Archive for July, 2013

RBI’s recent measures to address exchange rate volatility

July 16, 2013

Something is going on.

Late last night, RBI announced some measures to address exchange rate volatility. Read that as to prevent rupee depreciation. Expectations are rife that Rupee will touch 70  by year-end. The expectations are based on the wide Current Account Deficit which so far has been financed by FII flows. As FIIs turn away, currency depreciation is the natural route. This means more of imported inflation and so on.

Fighting expectations is tough as it so happens that what is expected tomorrow happens much earlier as exp sets in. So we have some late night measures.

Foll. measures were taken:

  1. The Marginal Standing Facility (MSF) rate is recalibrated with immediate effect to be 300 basis points above the policy repo rate under the Liquidity Adjustment Facility (LAF). Consequently, the MSF rate will now be 10.25 per cent. Accordingly, the Bank Rate also stands adjusted to 10.25 per cent with immediate effect.
  2. The overall allocation of funds under the LAF will be limited to 1.0 per cent of the Net Demand and Time Liabilities (NDTL) of the banking system, reckoned as Rs.75,000 crore for this purpose. The allocation to individual banks will be made in proportion to their bids, subject to the overall ceiling. This change in LAF will come into effect from July 17, 2013.
  3. The Reserve Bank will conduct Open Market Sales of Government of India Securities of Rs.12,000 crore on July 18, 2013. Details of the securities included for the OMO sale auction will be announced through a separate press release tomorrow.

Some explanation:

  • The second & third measures tighten Rupee liquidity. Both LAF Borrowing and OMO Purchases leads to creation of liquidity. With a cap on LAF borrowing and OMO Sales (RBI sells G-sec and gets reserves), there will be much lesser Rupee liquidity. This is expected to curb volatility as there will be lesser INR-USD carry trade. People are selling INR and investing in Dollar. This is leading to depreciating pressure on Rupee and the idea is to curb it. 
  • As liquidity tightens, Banks have two options. One, borrow from MSF at Repo +100 bops or borrow from markets. Not anymore as MSF has been raised to Repo +300 bps. This is expected to lead to higher interest rates and make Indian interest rates more attractive for FIIs in debt markets. This could lead to more flows and support Rupee.

The measures support exchange rate but has lead to hardening of interest rates. Yields in bond markets have jumped by 30-35 bps since y’day closing and call rates have jumped by 200 bps or so. It will be interesting to see whether RBI persists with this new policy as it could see significant dent in credit offtake as well. It also implies the July 30 policy is likely to be a non-event.

Instead of increasing Repo, RBI has just tweaked its measures to get the same effect. It could not raise Repo as economy continues to suffer. Raising Repo would mean end of the rate easing cycle, a sure disaster for the ailing economy. People had already started talking of rate hikes in India (one and two) given Rupee depreciation and it has happened much sooner than expected.

It is really tough to being RBI right now. Earlier it was trying to balance the infusion of liquidity (to counter tight liquidity) with its tight mon policy (to counter inflation). Now it is balancing the opposite -tightening of liquidity with its easy policy. Growth continues to remain weak warranting an easy policy and inflation (CPI) surges warranting an end to the easy policy. On top of that currency troubles. RBI’s cupboard is brimming with problems with no easy answers…

Law and Finance: What Matters? Hong Kong as a Test Case

July 15, 2013

Nice paper by Horace W.H. Yeung  (School of Law, University of Leicester) and Flora Xiao Huang (University of Hull – Law School).

LaPorta et al started this debate showing how legal systems matter to financial development. They showed countries with Common law (Anglo Saxon) were better at securing property rights than Civil law countries. As property rights are crucial for financial development, countries with common law (or those that inherited from their colonial masters) had better developed financial systems particularly market based systems. Others have contested this view on several grounds.

The authors test this hypothesis on HongKong and find it to be a mixed bag:


How to design a new Central Bank?

July 15, 2013

Ricardo Reis of Columbia explores the issue in the NBER conference on 100 Years of Fed.

He begins asking the q what is one had to design a new Fed:


The economic consequences of being a smoker

July 12, 2013

Julie Hotchkiss and M. Melinda Pitts of Atlanta Fed coauthor this paper.

They say non-smokers get higher wages than smokers. Even one cigarette per day is enough to kickstart the wage differential:


The narrowing of the Australian University economics curriculum

July 12, 2013

This looks like a global problem but nothing much is done. Most places complain how econ curriculum has become narrow over the years focusing just on neo-classical and math related stuff (or should I call it math and econ related stuff!!) and ignoring the other areas like history, economic development etc etc.

As this blog keeps saying econs do not have a problem of just fixing economic policy but even economic teaching.

Here is another of such papers which shows analytically how the econ curriculum has become narrower in Australia’s econ univs.:


CSO to release key economic data at 5:30 ??!!

July 11, 2013

Crazy things keep happening. Just when I hoped BoP data would now be released during market hours, the reverse has happened.

Now CSO will release the 3 key data it is responsible for – CPI inflation (new series), IIP and GDP – post market hours at 5.30.  Why so?

  • The main reason would be to curb market volatility. Yes there is huge volatility but that is the whole point right. Who said markets are expected to be slow and steady.
  • Or is it because of the numerous mistakes CSO keeps making in the data making it both embarrassing and doubly volatile?

It would have been much better if the several govt officials were asked to stop commenting  the moment data is released. It is these comments which create unnecessary volatility and raise false hopes..

On one hand the govt keeps promising to liberalise markets and then keeps taking such strangulating measures…

NBER conference on first 100 years of the Federal Reserve

July 11, 2013

NBER hosted the conference yesterday.

It has some really interesting papers and Speech by Bernanke.

I will try and cover a few papers in days ahead..

While Indians were silent and government was busy destructing..

July 11, 2013

A brilliant piece by Pratap Bhanu Mehta.

He presents a full set of events when we were silent and India’s government was busy destroying everything under the sun:

First, the UPA came for the roads sector. They destroyed contracting. They slowed down road construction. They left highways half built. We did not speak out. After all, the only reason the NDA could have started the golden quadrilateral is because they wanted to spread Hindutva.

Next, they came for the airline sector. They let Air India suck more money from taxpayers. They let bad regulation destroy the private sector. They let crony banking sustain bad bets. They ensured India would never be an aviation hub. We did not speak out. After all, flying is what birds do, not humans. Besides, aviation is bad for climate change.

Then they came for the power sector. …

And it goes on to cover agriculture, industry inflation etc etc..

Superlative stuff. Why were we silent? Is it that we are too tolerant a society or just that people have exited from governance as Prof AS pointed in his super article?

Terrific stuff.

The economic (negative) consequences of Professor Amartya Sen

July 10, 2013

It was amazing and unimaginable to see Sachin Tendulkar being howled at his home stadium – Wankhade sometime back.

It is equally amazing to see the negative coverage Prof. Amartya Sen and his camp is getting these days. Well getting criticism from the academic junta in academic press is part and parcel of the profession. But to see it in mainstream media and pretty regularly at that is amazing.

Arvind Subramanian of PIIE writes a nice piece on the topic. He points how Prof. Sen’s several rights and entitlement programs have craeted an economic mess in India. As Niranjan pointed in a brilliant piece that UPA’s economic (read political) strategy is hugely influenced by Prof Sen’s work.  So the economic faultlines have appeared mainly because of following Sen camp:


RaGa vs NaMo is like Sen vs Bhagwati

July 10, 2013

Niranjan Rajadhyaksha nicely converts the crazy RaGa/NaMo political debate into an economics one. In many ways it is opposite of what we are figuring these days. We are being told that most econ actions etc have a political angle to it. Here the political actions are based on econ thoughts..

He says RaGa philosophy is largely drawn from Sen camp and NaMo from Bhagwati camp. Former believes growth is useless without lowering inequality and latter says growth auto leads to lower inequality.

Bhagwati versus Sen may not have the same resonance as Modi versus Gandhi, but behind the political fight scheduled for 2014 is a duel of economic ideologies.

The protagonists of this cerebral combat are Jagdish Bhagwati and Amartya Sen, without a shred of doubt two of the finest Indian economists ever. The political hue to the intense debate between the two old friends of Manmohan Singh is another reason why the ongoing intellectual scuffle between the two brilliant economic minds deserves to be followed.
Well as Keynes said way back:

Banning the lawns (yeah the greens)..

July 9, 2013

An interesting paper by Sarah Schindler of University of Maine (School of Law). I haven’t read it fully but found the initial bit pretty interesting.

She says we keep worrying over worsening water supplies and lack of agri land leading to food-shortages. Several measures are considered but no attention is made on the lawns which take fair bit of land and are fairly water intensive:


The wrongs of rights (Right to education, food, and god knows what all??)

July 8, 2013

A brilliant article by Prof Devesh Kapur of University of Pennsylvania. It does not get better than this. It is nicely mixed with criticism and quotes

He criticises this approach by current govt to make right to programmes and undermining every institution:


Economic Imperialism or Imperial economists?

July 8, 2013

I was just reading this oldish paper by Ed Lazear of Stanford. I thought this was just a title of the paper but realised it has become a proper term in economese.

Prof. Lazear points to the contributions in other social science areas and how it has overpowered the ideas taught in those areas:


Financial crises and wars..

July 6, 2013

Well the current crisis is mostly compared to great depression. Few others compare it to the Panic of 1907 which finally led to a central bank in US and so on so forth.

Harold James draws some interesting comparisons to today’s times. 2014 will mark the 100th anniversary of first world war and Prof. James points to some prior financial events before the war. The main idea is how financial globalization can become the equivalent of a national arms race, thereby increasing the vulnerability of the international order.

Read the comments as well disproving what Prof. James says. History and its might…


The reasons for Turkey’s protests

July 4, 2013

Three Turkey born economists reflect on what is going on:

  • Dani Rodrik – Why democracy is unlikely to come back post protests..
  • Daron Acemoglu — Similar to Rodrik’s question and also compares Turkey protests to Brazil’s..
  • T Sabri Oncu of CAFRAL, RBI – The reasons behind protests are neo-liberal growth model followed by the political system in Turkey.

Did I read that right? Blaming neo-liberal growth model for Turkey’s protests! Interesting times surely. Oncu goes on to say (One can’t miss the similarities with India’s growth model):

The AKPhas not presided over an economic miracle. Its austerity-based economic model has been nothing but the neo-liberal speculation and finance-led growth model of development that has been around since the early days of Margaret Thatcher and Ronald Reagan, and is familiar to Indians. Through its economic policies, the AKPhas been imposing its neo-liberal agenda by increasingly commercialising public services, creating areas of rent for large corporations, and eroding the living standards and security of a significant part of the working people. 

The AKPgrowth model depends on cheap labour, speculative financial capital inflows and a high trade deficit. The share of industrial production is decreasing, and the country is becoming increasingly dependent on imports of intermediate and capital goods as well as energy. Agricultural production is weak, and meat production is virtually non-existent that even the well-liked Turkish kebabs are now grilled with meat imported from such faraway places as Argentina.

It is usually argued that the AKPsignificantly raised the national income and the prosperity of the Turkish population. This statement is correct only in the averages. Although there are minor improvements that can quickly reverse if the AKPeconomic miracle collapses, the income distribution is still skewed. And, the rich tail of income distribution is so fat that it can easily be called obese. If the Gini coefficient is any measure of income equality, India beats Turkey by far, .34 to .40 in 2010 respectively and the lower the Gini coefficient, the lower the income inequality. 4

It is also argued that the AKPpushed reforms that made housing, education, and healthcare more accessible. True, the construction sector constitutes about 6% of the annual gross domestic product (GDP) equalling the share of the manufacturing sector and many cities around the country look like huge construction sites. Many of the new apartment buildings in gated communities with security guards are beyond the reach of the majority of working people, and many of those new apartments are sold on easy credit. The Housing Development Administration’s buildings are of a low quality and are usually made available to AKPsupporters. A new shopping mall or another commercial building gets started almost every other day, and many shops in the new shopping malls sit empty with a slowdown in consumption. Debates have been going on about the possibility of a US-or Spain-like credit-fuelled real estate bubble in Turkey, with proponents of the AKPdenying the possibility.5

As for the increased access to education, a new private university pops up almost every other month, taking the quality of higher education further down and increasing the debt burden of families who want to provide their kids with a university education. Most graduates of these universities are not able to find well-paying jobs and the unemployment rate among the youth is above 20%. Further, healthcare is available to anyone who can pay for it, except that a majority of the hospitals are now private, the care they provide is expensive, and the quality of affordable care at the state hospitals is going down due to cost cutting and the increased work load of doctors, nurses and other personnel.

As I said, much like India..


The AKPeconomic miracle of the past decade stands on two pillars. First, on fuelling consumption through excessive credit. The driving force behind the country’s recent economic growth has been nothing but a spectacular rate of credit expansion, which reached 30% for households and 40% for businesses in 2011. Second, on rent extraction through privatisation of the commons from land to public enterprises, and spaces and buildings to natural resources. Indeed, Gezi Park that triggered the ongoing rebellion is the latest example of attempted privatisation of the commons.

Neither of these strategies is sustainable. Further, not only are households in significant debt, with a debt to disposable income ratio of about 45% in 2011, but also the corporate sector.6 Although the AKPtakes pride in having paid the last instalment of its debt to the International Monetary Fund (IMF), Turkey has borrowed increasingly more in the international financial market during its reign, shifting the foreign debt burden from the public to the private sector.

While the total foreign debt stock of Turkey in 2002 was $130 billion with 67% owed by the public sector, the foreign debt stock in 2012 was $337 billion with 67% owed by the private sector. In addition, while only 13% of the total foreign debt stock was short term in 2002, the short-term debt constituted 30% of the total foreign debt stock in 2012. More importantly, 88% of the short-term debt belonged to the private sector, and 66% of it belonged to the private financial sector in 2012.

This effectively turned the Turkish private sector into a shadow bank, which borrows short term in rollover debt markets, leverages significantly, and invests in long-term and illiquid assets, making Turkish corporations in general, and Turkish private banks in particular, vulnerable to currency shocks that may lead to collective bankruptcies. The AKPeconomic miracle recalls the experiences of Mexico in 1994 and Argentina in 2000, where surging external debt produced short-lived bubbles of prosperity, followed by currency devaluations, and deep slumps.7 No wonder Prime Minister Erdogan is worried about an imagined “interest rate lobby”.

Fascinating stuff.

One does not know where to look really. Turkey was seen as a successful growth model not very long ago. It is now falling apart. Though Prof. Rodrik had forewarned in 2009 itself that it will not sustain.


Does religious identity of India’s state legislators influence development outcomes?

July 4, 2013

An interesting paper by Sonia Bhalotra, Guilhem Cassan, Irma Clots-Figueras and Lakshmi Iyer.

One usually thinks the state legislators generally tend to favor their own religion people and much of the development programs are designed (explicitly and implicitly) to serve one’s own community. After all it is the same community which elected the legislator. This paper says it is not really the case. They study the development outcomes based on religion of state developers and say muslims do a better job compared to non-muslim identities. Moreover, the outcomes are felt across communities and not just limited to muslims:


Chennai’s IT Hub almost closed because of lack of water..

July 3, 2013

Well this is going to be the reality for most commercial and residential places in India, if nothing is done about it. It is happening sooner than I thought.

ET reports that Chennai’s IT corridor which  houses all who’s who almost closed as there was no water!:


Impact of rupee depreciation on Indian academia..

July 3, 2013

A nice article in BS on the issue.

Rupee depreciation has hit libraries in several India’s instis really hard. Whatever foreign journals/books librairies import, are going to get costlier:

Sustained weakness in Rupee has posed a challenge before the country’s academic institutions. With US dollar hovering around Rs 60, the cost of foreign books and journals are feared to escalate.

The recent surge in the Indian rupee has prompted libraries of many premiere institutes and universities to either reconsider their orders for foreign books and journals or look for a local alternate.

This, according to academic experts, has raised concerns about the quality of academic output from the institutions.

Online journals remain an option but still some instis do get foreign journals:

Though most libraries in the country are associated with the University Grants Commission (UGC) for online journals, many of them still remain vulnerable to currency fluctuations due to their dependence on international periodicals and books.

One of the many such cases is the Indian Institute of Management, Bangalore (IIM-B), which is mulling to cut down on number of books being ordered from outside the country.

“Every year we order about 2000-2500 such books. However, the rupee depreciation is costing us over 10% more for ordering these books. Since we usually order throughout the year, this academic year we may have to reduce the order,” said a source at the institute’s library on condition of anonymity.

Some instis have taken a contigency fund approach:

Considering the frequent fluctuations in currency rates, Nirma University has evolved a model to keep a margin fund to safeguard against the rupee slide.

“Since 2008 we have been keeping provision for currency fluctuation and inflation. So, even if the prices go up for journals or books, we don’t deny to order that,” said Monita Shastri, chief librarian, Nirma University.

In each crisis lies an opportunity:

“Indian institutes are vulnerable to currency fluctuations. Journal may not have much impact, but foreign book purchases will get adversely affected due to currency depreciation,” said Anil Gupta, faculty at Indian Institute of Management, Ahmedabad (IIM-A).

However, Gupta also offers a lesson in this. “This is a golden opportunity for local publishers and authors to cater to the Indian market. They should turn this crisis into an opportunity for them. Authors will have an incentive to write for Indian market as foreign books get costlier,” Gupta, who is also a founder of National Innovation Foundation (NIF).

Nice and different example on rupee depreciation..

IIMB students nudging to collect more aid for Uttarakhand..

July 2, 2013

Noticing some interesting nudges at IIM Bangalore (IIMB) like labeling bins seperately for waste food/utensils.

The best nudge I witnessed was by Vikasna, social service initiative undertaken by the students of IIMB.  In order to collect more aid for Uttarkahand disaster, they had to make 2 choices:

  • Standard : Ask students to contribute their chosen amount. In other words, students given a choice to tick-in to the aid option.
  • Based on Nudges : Just deduct a certain amount from all students’ monthly mess bill. Those who wished not to contribute for the fund, had to opt themselves out from the aid option.

The wise men chose the second option!  I am told it worked wonderfully with only a few opt-outs. Further, it was not really implemented post reading Nudge/or some other beh econ paper. The committee just thought that people do want to contribute but are lazy/don’t get time types and unable to work on the first option. So unlike what the rational school thinks, these ideas are pretty natural to come as well.

Nice bit..Could be applied at other places as well..

Will Indian society ever stand and wait in queues?

July 2, 2013

A fascinating piece in today’s Mint. It is by Tjaco Walvis, MD of brand agency THEY India.

He is miffed with two things:

  • Why Indians don’t queue up?
  • If they do rarely queue in say places like airports, then the first urge is to break the queue. Why those in queue do not object to the jumper?


On a more serious note, he calls this as part of cultural capital which India has to acquire. Recently he is seeing some improvements on both the issues on queuing. So something is moving.

The lines at the security check at the Delhi Metro are regularly of nearly Japan-like orderliness, where queues run around corners and can be a hundred metres long at rush hour. Queue jumpers are quite consistently asked to stand in line. It seems that security checks and retail concepts such as Starbucks—where visitors are gently coaxed to queue up—impact social behaviour in a way that transcends to other situations.

If this is a structural change that took place in only two or three years, perhaps an urban civil society is coming of age in India as we watch.
It took Europe around two centuries to develop an engaged middle class. It may take India only a few decades, or less, to acquire such “cultural capital”. This could have profound cultural, business and political implications—for the better.

These things do  matter.

Kaushik Basu in this super paper says how no one imagined a few decades ago that Koreans could be as punctual as they are today. Difficult to say woth precision, but this cultural capital should have played some role in  Korean growth story as well. Though, Prof Basu says the society can get out of this cultural trap and need not remain there.

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