Archive for the ‘Indian Economy/Financial Markets’ Category

History trivia: Why 19 November is a curious date for much awaited RBI Board meeting…

November 15, 2018

The much awaited RBI Board meeting is slated on 19 November. But if news are to be believed, lot of patchwork is already done. Trust the folks to meet as if nothing has happened.

What is interesting is 19 November also happens to be birthday of former Prime Minister Indira Gandhi. Reading RBI’s history volumes, one clearly sees how the central bank just becomes a handmaiden of government during her PMship years.  This was largely due to the nationalisation of banks in 1969 which gave government/finance ministry enormous powers over economic and banking matters. Much action during those days came from finance ministry. The joke was that all RBI top management did was to wait for phone calls from Delhi.

It is interesting that we are seeing these battlelines between the two being drawn on 19th November of all dates. We are hearing talks of Section 7 being invoked (its history) where government wants to take away powers being taken away from RBI top management.

In all likelihood, this is just sheer coincidence. But what a coincidence. If we do see government taking control on the date and day, it will be an interesting case of history coming back and biting…


IMF building case for Central Bank Digital Currencies (and mentions hundis too!)

November 15, 2018

Christine Lagarde in this speech discusses discusses pros and cons of issuing a central bank digital currency.

But before discussing CBDC, it was really surprising to see IMF chief mentioning hundis:

Let me begin with the big issue on the table today—the changing nature of money. When commerce was local, centered around the town square, money in the form of tokens—metal coins—was sufficient. And it was efficient.

The exchange of coins from one hand to another settled transactions. So long as the coins were valid—determined by glancing, scratching, or even biting into them—it did not matter which hands held them. But as commerce moved to ships, like those that passed through Singapore, and covered increasingly greater distances, carrying coins became expensive, risky, and cumbersome.

Chinese paper money—introduced in the 9th century—helped, but not enough. Innovation produced bills of exchange—pieces of paper allowing merchants with a bank account in their home city to draw money from a bank at their destination.

The Arabs called these Sakks, the origin of our word “check” today. These checks, and the banks that went along with them, spread around the world, spearheaded by the Italian bankers and merchants of the Renaissance. Other examples are the Chinese Shansi and Indian Hundi bills.

Suddenly, it mattered whom you dealt with. Was this Persian merchant the rightful owner of that bill? Was the bill trustworthy? Was that Shanxi bank going to accept it? Trust became essential—and the state became the guarantor of that trust, by offering liquidity backstops, and supervision.

Why is this brief tour of history relevant? Because the fintech revolution questions the two forms of money we just discussed—coins and commercial bank deposits. And it questions the role of the state in providing money.

Hundis has long been forgotten by researchers in India barring those history folks. Nice to see Lagarde mentioning hundis along with Sakks and Shansi..

Now to CBDC:


How does Inflation in Indian States differ with the national average?

November 15, 2018

Nice article by Sujata Kundu, Vimal Kishore and Binod B. Bhoi of RBI. It is released in RBI Bulletin for the month Nov-2018.

They look at how inflation is behaving in India’s States:

An analysis of the regional inflation dynamics in India reveals the presence of wide dispersion in inflation across states, largely driven by food price inflation. State level inflation tends to converge to the national average over time, however, validating the choice of national level consumer price inflation as the nominal anchor for monetary policy in India.

Which state has the highest average inflation and volatility? Interestingly, Southern States have higher average inflation (6.8%) compared to others:

Notably, all the southern states had higher average inflation than northern states like Punjab, Haryana, Uttar Pradesh and Uttarakhand as well as states in other regions like Maharashtra and Madhya Pradesh. Bihar recorded the highest inflation of 16.1 per cent (November 2013), while Chhattisgarh recorded the
lowest inflation level of (-) 2.3 per cent (June 2017) as against the national-level maximum of 11.5 per cent (November 2013) and minimum of 1.5 per cent
(June 2017). 

Over this period, inflation and inflation volatility did not exhibit any noteworthy co-movement, which is in contrast with the two-way causality posited in the
literature . In fact, when inflation averaged a high of 10.0 per cent in 2012-13, its volatility was at the lowest in the period of study at 0.5 per cent; volatility rose to 1.2 per cent when average inflation was at its lowest level of 3.6 per cent in 2017-18 (Chart 4a). This relationship alters dramatically, however, in the regional setting.

Unlike the all-India pattern, state-level inflation and inflation volatility co-moved during 2012-13 to 2017-18 (Chart 4b). Another interesting observation is that the states/regions that experienced high average inflation (e.g., Bihar, Chhattisgarh, Odisha and West Bengal) also recorded high volatility in inflation.

Much more in the short research paper with graphs and tables. RBI should release more and more of such type research.

Why Central bank autonomy is in the government’s “enlightened self-interest”…

November 14, 2018

Avinash Tripathi has a nice piece on the recent turmoil in relations between Indian central bank and government.

There is a bit of everything in the article: political economy, game theory, history, microeconomics and even Sherlock Holmes!

RBI deputy governor Viral Acharya in government crosshairs and what to expect if Section 7 of RBI Act is invoked…

November 14, 2018

Asit Ranjan Mishra of Mint on the ongoing drama between RBI and Finance Ministry.

The government may train its guns on Reserve Bank of India deputy governor Viral Acharya if the confrontation with the central bank escalates at the RBI board meeting on 19 November, a person familiar with the deliberations within central bank’s board said.

In case discussions between the government and RBI break down, the government may choose to invoke Section 7 of the Reserve Bank of India Act, 1934, and at least four of the 11 independent directors of the central bank could move a no-confidence motion against Acharya for publicly airing his views protesting government interference, the person said, asking not to be identified because of the sensitivity of the matter.

If Section 7 of RBI Act is invoked, the five representatives of the central bank, including governor Urjit Patel, and the two finance ministry secretaries have to withdraw from further deliberations of the board. The independent directors will then pass resolutions on contentious issues such as liquidity measures for non-banking financial companies (NBFCs) and micro, small and medium enterprises (MSMEs) and RBI’s 12 February circular.

“The danger in this board meeting is that it will boil down to voting. If both sides do not budge from their positions after their presentations, they will have to walk out of the room. The government is clear that there needs to be resolution of all the contentious issues at this meeting,” the person said.

Once the government invokes Section 7, the powers of the RBI board will be supreme.

“Subject to any such directions, the general superintendence and direction of the affairs and business of the bank shall be entrusted to a central board of directors which may exercise all powers and do all acts and things which may be exercised or done by the bank,” the relevant part of Section 7 (2) of the RBI Act says.

Hope RBI minutes the meetings and tells us atleast something…

If investors care for central bank independence, why does investment flow to China?

November 13, 2018

Manas Chakravarty has a nice piece in Mint:

Economic affairs secretary Subhash Chandra Garg’s tweet in reply to RBI deputy governor Viral Acharya’s hard-hitting speech was widely deplored, but he did have a valid question. To what extent are investors really bothered about central bank independence? If they are, what explains the flood of money that entered China, where the central bank doesn’t even pretend to be independent?

In fact, central bank independence has been in vogue only for the last 30 years. Not everybody is enamoured of it. Some academics have argued that rather than being truly independent, central banks have become handmaidens of international finance. Some have alleged central bankers pursue independence as a means of gaining power and prestige. Critics have said that the increasing emphasis on central bank independence is the result of the power of the financial sector to assert its interests, or the interests of creditors, over those of households and debtors, as inflation targeting results in the redistribution of real income from debtors to creditors. Fingers have been pointed to the rise in inequality in recent decades as a result of central bank policies that have led to huge gains for asset markets. In short, central bank independence is closely bound up with the rise to global pre-eminence of the financial sector.

…..let’s get back to the example of the Chinese central bank. It is unabashedly an arm of the Chinese state and the prime instrument of the government’s financial repression. It is partly because of its lack of independence that China is sitting on top of a volcanic mountain of debt, a mountain that now threatens to blow its top. However, foreign investors in China were not really bothered about the credibility of its central bank. They banked instead on the credibility of the Chinese government and its track record in managing extraordinary economic growth.

It is, therefore, an empirical matter whether investors repose confidence in the central bank or in the country’s government. In Turkey or Argentina, investors would no doubt prefer central bank independence. In China’s case, they seem to believe it doesn’t matter, as they rather ironically seem to have immense faith in the ability of the Chinese Communist Party to deliver the goods.

The question is: Is the Indian central bank or the Indian government more credible to the financial markets? Whom do they trust more?


50 years of Gunnar Myrdal’s Asian Drama: History of Indian economy since 1968…

November 13, 2018

Swedish economist Gunnar Myrdal published his book – Asian Drama- 50 years ago in 1968.

Prof Kaushik Basu reviews India’s economic history since 1968 in this paper:

This paper is a short history of the Indian economy since 1968. India today is a changed country from what it was half a century ago, when Myrdal published his Asian Drama. The stranglehold of low growth has been broken, its population below the poverty line has fallen markedly, and India has joined the pantheon of major players globally. This paper analyses the economic policies and the politics behind this transformation; and uses that as a backdrop to take
stock of the huge challenges that lie ahead.

Here is another piece from Prof Ravi Kanbur:

The Government makes changes in RBI Board….

November 7, 2018

Some interesting changes last evening. Apparently, the media knew of these changes on Oct 4 2018, but RBI informed the public only yesterday evening.


Kalecki’s insights on coordinating India’s fiscal and monetary policy (lessons from Pakistan?)

November 6, 2018

Good to read and learn from article which bring a key idea/ideas from past to make better policies of today.

Rathin Roy of NIPFP in this piece brings Kaleckian ideas to improve coordination in our fiscal and monetary policies:


Demonetisation and patriotism?

November 5, 2018

The RBI independence drama is over us once again. The media is full of discussions over how government is trying to undermine RBI independence. The frequency with which this one topic keeps coming is quite something. Perhaps, RBI Governors are judged less based on their macro management but more on whether they cry “we are not independent”.

Though, this time the troubles were clearly invited by RBI and its Board. It is quite amazing that experts did not see this coming. It was brewing and was just a matter of time.

Yet, experts side mostly with the central bank and blame the government alone. For instance, this piece:


The history and importance of Section 7 (1) of RBI Act (1934)

October 31, 2018

Lot of talk in media about Section 7(1) of RBI Act 1934. As per media reports, Government has invoked this section to give certain orders to the central bank. See this by Ira Dugal.

Section 7 of RBI Act states:

1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider
necessary in the public interest.

(2) Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of
Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.

(3) Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this
behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts
and things which may be exercised or done by the Bank.]

I  had blogged about the history of Section 7(1) in an earlier post. Reblogging it:


Remembering Prof Dwijendra Tripathi: Why is India’s business history important?

October 30, 2018

Prof Tirthankar Roy pays tribute to Prof Dwijendra Tripathi.

In September this year, Professor Dwijendra Tripathi passed away. Until recently, he was the only business historian of India whose works were internationally recognized and respected. In the last twenty years, he produced as author or co-author a set of books, the Oxford History of Indian Business. The deep knowledge of the facts, love of the field, and a direct writing style, for which Tripathi was known, are in full display in these books.

I had interacted with Professor Tripathi closely in the 1990s, reviewed his books, visited his home, and admired him for his warm personality, scholarship, and his distance from ideological camps. On the last occasion we were in touch (7th July 2017), I emailed him the draft of a paper where there was a reference to Tripathi and Jumani in a mildly critical fashion, asking him if he would think that my criticism was unfair. He wrote: “Please go ahead with your paper; criticism is the life blood of scholarship.” Few Indian scholars I know of are so sporting.

In the process, he also tells us about his new book on business history:


100 Years of Saraswat Bank: What made the Gauda Saraswat Brahmins excel at banking?

October 29, 2018

I keep saying that 2018 is a year of anniversaries especially for banks and central banks.

On 14 September 2018, Saraswat Bank celebrated its 100th anniversary. We do see commercial banks celebrating 100 years but it is really nice to see an urban cooperative bank  also achieve this milestone of 100 years. On the anniversary, they call themselves 100 years young. Its business has grown from a mere 0.07 lakh in 1920 to nearly 60,000 crore today.

While searching for more articles on Saraswat Bank, I realised that North Kanara Gauda Saraswat Bank also completed its 100 years in 2017. Further research showed another cooperative bank- Shamrao Vithal Bank (SVB), formed in 1906, was in its 112th year.

The readers might wonder about the linkages between these three banks. The connection is that apart from being Mumbai based cooperative banks, these three banks were found by one community of Gauda Saraswat Brahmins (GSB).


Will Indian financial markets click Robert Merton’s SeLFIES?

October 24, 2018

Prof. Robert Merton recently gave the RH Patil memorial lecture organised by NSE.

Here is my recent piece where I have reviewed the key ideas of his lecture. The lecture was about this retirement financial product which he has named as SeLFIES. I also have tried to figure whether and how India can click these SeLFIES.

Profit Inflation, Keynes and the Holocaust in Bengal, 1943–44

October 22, 2018

Prof Utsa Patnaik in this interesting paper discusses Keynes’role in Bengal Famine in 1943-44. This year marks the 75th anniversary of the disaster.

Prof Utsa says Keynes’ profit inflation idea/policy was the key to the famine:


Economic growth is not an entitlement…

October 16, 2018

Anantha in this piece says it is assumed that we are entitled to higher and higher economic growth (via his blog). It is a mistake to think so and lower economic growth though a bitter pill will do us some good:

What is the good news about the World Economic Outlook (October 2018) that the International Monetary Fund (IMF) had released this past week? The good news is that it has lowered the forecast for global economic growth from 3.9% to 3.7% this year and the next. Why is it good news? Unsustainable economic growth in the years leading up to 2008 was one of the causes of the crisis. It was sustained by fickle and debt-based capital flows into the developing world. That is one of the reasons why developing countries had not been able to shake off the effects of the crisis until now. Indeed, India and China are no longer the same economies they were before 2008. They will continue to suffer from its after-effects for quite some time to come. They are yet to figure out and admit that their growth was simply too fast for their own good.


The same goes for India. The debate over whether the rupee’s recent weakness is good or bad for the country misses the point. It is neither good nor bad. It is inevitable. India’s dependence on foreign capital flows and its higher inflation rate (despite the recent low outturn) make the medium-term case for a weaker rupee. Advocates and proponents of a strong rupee should note that the Federal Reserve could make the dollar stronger in the early 1980s with sky-high interest rates, but at the cost of inducing a recession.

India cannot replicate that. Other strong currencies around the world earned their spurs over a long time and the ingredients included not just low and stable inflation but also economic, financial and political stability and soundness. India needs an adult-like conversation on the economy. However, it lacks a quorum.

In 2012, a chart in The Economist showed that the global economy had packed so much economic growth in the decade up to 2010 (we now know how) that a prolonged period of mean reversion was not only overdue but also desirable. Only a prolonged period of low and stagnant economic growth—unfortunately with all its costs—will get us back to the table to discuss our goals and methods for the world economy and society. The World Economic Outlook (October 2018) growth downgrade marks a rather tentative beginning of a return to such a discussion. The world needs another Bretton Woods like conference, not just on exchange rate regimes but on economic growth regimes.

Keep the engine going even at the cost of total break down and stagnation thereafter….



150 years of Tata Group…

October 15, 2018

It all started in 1968 by Jamsetji Tata:

Nothing of Jamsetji’s childhood suggested he would create his own destiny. Born on March 3, 1839, in the sleepy town of Navsari in Gujarat, he was the first child and only son of Nusserwanji Tata, the scion of a family of Parsee priests. Many generations of the Tatas had joined the priesthood, but the enterprising Nusserwanji broke the mould, becoming the first member of the family to try his hand at business.

Raised in Navsari, Jamsetji joined his father in Bombay when he was 14. Nusserwanji got him enrolled at Elphinstone College, from where he passed in 1858 as a ‘green scholar’, the equivalent of today’s graduate. The liberal education he received would fuel in Jamsetji a lifelong admiration for academics and a love of reading. Those passions would, though, soon take a backseat to what Jamsetji quickly understood was the true calling of life: business.

It was a far-from-opportune time for a young native to take his first, tentative steps into the volatile world that was business in the subcontinent. Jamsetji’s entrepreneurial career began, in the words of JRD Tata, “when the passive despair engendered by colonial rule was at its peak”. The Indian Mutiny of 1857 was but two years past when Jamsetji joined the small firm that his father, a merchant and banker, ran. He had just turned 20.

Nusserwanji and Kaliandas, the partnership company his father presided over, was Jamsetji’s first port of call. With Nusserwanji for teacher, Jamsetji, an eager learner, gradually grew from apprentice to a skilful practitioner of the business arts. He gained knowledge about commodities and markets, trading and banking.

In 1868, aged 29 and wiser for the experience garnered by nine years of working with his father, Jamsetji started a trading company with a capital of Rs21,000. The budding entrepreneur was by now accustomed to the fickleness of the business life, being witness to the failure of his father’s banking enterprise. This episode blighted his first visit to England, where he was besieged by creditors, but Jamsetji also learned a lot on this trip, most significantly about the textile business.

Jamsetji’s maiden expedition to England, and others that he made in subsequent years, convinced him that there was tremendous scope for Indian companies to make a dent in the prevailing British dominance of the textile industry. Jamsetji made his move into textiles in 1869. He acquired a dilapidated and bankrupt oil mill in Chinchpokli, in the industrial heart of Bombay, renamed the property Alexandra Mill and converted it into a cotton mill.

Two years later, Jamsetji sold the mill for a significant profit to a local cotton merchant. He followed this up with an extended visit to England, and an exhaustive study of the Lancashire cotton trade. The quality of men, machinery and produce that Jamsetji saw during this sojourn was impressive, but he was certain he could replicate the story in his own country. Jamsetji believed he could take on and beat the colonial masters at a game they had rigged to their advantage.

The prevailing orthodoxy of the time determined that Bombay was the place to set up the new project, but Jamsetji’s genius told him otherwise. He figured he could maximise his chances of success if he factored three crucial points into his plans: close proximity to cotton-growing areas, easy access to a railway junction, and plentiful supplies of water and fuel. Nagpur, near the heart of Maharashtra’s cotton country, met all these conditions. In 1874, Jamsetji had floated a fresh enterprise, the Central India Spinning, Weaving and Manufacturing Company, with a seed capital of Rs1.5 lakh. Three years later, his venture was ready to realise its destiny. On January 1, 1877, the day Queen Victoria was proclaimed Empress of India, the Empress Mills came into existence in Nagpur. At the age of 37, Jamsetji had embarked on the first of his fantastic odysseys.

Lots of links here. Chronology of the Tata Group is here.

I mean Tatas are such a behemoth and historical of an organisation, that no amount of reading is enough. Just amazing how this business group has built over the years…

Documentary on Haji Abdullh: Founder of Corporation Bank

October 12, 2018

This is just a brilliant (and highly tragic) documentary (youtube) on Haji Abdullah who found Corporation Bank in Udupi in 1906. He was a philanthropist and they say charity started with him. He gave up all his wealth for public purposes and eventually died owing money to the bank he formed. It was an absolute tragedy.

Apart from Corporation Bank, he contributed to many social and economic activities in the region.

In praise of India’s women economists

October 10, 2018

Niranjan in his recent piece lists some of the prominent women economists of India and discusses their work.

In any general economic discussion, it is rare to find mention of Indian economists and even rarer to find mention of  works by women economists. This is a good starting put to think and work on the women economists in India….

Reblogging and reminiscing: Before Thaler there was Pai

October 9, 2018

I cannot help but reblog this article I wrote reflecting on last year’s Economics Prize.

The recipient was Richard Thaler for his amazing and inspirational work on behavioral economics.  His Nobel lecture is really inspirational on getting ideas and then pursue them despite all adversity. Thaler even mocked himself saying on completing his thesis, his adviser famoulsy said:” We didn’t expect much of him”.

Having said that, we have barely engaged with Indian financial history in a meaningful way. I wrote how Dr TMA Pai of Syndicate Bank had not just thought about the financial nudge idea but even implemented it very successfully at his bank via pigmy deposits way back in late 1920s. Sidin the editor of Mint Sunday paper not just agreed to publish it right away but also gave it a teasing title “Before Thaler there was Pai”. 🙂

I am still amazed how little we learnt from Pigmy Deposits gives our focus on financial inclusion. It helped open bank accounts across the region, encourage savings, mobilise deposits for the bank and most importantly generated enormous trust amidst bank’s customers. It was a huge win-win for all the stakeholders. But still never got the traction it deserved..

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