Archive for May 8th, 2020

New Borrowing Program and rising WMA

May 8, 2020

The Government has announced new borrowing program for the first half 2020-21. The earlier borrowing was kept at Rs 4.88 lakh crore of which 98,000 cr has already been borrowed.  The Govt has revised and announced new program of Rs 6 lakh cr which implies borrowing is higher by Rs 2.1 lakh cr.

Apart from this, WMA for the week ended 1-May-2020 was noted at  all time high of Rs 1,65,833 cr.

The crisis is worsening beyond imagination…

Franklin Templeton India’s apology to SEBI

May 8, 2020

All kinds of things happening.

On 30 Apr 2020, FT’s Global head. Ms. Jenny Johnson blamed SEBI’s guidelines on unlisted securities for the failure of the six funds.  This created furore in Indian markets.

FT India office had to issue an apology to SEBI:

In response to a question regarding the winding up of six schemes offered in India, Ms. Johnson provided general background concerning Franklin Templeton’s experience in the Indian market as it existed before COVID-19. The reference to the regulations around unlisted securities was intended to be a part of these background statements to provide context to an audience unfamiliar with Indian markets.

As per our notice and all communications issued to date, and as stated by Ms. Johnson in her remarks, the primary reason which forced the decision to wind up these six schemes was the severe market dislocation caused by the COVID-19 pandemic and related lockdown which led to severe market illiquidity particularly for papers rated below AAA, combined with heightened redemptions during this period.

Franklin Templeton would like to highlight that every possible option to avoid this difficult decision was considered, but it was concluded that this was the only viable option to protect value for investors in these funds. Working closely with the Trustees, the firm is committed to ensuring an orderly and equitable exit for all investors at the earliest possible time.

Franklin Templeton has a long history of over 25 years in India, where a third of our global workforce is based, and the firm remains fully committed to our clients and our business in India.

We deeply regret any unintended slight this may have caused to the esteemed offices of SEBI whom we have always held in the highest regard and unconditionally apologize for the same.


A Philosopher-Banker Who’s Shaking Up a Nation (Suriname)

May 8, 2020

Interesting piece in NYT:

Steven Coutinho had long wanted to help Suriname, his homeland, overcome its colonial past. A huge financial scandal gave him his chance.

Is central bank currency fundamental to the monetary system?

May 8, 2020

Hanna Armelius, Carl Andreas Claussen and Scott Hendry of Bank of Canada in this paper look at one of the fundamental questions of monetary economics: Why do we need a central bank currency? Why can’t we just work with commercial bank deposits to work as money?

In this paper, we discussed whether the ability of individuals to convert commercial bank money into central bank money is fundamentally important for the monetary system. This is a significant question because cash, the only form of central bank money that the public currently has access to, is becoming marginalized in some countries. The question is highly relevant to the discussion about whether central banks need to issue a retail CBDC.
Theory suggests that commercial bank money is sufficient if it is safe. We have argued that instituted measures like deposit insurance, lender of last resort, regulations and supervision, together with sound government finances and macroeconomic policies, make commercial bank money safe up to the limit of the deposit insurance guarantee—and often beyond.

Thus, to begin with, neither cash nor a CBDC seems fundamental to the monetary systems in countries with these measures in place.

We discussed two other potential reasons why cash or a CBDC might be fundamental. The first is the role of convertibility of bank deposits into cash or a CBDC for the uniformity of money. We argue that the uniformity of money can be maintained without cash or a CBDC if:
• institutions are strong,
• the government has the ability and willingness to quickly address systemic problems, and
• payment alternatives are instantaneous and fully understood to be so.

Weakness in any of these components may leave some role for cash or a CBDC to help ensure the uniformity of different types of money.

The second reason is the role of convertibility of commercial bank money into central bank money in giving a sense of control to economic agents that mistrust banks. Research has shown that individuals who feel they are in control are more willing to take risks. Thus, in this sense, one of the roles of cash, and potentially of CBDC, may be to promote a sense of control for individuals. Furthermore, by extension this will support individuals’ trust and
confidence in their financial well-being and the financial sector.

Our overall conclusion is that the question of whether general public access to central bank money in the form of cash or a CBDC is fundamental to the monetary system is a judgment call and depends on the national context. In the two countries that are now experiencing the most rapid decrease in cash, Sweden and Norway, the governments have a proven record of protecting commercial bank money in times of crisis. People therefore have good reasons to
believe their commercial bank money is safe should a new crisis come along. However, the perceived control provided by the ability to convert commercial bank money into cash or a CBDC may still be needed to make people willing to hold the former. We find that more research into this mechanism is needed before we can draw any definite conclusions. 

Controlling COVID-19: Learnings from the Northeast

May 8, 2020

Interesting article by Bishwantah Sinha:

Self-governance versus policing, ownership at the village level, and cooperation among different ethnic groups have enabled India’s northeastern region to contain the spread of the virus.
My understanding of experiences across different regions tells me that in pandemics, self-governance and local institutions are highly important.

Rise in inequality and falling low labor productivity growth are robust predictors of crises

May 8, 2020

Pascal Paul and Joseph H. Pedtke of San Francisco Fed in this research:

‘Long-run historical data for advanced economies provide evidence to help policymakers understand specific conditions that typically lead up to financial crises. Recent research finds that rapid growth in the top income share and prolonged low labor productivity growth are robust predictors of crises. Moreover, if crises are preceded by these developments, then the subsequent recoveries are slower. This recent empirical evidence suggests that financial crises are not simply random events but are typically preceded by a prolonged buildup of macrofinancial imbalances.

The relation runs both ways.

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