History of RBI’s Ways and Means Advances to Central Government: Old Wine in New Bottle?

January 17, 2020

Good friend Niranjan pointed to me how WMA was started as a way to bridge the “short-term gap” between Government’s receipts and expenses. This piece tracks the short history of WMA

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Cambodia is criminalizing democracy by suppressing opposition

January 17, 2020

RBI update: WMA declines from 130171 cr to 60605 cr..

January 17, 2020

Following from my last article, WMA for the week ended 10-Jan-2020 declined to Rs 60605 cr. It was at a record 130171 cr on the week ended 3-Jan-2020.

WMA on asset side is usually linked with reverse repo (included in Deposits – Others) on liabilities side. This is because as WMA increases, liquidity in the system increases leading to rise in reverse repo. And the opposite happens in case of reversal.

Thus, as WMA has declined on the Assets side, Reverse Repo on the Liabilities side has declined by 93197 cr.  For tracking all the changes exactly, we need a detailed balance sheet which we do not get in WSS.

The puzzle of inflation going up despite low demand in India

January 17, 2020

Prof Himanshu of JNU in this Mint piece:

Why is inflation rising? Most commentators have highlighted the rise in onion prices, which did contribute to vegetable inflation. However, data also shows a sharp rise in inflation in almost all vegetables along with cereals (mainly wheat and coarse cereals), pulses and personal care items. Clearly, the inflation story is not just an onion story, and is far more widespread and serious. However, attributing this to seasonal factors would be missing the forest for the trees. Untimely rains, drought in some regions and crop losses due to local factors did contribute to supply shocks, but this is not enough to explain the sharp rise in overall inflation, or even food inflation, given the small weight of these crops in the consumption basket. Onions, for example, have a weight of only 0.64% in the CPI and 0.16% in the WPI.

Further, the worry is not restricted to vegetable prices—which may stabilize in due course if driven by seasonal factors—but also cereals and pulses, whose inflation rates have seen a consistent rise in the past six months. They together have a weight larger than vegetables, and the rise in their prices is unlikely to be a result of seasonal factors. Some of it may be due to the transmission of global food prices, which have shown a rising trend in the last half year. But a bulk of the blame lies with government policy. In pulses, untimely imports flooded the markets and contributed to lower price realization last year, further leading to lower production this year. Within cereals, wholesale wheat prices have risen 8% this year while retail prices gained 6.3%, the highest in five years.

But why are wheat prices rising if wheat production has been at record levels? Government policy has created an artificial scarcity in the market. In the run-up to the general elections, the government procured 34 million tonnes of wheat in 2019, on top of the 36 million tonnes procured in 2018. These are the highest procurement levels since 2012-13. But it failed to distribute the wheat through the public distribution system, so there just wasn’t enough to go around. As of January, total stocks with Food Corporation of India (FCI) stand at 75 million tonnes, 33 million tonnes of it wheat, and the rest, rice. This implies that almost all the wheat that the FCI procured before the polls is still with it. This is almost a third of the country’s total wheat production. For the record, the buffer norms for FCI prescribe 21.4 million tonnes of stock at the start of each year. The resultant artificial scarcity has not only pushed up wheat prices, but also led to higher demand for coarse grains and fodder, almost all of which have seen double-digit inflation. Fodder prices have risen 14% in the last six months, driving up input costs for non-vegetarian items, which are now seeing high inflation.

Given high government stockpiles, it is unlikely that food inflation will fall soon. This poses problems in reviving the economy. The poor have to bear the brunt of government apathy. With food accounting for two-thirds of their household budgets, higher prices will worsen demand for non-food goods, in addition to proving a serious setback for nutrition security. At a time when consumption expenditure data shows rising poverty along with declining wages, climbing inflation will only lead to increased vulnerability, while making an economic recovery harder.

Problems of plenty and keep compounding..

The evolution of monetary policy frameworks in the post-crisis environment

January 17, 2020

Anna Samarina and Nikos Apokoritis in this voxeu piece:

Efficacy of Credit Ratings in Assessing Asset Quality: An Analysis of Large Borrowers

January 16, 2020

RBI Bulletin Jan-2020 has an article by Sukhbir Singh and Pallavi Chavan:

Using data on credit ratings from the Central Repository of Information on Large Credits (CRILC) mapped with Prowess, this article examines the efficacy of ratings in facilitating a sound and timely assessment of the asset quality of large borrowers. About one-fourth of the sampled Non-Performing Asset (NPA) exposure from CRILC was found to be in investment grade a quarter before slipping into the NPA category. The percentage of NPA exposure with an investment grade rating just before turning nonperforming varied across Credit Rating Agencies (CRAs) with three out of the six CRAs covered in the study showing a relatively high concentration of such exposure.

CRAs have a tough clean up job at hand!

Is America Going Fascist?

January 16, 2020

WHo would have thought this question would be asked and needs to be answered.

Daron Acemoglu in this piece warns against this typecasting as it polarises the society further:

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Government under fiscal pressure: WMA trends suggest so

January 15, 2020

My new piece in moneycontrol:

The frequency with which RBI is advancing loans to the Centre is a reminder that public finances need to be set right at the earliest

When Climate Activism and Nationalism Collide

January 15, 2020

Kemal Dervis sums up one of the key battles of 2020s decade:

There is an overwhelming consensus among scientists that this decade will be the last window for humanity to change the current global trajectory of carbon dioxide emissions so that the world can get close to zero net emissions by around 2050, and thus avoid potentially catastrophic climate risks. But although the massive technological and economic changes required to achieve this goal are well understood, their political implications are rarely discussed.

While climate activists have built an impressive international movement, broadening their political support and crossing borders, the nationalist narrative has been gaining ground in domestic politics around the world. Its central message – that the world consists of nation-states in relentless competition with one another – stands in sharp contrast to the climate movement’s “one planet” emphasis on human solidarity. And these two trends are on a collision course.


In fact, this clash may become a defining feature of politics, with the nationalist right facing a coalition of climate-oriented voters comprising not only today’s Greens, but also those from the social-democratic center-left and the traditional center-right. Moreover, other issues will be connected to this fault line, not least the need for domestic compensation of those groups that temporarily lose out as a result of ambitious climate mitigation efforts.

If the dominant divide of the 2020s is between the nationalist narrative and green internationalism, then the climate debate may import global issues into national politics like never before. The outcome, of course, remains to be seen.

From reforms to stagnation – 20 years of economic policies in Putin’s Russia

January 15, 2020

Laura Solanko of Bank of Finland in this research note tracks Putin era.

This paper gives a concise overview of the economic difficulties and policy responses in Putin’s Russia from the late 1990s to present. The discussion concludes with thoughts on future challenges facing Russia.


Why every company needs a Chief Fun Officer?

January 15, 2020

of Warwick Business School in this piece argues why fun is important in workplaces and you need a officer to promote fun:

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A network analysis of economic history: how economic historians are interconnected through their research

January 15, 2020

Gregori Galofré Vilà of Universitat Pompeu Fabra in this voxeu piece:

The origins of microfinance

January 14, 2020

Marvin Suesse and Nikolaus Wolf in this article:

There was a rapid spread of credit cooperatives in rural 19th-century Germany providing small-scale savings and loan services to previously unbanked people. This column shows how these cooperatives helped shift farm investment from grains to potentially profitable but more capital-intensive products, such as the production of meat and dairy. In cases like this, changes in the sector of economic activity are a better metric for the impact of microfinance than comparing income pre- and post-credit.

JNU violence: Indian university’s radical history has long scared country’s rulers

January 14, 2020

Shalini Sharma of Keele University in this piece tracks JNU’s history. She points how JNU’s policy has been to give admissions to those with deprived background:

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A monetary policy framework for all seasons?

January 13, 2020

Mark Carney of Bank of England in this speech argues that Inflation targeting has been a framework for all seasons in UK:

To set the stage for today’s discussions, I would like to do two things. First, I will review the conduct and performance of inflation targeting during my time as Governor. This period, which roughly coincides with the post-crisis recovery and which has seen more than its share of shocks and structural developments,
provides some insights to the ability of inflation targeting to deliver price stability and support macroeconomic outcomes. I will suggest that, so far at least, inflation targeting has proven to be a framework for all seasons, an essential part of a robust foundation for economic prosperity.


To conclude, the flexibility in the UK monetary policy framework means that the MPC has been able to support the UK economy through the changing of the seasons.

Despite the economy being buffeted by diverse and sizable shocks since the recovery began, inflation has averaged 1.7%; GDP growth has generally been robust, averaging around 2%, and above the subdued rate of potential supply growth. The wide margin of spare capacity present after the crisis was absorbed,
unemployment is at multi-decade lows and employment at an all-time high. Real wages have finally returned to relatively strong rates of growth. Inflation expectations have remained anchored to the target, even when CPI inflation has temporarily moved away from it.

This performance underscores that the bar for changing the regime is high. But it is nonetheless healthy to review it periodically, and that review is supported by the Bank’s active research agenda. Today’s workshop is organised with that in mind, and we appreciate all your contributions to help focus our research efforts.

There is an old saying that there is no such thing as bad weather, just inappropriate clothing. With the economic climate changing, let’s ensure that the Bank remains well suited to deliver its mission to maintain price and financial stability in support of the Good of the people of the United Kingdom


I would actually argue that more than the framework, central bankers have been really flexible to bring all kinds of changes in the monetary policy.

Found and busted: Rs 2000 fake note printing gang

January 13, 2020

This blog is super interested in all kinds of money news including the counterfeiting ones.

This news caught my eye:

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Bankers as Immoral? The Parallels between Aquinas’s Views on Usury and Marxian Views of Banking and Credit

January 13, 2020

Thomas Lambert of University of Louisville in this interesting paper looks at history of thought on banking:

Throughout history, the performance, practices and ethics of bankers and banking in general have received mixed reviews in both popular and scholarly writings. Early writings by philosophers, clerics, and scribes played a crucial role in the perceptions of banking and banking occupations. Thomas Aquinas’s thoughts and writings were greatly influenced by the Romans’ and Aristotle’s opinions on usury and the charging of interest, and Aquinas was in a position to have his opinions implemented in policy and practice.

Marx noted how banking and credit were used to expand the production and sales of a capitalistic economy beyond certain limits, although his focus was mostly on credit extended to businesses. At the same time, he wrote about how the credit system could lead to economic crises as well as to the concentration and centralization of capital. While lending is motivated by profit, and while households are not coerced into borrowing money, the justice of a system which exploits workers and at the same time encourages them to borrow money in order to maintain a certain standard of living can be viewed as unfair and immoral.

The value of goods, according to Aquinas and Marx, should mostly reflect the value of labor embodied in them, and for that reason, labor should be compensated fully for its work.

For these reasons, Aquinas and Marxian economists offer somewhat similar views on both the labor theory of value as well as on the morality of certain banking practices. If credit and the banking system also bring about crisis and the greater concentration and centralization of capital, then the morality of
these outcomes also needs to be examined.

Morality has been off economic discussions for a while. It has become so so important today..

How does information management and control affect bank stability: Evidence from FDR’s Bank Holiday

January 13, 2020

Haelim Anderson and Adam Copeland in this NY Fed paper:

How does information management and control affect bank stability? Following a national bank holiday in 1933, New York state bank regulators suspended the publication of balance sheets of state-charter banks for two years, whereas the national-charter bank regulator did not.

We use this divergence in policies to examine how the suspension of bank-specific information affected depositors.

We find that state-charter banks experienced significantly less deposit outflows than national-charter banks in 1933. However, the behavior of bank deposits across both types of banks converged in 1934 after the introduction of federal deposit insurance.

Interesting. One would imagine that deposits flows would be higher for more transparent banks but opposite is the case.

Implications? Mindful of too much transparency in times of crisis..

Our study has important implications for policy today. Following the financial crisis of 2007-09, policymakers have attempted to promote the market discipline of financial institutions by enhancing public disclosure, with the goal of improving financial stability. Our work highlights, however, that after implementing rules requiring greater public disclosure during normal times, regulators should bear in the mind the value of suppressing information about individual institutions in times of crisis.


The Dilemma of Central Banking: To follow Keynesian, Fisherian or Neo Fisherian

January 13, 2020

Nice Proj Synd piece by Miao Yangling:

Neoclassical thinkers in the tradition of Alfred Marshall, Knut Wicksell, and Irving Fisher believe that real interest rates are determined by real economic forces. Money (or monetary policy) is neutral, and the rate of interest is that which equilibrates saving and investment, as determined by time preference and returns, respectively. (Hence, the title of Fisher’s 1930 book on the topic is: The Theory of Interest, as Determined by Impatience to Spend Income and Opportunity to Invest It.) Using the neoclassical framework, one can identify a range of structural factors – from demographic changes driving up savings to slower technological progress reducing demand – to explain the secular decline in interest rates.

By contrast, according to John Maynard Keynes’s “Liquidity Preference Theory,” interest is best understood as a reward for parting with liquidity for a specified period of time. As such, it is not about saving in general, but about the saving of money in particular. The interest rate, then, is determined jointly by the supply of liquidity and economic agents’ preference for money.

In normal times, these two schools of thought run in parallel and can coexist. Keynes focused on the nominal rate, while Fisher focused on the real rate; Keynes emphasized the short term, and Fisher the long run. Keynes’s principle of monetary non-neutrality in the short run does not directly conflict with Fisher’s principle of neutrality in the long run. Usually, when central banks act in a Keynesian manner by cutting nominal rates, real rates will fall, owing to the sticky-price effect.

Yet, with interest rates now stuck near or at the zero-lower bound (ZLB), these two views might collide: a nominal-rate cut will elicit an immediate one-for-one reduction in inflation expectations, leaving the real rate unchanged. Some economists refer to this change in expectations as the “neo-Fisherian effect,” because the traditional Fisher effect – whereby inflation tracks the nominal rate by a factor of one to one – is supposed to happen only in the long run. A Fisherian effect will not happen if inflation expectations remain well anchored. But once rates are trapped at or near the ZLB, inflation expectations begin to fall; the usual Keynesian effect comes to be dominated by the neo-Fisherian effect.

Hence, a distinct feature of the ZLB is that it is where Fisher crowds out Keynes. Central banks can cut nominal rates to zero or into negative territory all they want, but real rates will remain unchanged. The more Keynesian a central bank acts (by trying to stimulate demand through rate cuts), the more Fisherian the economy becomes, at least in terms of inflation expectations. And when this happens, monetary policy becomes not just impotent but potentially harmful.

To be sure, the neo-Fisherian perspective is controversial in academic circles. But even if there is no perverse Fisherian effect, interest-rate pegging or a situation in which rates are involuntary trapped at the ZLB could still amplify shocks. For central banks, avoiding these conditions can pose a dilemma. Should they cut rates when necessary, even if doing so might bring on a Fisherian trap?

Look beyond Mon Policy:

An overdose of monetary policy may create conditions of monetary “non-neutrality” by pushing down the equilibrium real rate. This can happen through at least two channels. The first is the financial boom-bust cycle. Persistently low interest rates encourage risk-seeking, and can result in financial imbalances and debt build-ups. When the music stops, central banks must reduce rates even further to counter the inevitable bust. The second channel is resource misallocation, which can happen when too much liquidity inhibits Schumpeterian “creative destruction” by offering a lifeline to uncompetitive firms.

Resolving the dilemma will require a fundamental change in the design and implementation of economic policy. We need far better policy coordination at the national and international levels. At the country level, monetary policy cannot be the “only game in town.” Not only should fiscal policy and structural reforms play a larger role, but macroprudential policy should be made a top priority, in order to contain financial boom-bust cycles.

At the international level, a well-integrated financial safety net would help reduce the need for self-insurance through safe assets. One good way to pool resources would be to enhance the International Monetary Fund’s firepower through quota reforms. A  new and improved international monetary system won’t be built in a day, but we have to start somewhere.


Murugappa group family dispute: missing representation of women heirs on the Board

January 10, 2020

Top business groups need to set examples for others to follow. This case of Murugappa group is telling:

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