asked me why the financial stability side of the Bank was so gloomy, always pointing to risks on the horizon and seeing the glass as half empty at best? My answer was that it was our job to worry about what could plausibly happen – and to ensure that if it did happen, the glass did not
suddenly empty entirely.

This is important. Monetary Policy looks at the mean while addressing risks. Financial stability while looking at the mean has to look at risks. Clarifies a lot on how we think about the two sets of policies…

Models, Markets, and Monetary Policy: From Friedman to Taylor to Data dependent policy

May 14, 2019

Nice speech by Richard Clarida.

Let me set the scene with a very brief—and certainly selective—review of the evolution over the past several decades of professional thinking about monetary policy. I will begin with Milton Friedman’s landmark 1967 American Economic Association presidential address, “The Role of Monetary Policy.”2 This article is, of course, most famous for its message that there is no long-run, exploitable tradeoff between inflation and unemployment. And in this paper, Friedman introduced the concept of the “natural rate of unemployment,” which today we call u*.3 What is less widely appreciated is that Friedman’s article also contains a concise but insightful discussion of Wicksell’s “natural rate of interest”—r* in today’s terminology—the real interest rate consistent with price stability.

But while u* and r* provide key reference points in Friedman’s framework for assessing how far an economy may be from its long-run equilibrium in labor and financial markets, they play absolutely no role in the monetary policy rule he advocates: his well-known k-percent rule that central banks should aim for and deliver a constant rate of growth of a monetary aggregate. This simple rule, he believed, could deliver long-run price stability without requiring the central bank to take a stand on, model, or estimate either r* or u*. Although he acknowledged that shocks would push u away from u* (and, implicitly, r away from r*), Friedman felt the role of monetary policy was to operate with a simple quantity rule that did not itself introduce potential instability into the process by which an economy on its own would converge to u* and r*.4In Friedman’s policy framework, u* and r* are economic destinations, not policy rule inputs.

Of course, I do not need to elaborate for this audience that the history of k-percent rules is that they were rarely tried, and when they were tried in the 1970s and the 1980s, they were found to work much better in theory than in practice.


That vacuum, of course, was filled by John Taylor in his classic 1993 paper, “Discretion vs. Policy Rules in Practice.” Again, for this audience, I will not need to remind you of the enormous impact this single paper had not only on the field of monetary economics, but also—and more importantly—on the practice of monetary policy. For our purposes today, I will note that the crucial insight of John’s paper was that, whereas a central bank could pick the “k” in a “k-percent” rule on its own, without any reference to the underlying parameters of the economy (including r* and u*), a well-designed rule for setting a short-term interest rate as a policy instrument should, John argued, respect several requirements.



Undermining Central Bank independence, the Cyprus way (reads much like India’s story!)

May 13, 2019

It has been 5 months since RBI Governor resigned from the central bank. A lot was written exploring several reasons which led to his sudden exit from the central bank. But much of it is still speculation and truth is known to either Governor or someone close to the scenes in the Government. However, there is one book which reads much like what could have happened between the RBI and the Government.

The concerned book is written by Dr. Panicos Demetriades, former Governor of Cyprus (May-2012 to Apr-2014) and is titled as ‘A Diary of the Euro Crisis in Cyprus’. It is highly surprising that such an account by a central banker has not got due attention. The book was written in 2017 and should be on top of the charts. There are other central bankers who have written their accounts recently. But neither had they faced experiences as telling as those faced by Demetriades nor wrote as frankly as Demetriades.  One reason for ignorance is Cyprus being a tiny economy. Even then the book is a must read for those interested in political economy of central banking.

I came to know of this book by reading a recent speech by Lesetja Kganyago, Governor of the South African Reserve Bank. Kganyago speaks on how central bank independence is under attack including South Africa (which requires a separate article of its own) and picks insights from this book to reflect on Cyprus experiences. The events which happened in Cyprus during those 2 years read as the events in India during 2016-18. The resemblance is so striking, that it leaves you in splits.

What happened in Cyprus which is so telling?

First some basics. Before 2008, Cypriot banking sector grew enormously to touch 10 times the size of its GDP. The banks had invested heavily in Greek government bonds as they gave higher yields. Further, Cyprus banks not just offered higher deposit rates but also lend aggressively towards real estate sector. One of the real estate developers even became chairman of one of the Bank Boards. The financial transactions were not limited locally but funds flowed from and to Russia, Ukraine and Romania, becoming a deadly cocktail at the end. The banks were also the main advertisers in the media leading to no one really raising fingers.

Though, this was hardly unique to Cypriot banks as we saw banks in Iceland, Ireland, and US etc. following similar strategies only to end up in crises. In Cyprus too, the Greece crisis and European financial crisis engulfed banking system of Cyprus which was anyways built on shaky foundations. What is unique though is what transpired later.

Enter Panicos Demetriades who was appointed Governor of Cyprus Central Bank in May-2012. He had taken over from Athanasios Orphanides, who in in his send-off remarked that though banking system was quite stable under his tenure but wasn’t sure what would happen next.

Talk about prophecy as what followed was complete meltdown of the Cypriot banking system. The blame lies on Orphinades as well, as the fragile banking system took shape under his tenure. Demetriades knew he was sitting on a time bomb and tried to figure a solution but could not succeed. The troika of IMF, ECB and European Commission wanted to implement stricter norms for recapitalization which were not agreeable to politicians. The banks remained highly undercapitalized, politicians continued to underestimate the scale of problem also on account of high cronyism. Gradually losses mounted and the share of non-performing loans as a percentage of total loans in Cyprus was next only to Greece. Even today the share of NPLs are as high as 20% of total assets.

As banking problems worsened, a scape goat had to be identified and who better than a central banker! The media anyways disliked Demetriades right at his appointment as he was seen as an outsider. Soon, the political parties joined this chorus. The politicians wanted Demetriades to be ousted but as Cyprus was part of Eurosystem and under this system the central bank governor could not be fired. The only way was to pressurize the central banker and push him towards resignation.

The Government did two major things (apart from humiliation) in mid-2013 which pushed Demetriades towards his resignation – firing the Deputy Governor who backed the Governor and pushing the governance powers from Governor to the Central Bank Board!  Under the new legislation, the Government expanded the Central Bank Board membership from 5 to 7 with the two new members becoming Executive Directors. Further, the decisions related to licencing of new and old banks were to be made by the Board and not the Governor. The ECB protested against this legislation but to no avail.

The new Board stopped backing the Governor and even the loyal staff started complaining of harassment. Demetriades began to tire eventually and health started to suffer. The personal attacks mounted even bringing his family into picture. In March-2014, he submitted his resignation citing “personal reasons and difficulties working with the Board as the reason for resignation. This way the government won not just the battle but also the war against its own appointed Governor.

The events in Cyprus showed how governments can undermine central bank independence in interesting ways. The rules prevented the Governor from being fired but one could still build the pressure through the Board and firing the Deputy Governor.

Given this brief, there is a reason why I mention that Cyprus case reads much like India’s case. The RBI Governor was under pressure for rising NPAs, low credit growth and maintaining high reserves, leading to discontent with the Government. There was news on how the powers of governing RBI had shifted from the Governor to the Board members. There were also reports on how Governor Patel was tired fighting these battles and his health was suffering. In the end, these multiple events forced him to resign, also serving for two years just like his Cypriot counterpart. The resignation letter of the Governor also mentions personal reasons but not saying anything else.

The German classical archaeologist Gustav Hirschfeld once said ‘He who would become and remain a great power in the East must hold Cyprus in his hand.’  Paraphrasing the quote, those who believe in great power of central bank independence, should hold and read this account of Cyprus central bank Governor in their hands! Hope Dr Urjit Patel writes his own account as well.

How much equity capital should a central bank hold? Case of RBI

May 13, 2019

New paper by Ila Patnaik and Radhika Pandey of NIPFP:

The mechanism to calculate how much reserves the RBI transfers to the Central Government has been at the forefront of debate amongst experts and policy makers. The present legal framework allows the RBI to choose what proportion of reserves it transfers to the Government. As a consequence, it has built up reserves that are higher than most other central banks hold. This paper presents the logic for why central banks might hold reserves. Drawing on cross country practices, it presents a discussion of the possible arrangements for transfer of reserves to the Government. Any institutional arrangement to determine a framework for reserves transfer must consider these options.

One expects Bimal Jalan Committee to submit its report after election results. One expects the committee to advocate some rules for capital and reserve management of RBI..

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