Assorted Links

1. Urbanomics says RBI should slash rates further

2. WSJ Blog points to the new world financial order. It also points Fed’s total swap line  with other central banks amounts to USD 520 billion

3. CMB says Bernanke should focus on deflation now

4. IIEB on policy responses in Eurozone and India

5. Macroblog on what Fed is trying to do?

6. FinRounds onlevered ETFs.

2 Responses to “Assorted Links”

  1. AcK Says:

    Finally it has happened…

    Urbanomics has actually written something stupid…

    I do agree that RBI can do more in terms of monetary stimulus to kickstart the economy… but an even bigger question is how much of RBI has done has been passed on to the economy… a simple look at my bloomberg tells me that SBI (which is supposed to be controlled by the gvt) has cut its PLR by only about 100 bps even after the huge cut in CRR rates, repos and reverse repos… so the key problem, in my view anyways, is the banking system (not the RBI)… moreover, Urbanomics also glosses over the linkage between liquidity (money supply) and interest rates… as far as my understanding goes, a high-liquidity situation in the market should result in to lower interest rates in the real economy… so why has that not happen (read, banking system again)… look at the banking results coming out (axis, hdfc recently)… all of them are making money by the droves (even as the real sectors like real estate, infra etc. are hurting)… see the irony… I do not understand why people are not scandalized when HDFC bank says it expects NIMs in the range 4.2-4.4%… hell, margins in even other emerging economies operate in the range of 2-3%… can something be done about this (RBI saying that NIMs must be capped at some percent (drastic, I know, but the general public, home-owners and SMEs must be spared the brunt even as banks makes tons of money)


  2. Gulzar Says:

    Thanks AcK for the comment. This may be a case of improper interpretation of my case.

    There are two issues here in this debate. First, RBI lowering the repo rates, and second, the banks passing on the benefits to the borrowers by way of lower rates. Ideally. the transmission from the first to the second, should be an action and reaction event. But, the circumstances, extraordinary as they are (more due to global forces at play, than local factors), and I have dwelt it here
    (, the action is clearly not having the desired reaction. How we need to trigger the “suppressed” reaction is another issue altogether, and I agree with you that it may require some out-of-the-box actions, and can be the subject of another big debate.

    In fact, I had already made a reference to this in my post – “premium arising from rational expectations on the counter-party risks prevalent in the credit markets”. The high NIMs you are referring to is a reflection of this premium.

    But the absence of reaction does not mean that the action itself is not necessary. Given the depth and extent of economic slowdown and especially given the declining inflation rate, standard economic theories would have it that monetary policy be loosened by cutting rates. How much depends on the specific contexts. My contention is that the context – externally and internally – demand even further loosening.

    First, even by comparisons with other emerging economies, forget the zero-bound kissing developed economies, our interest rates are very high. In fact, the RBI has stood out in fighting inflation, long after others have abandoned it and moved into fighting growth stabilization. In an integrated global economy, such discrepancies and arbitrage opportunities are dangerous (remember carry trade etc), and it is only a matter of time before we re-align our rates to the rest. If we are to loosen the rates some time soon, better do it now and get the benefits early.

    Second, internally, the rates affect not only the lending, but also the debt holders. So, lower rates reduces the debt service burdens and gives much needed breathing space for credit starved businesses. Further, a higher NIMs (due to lower bank rate) increases the pressure on banks to lower their rates atleast now! In any case, it is only a matter of time before the reluctance of banks (to lower rates) breaks down and rates come down, through government arm-twisting or otherwise. Finally, it is surely better to borrow at 11% than 13%!

    I have tried to understand and speculate on some of the reasons why the Indian banks are digging their heels and refusing to lend. It is available here (

    Interestingly, the same problem affects the duty and tax cuts on goods. Here too, like the banks, the producers and retailers refuse to pass on the benefits to the consumers. The tax cut ends up as a corporate welfare measure than an inflation fighting measure. I have posted on this here ( and here (

    Yes, like AcK, I too am personally scandalized by the usurious NIMs, but then that is another matter!!

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