Archive for April 28th, 2020

John Maynard Keynes’s art portfolio

April 28, 2020

Interesting voxeu podcast:

Keynes amassed an extensive collection of fine art during his lifetime. David Chambers tells Tim Phillips what the financial returns on his investment have been, and the insight this gives us into how to value an art portfolio as an asset.

How to Develop a COVID-19 Vaccine for All

April 28, 2020



RBI should not bypass its MPC

April 28, 2020

New piece by Urjit Patel. He says RBI should not bypass MPC as seems to be the case of late:

By objective measures, the MPC framework until recently worked rather well. It lent transparency and democratic accountability to the process of interest-rate setting; combined with efforts on managing food inflation, it has brought inflation closer to the target; it has contributed to tempering household inflation expectations; and, it has kept borrowing costs in the economy at reasonable levels in spite of the high level of government borrowing and several other distortions. Indeed, rating agencies and multilateral institutions repeatedly mention the MPC and the inflation targeting framework as a landmark structural reform towards sound macroeconomic management.

Yet, since last year, somewhat inexplicably, a series of monetary actions by the RBI have left the MPC’s decision on the policy rate partly redundant, diluted the accountable process of monetary decision-making, and put at stake the sanctity of the framework.

Let me elaborate.

With a stated intention to improve the transmission of monetary policy to households and corporations, the RBI has pumped unprecedented levels of money (close to Rs 7 trillion) into the banking system. It has done so mostly by purchasing government bonds but partly also by purchasing dollars. Given impaired financial sector balance-sheets, transmission to economic growth has been at best muted; liquidity is no silver bullet to durably address financial sector stress. The primary effect of excessive liquidity has, instead, been to monetise the government’s expenditures and keep its borrowing costs low. With its declared aim not being met satisfactorily, the RBI has doubled down on liquidity supply, with the same outcome.

An important casualty has been the MPC framework.

At times, even when the MPC has kept the policy rate unchanged, the RBI has injected yet more liquidity to move medium-term interest rates down; the two actions have been noted to be in direct contradiction of each other. If the objective is to move medium-term rates, why not build consensus within the MPC to cut the policy rate more aggressively and communicate the rationale?

Further, given the enormous liquidity glut, every night banks park liquidity with the RBI at a (reverse repo) rate lower than the policy rate and which is not set by the MPC; nevertheless, this rate used to be changed only as part of the MPC Resolution. Lately, the RBI has moved this rate progressively lower than the policy rate; recently, it has done so outside of the MPC meeting cycle and not as part of the MPC Resolution. There are straightforward tools in liquidity management to ensure that in surplus conditions also, the central bank transacts with banks at the policy rate — technically, by switching from “deficit” to “floor” system of liquidity management. Such a switch is routinely adopted by central banks when they provide excess liquidity; the RBI has chosen not to do so.

The net effect is that market interest rates are being increasingly controlled by the RBI rather than the MPC. Indeed, there is a proposal that the rate at which the RBI absorbs liquidity be still lower, likely divorced from the policy rate set by the MPC. The spirit of the MPC framework enshrined in the RBI Act is being violated. It is unclear how the MPC can be expected to satisfy its legal mandate if what it seeks to achieve via setting of the policy rate is in conflict with, or compromised by, the RBI’s liquidity management.

In my earlier piece, I made similar points..

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