Archive for March 12th, 2019

RBI’s museum at Calcutta

March 12, 2019

It was really surprising to see this logo on the homepage of RBI’s website:

The RBI Museum

On clicking, one realised it is RBI’s museum at Calcutta. There is one in Mumbai in Fort area too.

The Calcutta museum website says:

Welcome to the The Reserve Bank of India Museum. The Museum will immerse you in a one-of-a-kind experience that explains the money, its role in the economy and your role in it, in a fun and interactive way. 

You can also explore how money has evolved over the centuries, how and why gold still holds an important place in our society and also about the genesis of RBI. The Museum also features a 7 ft. ‘Yap’ Stone, an interactive exhibit on gold mining, a 12 ft. high sculpture and much more. 

You can read more about ‘The RBI Museum’ in this brochure here and get a preview of the exhibits. Engage in a hands-on journey through exhibits that are brought to life through interactive displays, games, sculptures and videos.

Wow! It rarely happens that India’s museums welcome people. It is also nice that RBI has put up the link to the museum on its homepage. One is wondering, whether RBI is listening to the constant cry of this blogger to include history in its analysis? Too much to imagine but this is welcome…


ILFS fallout on GIFT city’s future

March 12, 2019

GIFT City is a 50:50 JV between IL&FS and state government-owned Gujarat Urban Development Company.

Maulik Pathak of ToI reports that with IL&FS in trouble, future of GIFT City is also in jeopardy. The State Government is likely to take the 50% stake but there are complications.



11 economic stats that sum Venezuela’s misery

March 12, 2019

Jon Miltimore in this piece:

A tragedy common to human history is unfolding in Venezuela. It’s impossible to predict how it will end or what the human toll will be.

As we watch events and hope for a peaceful resolution that restores liberty in Venezuela, here are some noteworthy facts about the Land of Grace.

    1. Venezuela has the largest oil reserves in the world. While the US is the top producer of oil, its total reserves represent a mere fraction—roughly 10 percent—of Venezuela’s 300-plus billion barrels of oil. (Source: UPI)
    2. In Venezuela today, the median monthly income is $8. (source: FEE)
    3. A two-pound bag of onions currently costs about $2 in Venezuela. (source: FEE)
    4. In 2016, the price of a gallon of gasoline in Venezuela was less than one cent per gallon. (source: Washington Post)
    5. Roughly 90 percent of Venezuelans today live below the poverty line. (source: The Borgen Project)
    6. In 1950, Venezuela ranked among the top ten most prosperous nations in the world. (source: Human Progress)
    7. In 2018, inflation in Venezuela topped 1 million percent. (source: Reuters)
    8. Economic projections show inflation in Venezuela is expected to hit 10 million percent in 2019. (source: Miami Herald)
    9. In 1959, the Venezuelan GDP per capita was 10 percent higher than America’s. (source: Human Progress)
    10. As of June 2018, about 2.3 million people had emigrated from Venezuela following its economic collapse, or 13 percent of its population. (Source: The Panam Post)
    11. When Hugo Chavez came to power in 1999, the Venezuelan GDP per capita was 27 percent higher than the average in Latin America. (source: Human Progress)

The fiscal health of states and the limits of federalism

March 12, 2019

V. Anantha Nageshwaran in his new article points to this new book by Dr YV Reddy on fiscal federalism. It is co-authored with Mr. GR Reddy, adviser to the government of Telangana.

Anantha takes us through the release of the book which is critical of the terms of reference of 15th Finance Commission:

On 8 March, I had the privilege and honour of being a panellist at an event organized at the Madras School of Economics for the release of the book Indian Fiscal Federalism authored by Y.V. Reddy, former governor of the Reserve Bank of India (RBI), and G.R. Reddy, adviser to the government of Telangana. The book was released by C. Rangarajan, another former RBI governor and chairman of the 12th Finance Commission.

Y.V. Reddy, with his self-deprecating humour, used to begin his speeches (during his tenure as chairperson of the 14th Finance Commission) by saying that he did not need an introduction but only a conclusion. He would be alluding to his tendency to couch his views and opinions as self-evident questions, leaving the audience and readers to draw their own inferences.

He has been speaking his mind on many issues of late, and in his co-authored book Indian Fiscal Federalism, he continues that practice. For example, he pulls no punches while talking of the functioning of Niti Aayog and about the Terms of Reference (ToR) of the 15th Finance Commission. Take this bit for instance: “Just a day after the presentation of the report of the Sub-group of Chief Ministers on rationalization of Centrally Sponsored Schemes, the Ministry of Finance issued a notification without taking on board most of the recommendations.” In another instance, he writes that the scope and remit of the Niti Aayog had been expanded and its stature reduced, with the result that there was little evidence of focus in its working.

The authors are quite critical of some of the “Terms of Reference” of the 15th Finance Commission. While they have sympathy for the use of the population figures of 2011, they feel that the union government directing the Commission to take “expenditure on populist welfare measures” into account while devising performance-based incentives is as problematic as many of the other criteria spelt out for determining performance-based incentives. For example, achievements in the implementation of the flagship schemes of the government of India cannot be a criterion. Some of the schemes may not be necessary or relevant for some states.

Interestingly, I had pointed to this paper by Kerela’s State Finance Minister Dr Issac (co-authored) which discusses the same points.

Looking forward to reading Dr Reddy’s book..

Pass-through of Bank of England’s policy rate to household interest rates

March 12, 2019

Michael Saunders,  External MPC Member at Bank of England in this speech discusses the monetary transmission in UK.

The transmission has been weak due to low policy rates:

Let me summarise the argument so far. Household deposit rates are unlikely to respond fully to policy rate hikes until the spread between deposit and policy rates has normalised further. With the funding gap closed, mortgage lending rates are now more sensitive to deposit rates and less sensitive to wholesale unsecured funding rates. Hence, for as long as deposit rates remain less sensitive to policy rate changes, rates on new mortgages may also respond by less than usual to changes in Bank Rate (and corresponding swap rates). 

The link from changes in the policy rate set by the MPC to changes in households’ deposit and lending rates is not permanently broken, but is likely to be less effective while the policy rate is very low. This has some general implications for monetary policy. Since the crisis, policymakers have had to pay more
attention to the issue that there may be an effective lower bound (ELB) for the policy rate – not necessarily at zero – below which a further reduction generates no extra stimulus and may even be counter-productive.

However, as the policy rate approaches the ELB, there also may be a range in which policy rate changes have progressively less impact on banks’ deposit and lending rates. Close to the ELB, a lower policy rate would be reflected mainly in wider lending spreads (over riskless rates) rather than lower mortgage rates.
Conversely, a slight rise in the policy rate would produce narrower lending spreads. Lending and deposit rates would not move much either way.

This is only part of the monetary transmission mechanism (MTM). But it is a fairly important part.

BoE models suggest that monetary policy in the UK operates through four main channels: the exchange rate; cost of capital and non-housing wealth; the cashflow effect on households and their willingness to bring forward or delay purchases; and a housing channel. The latter two channels rely on the pass-through of policy rate changes to household interest rates. For example, a higher policy rate pushes up mortgage rates and hence weakens housing activity and house prices, reducing the value of households’ collateral (the housing channel). And the combined rise in deposit and mortgage rates squeezes consumer spending because the spending of people with a mortgage is more sensitive to interest rate changes than the spending of net savers (the cashflow channel), even if this effect is less marked than it used to be.20 The Bank’s suite of models suggest that these two channels typically account for between a third and two thirds of the total expected medium-term impact on output from policy rate changes, depending on how persistent the interest rate change is and the extent to which it is anticipated. If these channels are less effective, then the overall MTM also may be less effective than usual.

It is not possible to be precise about where the threshold for such a zone of reduced policy effectiveness might be. It probably starts when sight deposit rates reach or are close to their effective lower bound, and hence when the policy rate itself is clearly above the ELB. As a rough estimate, my guess is it that for the UK this might occur at a policy rate of roughly 2% or so, reflecting a near-zero floor for sight deposit rates plus an equilibrium spread of 150-200bp between household sight deposit rates and the policy rate.

The reduction in policy effectiveness may become more marked as the policy rate approaches the ELB and a higher share of deposit rates (eg time deposits) become constrained. Of course, this is still very uncertain  and we are still learning about the effects of policy rate changes at low levels. But this issue may be a fairly regular occurrence given that the neutral policy rate is much lower than previously.


Banks That Are No More: From Tagore’s Union Bank To Shetty’s Vijaya Bank

March 12, 2019

My new piece in Bloomberg Quint (behind a paywall)..

As Vijaya Bank and Dena bank are merged with Bank of Baroda, they join the long list of banks which were once mighty but have faded in memory. In the article, I look at a few of such banks.

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