Archive for November 6th, 2009

Simplifying thinking about financial regulation

November 6, 2009

There is so much being written on financial regulation that one’s head just aches. There is much confusion and no clarity on how do you summarise them.

I came across this useful way of simplifying and classifying financial regulation from Mark Carney of Bank of Canada. In his speech he summarises the financial regulation debate as working on 2 issues:

There are two main approaches to reform:

  • First, protect the banks from the economic cycle; in other words, make each bank, individually, more resilient.
  • Second, protect the cycle from the banks; that is, make the system as a whole more resilient.

 Both are necessary.

This is precisely the state of the problem. In the first, we talk about a sound banking system getting least impacted by the economic cycle. So we need capital ratios. now leverage ratios etc etc. In second, we need to ensure the financial crisis does not lead to systemic risk, credit crunches etc etc.

The moment we organise our thinking on these lines, it makes the task so easy. You start thinking about the problems and solutions accordingly. All fits in pretty neat.

The speech also has some interesting Canada add-ons to making the system more resilient.

Icrier Review of Indian economy 2009-10

November 6, 2009

ICRIER, the New Delhi based think tank has released its  review of Indian economy for 2009-10.

Despite signs of recovery from the global financial crisis, the GDP growth rate for the Indian economy is likely to be between 5.8 to 6.1 per cent in 2009-10, below the 6.7 per cent recorded in fiscal 2008-09. While there has been an improvement in Indian industry, particularly the manufacturing sector, the adverse impact of the fall in kharif production due to a rainfall deficiency will act as a drag on the overall growth of the economy. In the current financial year, the major policy challenges for the government will come from the rather sharp rise in inflation and deteriorating public finances. The balance of payments situation may also require policy attention despite a narrowing of the current account deficit and a considerable capital account surplus because of the appreciation of the rupee.

It has interesting scenario analysis on India’s debt ratio (Gross Govt Debt as a % of GDP) in future given changes in interest rates, primary deficit and growth rate in nominal GDP. Lots of possibilities there with the best case for India being interest rates at 7%, primary deficit at 3% and GDP growth at 14%.

It also looks at the likely growth rate of GDP given the weak monsoons. They expect agriculture to decline by about 4.2% to 6.0% in 2009-10 and GDP at 5.8% to 6.1%. This is lower than EAC estimate of 6.5% plus and in line with RBI’s 6% with an upside bias.

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