Archive for the ‘Indian Economy/Financial Markets’ Category

Constructing a composite index of States’ fiscal performance and its impact on yields of State Development Loan

January 24, 2022

Ramesh Jangili, N.R.V.V.M.K. Rajendra Kumar and Jai Chander in this Interesting RBI paper construct a composite index of states fiscal performances. Then they assess the impact of index on yields of State Development Loans (state government bonds):

This paper constructs a composite index of States’ fiscal performance and examines if the constructed index can help in explaining the State Development Loan (SDL) yield spreads. Key fiscal parameters viz., deficit, debt, expenditure quality, revenue mobilisation efforts, and market liquidity of SDLs are considered for the composite index.

The inclusion of both fiscal as well as market indicators makes the study unique and broadens the analysis. Empirical results establish a statistically significant association of the index with SDL yield spreads suggesting that better fiscal management and improved market liquidity can help states to reduce their cost of borrowing. Further analysis of individual sub-indices revealed that deficit, expenditure quality and market liquidity are the important factors in determining yield spreads.

Thus, the index provides a menu of choice to state governments to reorient their policies towards improving their performance in order to reduce the cost of borrowing. The index provides investors with a single measure to make a more informed investment decision, thereby expecting to make the price discovery mechanism of SDLs more efficient.

The two states which feature in top rankings in each of the years are Karnataka and Gujarat. N.East states lag behind in all the years.

The Impact of COVID-19 Pandemic on Consumer Confidence in India

January 18, 2022

Aditya Mishra, Roshin Paul P and Tushar B. Das of RBI in the Jan-22 Bulletin article analyse the impact of pandemic on consumer confidence index. The authors work at Division of Household Surveys, Department of Statistics and Information Management, which looks quite interesting.

Most countries witnessed a gradual uptick in consumer confidence after the major slump encountered when the Covid-19 pandemic first hit their shores, though it is yet to return to pre-pandemic levels in most countries. This article analyses the impact of the pandemic on consumer confidence in India, as gauged by the Reserve Bank’s Consumer Confidence Survey (CCS).


    • The pandemic severely dented consumer confidence in India, with sentiments of households across strata influenced by the spread of infections and fatalities.
    • Sentiments of consumers in severely impacted cities were more affected as compared to that for respondents in other cities.
    • While consumers remain concerned about the current situation, their expectations for the year ahead may portend confidence in economic recovery after subsidence of the pandemic.

It will be interesting to see whether the pandemic had any long term impact on consumer confidence and habits..

How will taper impact Indian economy this time?

January 18, 2022
Barry Eichengreen, Poonam Gupta and Rishabh Choudhary in this IPPR paper assess whether and how taper will impact Indian economy:

On November 3, 2021, the Federal Open Market Committee announced that it would reduce the scale of its asset purchases by $15 billion a month starting immediately. Do emerging markets, such as India, need to prepare for a replay of the taper tantrum of 2013? We show that emerging markets, including India, have strengthened their external economic and financial positions since 2013. At the same time, fiscal deficits are much wider, and public debts are much heavier. As U.S. interest rates now begin moving up, servicing existing debts and preventing the debt-to-GDP ratio from rising still further will become more challenging. Either taxes have to be raised or public spending must be cut to generate additional revenues for debt servicing.

Lots of charts and data in the paper.

Indian Agriculture @ 75: Past achievements and future challenges

January 17, 2022

Ashok Gulati, Ritika Juneja and  Ranjana Roy of ICRIER in this IPPR paper analyse Indian agriculture over 75 years and way forward:

India has experienced significant transformation in its economy since independence, especially agriculture.

From a severely food-deficit nation during mid-1960s to a self-sufficient one, and becoming the largest exporter of rice and the largest producer of milk in 2020-21 is not a small achievement.

Similar break-throughs have been achieved in poultry, fishery, fruits and vegetables, and cotton. All this was made possible with liberal infusion of modern technology, institutional innovations that made small holders part of this change, and enabling right incentives to cultivators.

This holds lessons for many developing countries in south and south-east Asia as well as in African continent.

But India still faces many challenges on food security front. Malnutrition rates amongst children remain high, and agricultural production begs the question of sustainability as water table in most parts of the country is falling rapidly. Also, the food system needs to move from ‘tonnage centric to farmer centric’ as incomes of agri-households remain pretty low, largely because of small holding sizes.

It is high time that India opens up land lease markets, build efficient supply chains with Farmer Producer Organisations by infusing digital technologies to unleash next technological revolution that promotes efficiency, inclusiveness, and sustainability in agriculture through precision agriculture.


Indian G-sec yields: RBI devolving the new 10 year benchmark on Primary Dealers!

January 17, 2022

I am not sure whether this happened in the past.

The government auctions the bonds every week to mage its borrowing programme and RBI manages the government bond auctions. In case, the RBI sees the bids for the yield higher than its comfort level, it either scraps the auction or devolves the auction on Primary Dealers. Primary Dealers are special institutions created for managing the bond markets.

In most bond markets worldwide, 10-year serves as the benchmark and most liquid bond. There is usually demand for these bonds amidst investors.  Every year governments issue new 10 year bond which serves as the benchmark yield.

Hence, it is really odd to see devolvement in the new 10-year bond.  The RBI’s preferred yield was 6.54% and lower but section of investors demanded a higher yield. The RBI accepted bids worth Rs 7555 crore at 6.54% and devolved the remaining Rs 5442 cr on primary dealers.

RBI can reject auction bids but can’t do much about the market sentiment. The yields in earlier benchmark 6.1% GS 2031 bond are at 6.64% and for the new benchmark 6.54% GS 2032 are at 6.61%.

In the end it is futile to fight market sentiment and usually misfires.


Kazakhstan unrest highlights continued importance of offline payments

January 13, 2022

Lewis McLellan in this OMFIF piece points how Internet outages in Kazakhstan rendered digital payments useless:

Civil unrest in Kazakhstan has led to widespread internet blackouts throughout the country, with the country’s largest city Almaty going five days with no internet.

Many Kazakh citizens rely on traditional digital payment methods like debit cards to buy food, but without internet connections, these were rendered useless. Local media have reported long queues for ATMs and withdrawal caps because of shortages of cash.

For central banks, the situation in Kazakhstan shows both the importance and the limitations of cash. The crisis makes it clear that it will not be enough for central banks to develop an online digital currency transaction network while treating cash as the offline back-up.

Joachim Samuelsson, CEO of Swedish technology company Crunchfish, told OMFIF: ‘This is something central banks have to plan and be prepared for. Obviously big internet blackouts like we’ve seen in Kazakhstan are rare in most countries, but if we have learned something from the Covid-19 pandemic it is that even unlikely scenarios may occur.’

The article discusses a platform named crunchfish which allows digital transactions in offline mode.

The RBI is also gearing to offer digital transactions in offline mode.

IFSCA GNLU Certificate Course on Financial Market Laws

January 11, 2022

International Financial Services Centres Authority and Gujrat National Law University have started offering a joint program on Financial Market Laws:

The commercial dialogue among the business entities is incomplete without financial communications. The role of law specifically the financial market (laws and regulations) are significant to regulate the financial activities of the business entities in the financial market. Since 1991, with the liberalised economic policy (Indian Budget 1991-92), the country has seen the opening up of the financial sectors and SEBI got the power to regulate the capital market. In the 30 years of liberalisation, the financial sectors activities are governed by multiple regulators.

The current practice of business and commercial law shows the expansion of the boundaries of the financial market activities. The classic example is the establishment of the GIFT-IFSC and the International Financial Services Centres Authority (IFSCA). The IFSCA Act, 2019 has given a new dimension to the financial sector activities with the establishment of the IFSCA as an unified financial regulator conferred with the powers of SEBI, RBI, PFRDA, and IRDAI to regulate the financial services market in the International Financial Services Centre/s.

This course is designed covering the legal and regulatory frameworks related to financial sector market and financial services market in the International financial services centres. The participants will have a thorough legal understanding about the practice and procedure related to financial markets and financial services within the boundaries of legal and regulatory framework.

Laws are extremely crucial in understanding of financial markets. Good to see a course being offered on the subject.  Also interesting to see a regulator collaborating with an educational institute to offer a program combining theory with practice.

IFSCA chair remarked on the commencement of the program.

While launching the course Chairperson, IFSCA gave a panoramic view of the importance of IFSCs in the context of global as well as domestic financial sector. In his speech he touched upon important topics such as significance of green finance in the backdrop of Climate change and its role in achieving Sustainable Development Goals. He further stressed that the IFSC has the capability to attract global capital which is required for the economic growth of   India for achieving the sustainable development goals and sought cooperation of all stakeholders in achieving this. He also stated that IFSCA Act is a step in the right direction to give huge imputes to India’s growth.

The speech also covered the extraordinary powers under IFSCA Act, 2019 which signifies the importance given by the Parliament to the unified regulator IFSCA in making India a major destination for the investors and developing it as a truly global financial centre. He also shed light on the genesis of IFSC in India and how IFSCA has strived to develop financial institutions, financial products and financial services in the last one year.

He categorically emphasized that the success of IFSCs would not only rely on the role of the regulator, but it must also be complemented by all the stakeholders in promoting and providing greater exposure for IFSCs, which would also be achieved by imparting knowledge to various stakeholders. In his concluding remarks, he exemplified that the academic outreach by this course from GNLU under the aegis of IFSCA is a steppingstone in this direction.

Let’s see how this one goes..


Explainer: An overview of RBI’s efforts to encourage retail investment in debt markets

January 11, 2022

My new piece in Moneycontrol where I explain RBI’s ongoing efforts to encourage retail investment in debt markets.


100 years of Nainital Bank in 2022

January 10, 2022

Nainital Bank was established in 1922 by Pandit Govind Ballabh Pant.

In 1973, the RBI asked Bank of Baroda to manage the Nainital bank.  Bank of Baroda currently owns 98.57% of the bank.

Times of India reported on the 100th foundation day and the bank also organised a cricket tournament on the occasion.

One hopes the bank atleast releases a coffeetable book and uploads it on the website to figure the interesting history of this lone bank based in the Himalayas.


25 glorious years of India’s flagship index NIFTY50 & 20 years of Derivatives trading in India

January 5, 2022

2022 marks the 25th anniversary of NSE’s flagship NIFTY50 index and 20th anniversary of derivatives trading in India.

There is an event today marking celebrations of the two anniversaries.


1997-2022: 25 years of end of automatic debt monetization and movement towards RBI autonomy

January 3, 2022

This is the first post of the New Year 2022. Let me start with what else but economic history.

The year 2022 marks 25th anniversary of the agreement between the government and the RBI to end the practice of automatic debt monetisation.

The 1991 reforms started multiple strands of sub-reforms in different sectors and domains. one such domain was fiscal reforms.  Within fiscal reforms, the key was ending the practice of automatic debt monetisation. Each time the government ran deficits, it issued ad hoc t-bills to RBI and got funds, resulting in monetisation of the deficit. The RBI monetary policy remained subservient to fiscal policy.

The government knew without ending adhocism the reforms will not mean much. Thus, it decided to undo the policy in phased manner.    Globally, the 1997 agreement has parallels with the US debt accord in 1951.

In 1994-95 budget speech, then finance minister Manmohan Singh made the first announcement in this regard:


New Year may herald first round of bank privatisation, new licences for private entities

December 29, 2021

My new year piece on what to expect from Indian banking sector in 2022:

The next year brings hope that a decade of bad news in Indian banking ends and will pave the way for far-reaching changes. Yet, the surfacing of the new Omicron variant of Covid-19, has cast a pall of uncertainty.

Case of RBL Bank Limited: Poor communications leads to crisis

December 27, 2021

Just as markets were gearing for the Christmas and new year break, there was some noise from India’s RBL Bank over the weekend.

First, the bank board approved CMD Mr Vishwavir Ahuja to proceed on leave with immediate effect. Second, the RBI appointed Mr Yogesh Dayal, currently chief general manager at RBI as an additional director.

The bank issued a press release saying all is well:

  • The Reserve Bank of India has appointed Mr. Yogesh Dayal as an Additional Director on the Board of the Bank for a period of two years till December 23, 2023 or till further orders, whichever is earlier.
  • The Board accepted the request of Mr Vishwavir Ahuja to proceed on medical leave and appointed Mr. Rajeev Ahuja (existing Executive Director of the Bank) as the Interim Managing Director & CEO of the  Bank subject to regulatory and other approvals.
  • The Board is grateful for the significant contribution of Mr. Vishwavir Ahuja towards the transformation
    of RBL Bank.
  • The Bank and the current management team led by Mr. Rajeev Ahuja has full support from RBI.

The markets smelled foul and as they opened, the share price dipped. The share price had closed last week on Rs 172.9 and declined to touch Rs 130.2. the RBI had to release a seperate statement expressing confidence:

There has been speculation relating to the RBL Bank Ltd. in certain quarters which appears to be arising from recent events surrounding the bank.

The Reserve Bank would like to state that the bank is well capitalised and the financial position of the bank remains satisfactory. As per half yearly audited results as on September 30, 2021, the bank has maintained a comfortable Capital Adequacy Ratio of 16.33 per cent and Provision Coverage Ratio of 76.6 per cent. The Liquidity Coverage Ratio (LCR) of the bank is 153 per cent as on December 24, 2021 as against regulatory requirement of 100 per cent.

Further, it is clarified that appointment of Additional Director/s in private banks is undertaken under Section 36AB of the Banking Regulation Act, 1949 as and when it is felt that the board needs closer support in regulatory / supervisory matters.

As such, there is no need for depositors and other stakeholders to react to the speculative reports. The bank’s financial health remains stable.

Following the RBI statement, there was recovery in the stock price to Rs 140 levels.

Hoping there is nothing wrong with RBL. Eeven if there is nothing wrong, it is a clear case of how poor communications can just lead to an unnecessary crisis. Indian banks have been facing governance and financial crisis for nearly a decade now.  RBL an old private sector bank known as Ratnakar Bank earlier has revamped its operations considerably but still has been under radar due to the pandemic. The board and the regulator should have known better.

Do Indians need insurance for bank deposits?

December 25, 2021

Prashanth Perumal J interviews me and Prof Amiyatosh Purnanandam on the need for deposit insurance. Here is the podcast version and transcript of the interview.

Reserve Bank of India Quiz 2021 and two wonderful blogs on Indian economic/monetary history

December 23, 2021

DR G Sreekumar, former central banker at Reserve Bank of India has two wonderful blogs on various aspects of Indian and global economics/monetary history.

On the tigerandpalmtree blog, there is a superb quiz on RBI. I will try and post answers later.

Coal Supply and Demand Situation in India

December 16, 2021

Kashyap Gupta, Bipul Kumar Ghosh, and Sunil Kumar from RBI in the December-2021 bulletin article analyse coal sector in India;

This article analyses the recent demand-supply mismatches experienced by the coal sector in India owing to global and domestic factors. Coal being an important input for thermal power and some other important industries, its timely and adequate supply is imperative. With the government’s efforts, coal shortage has eased in recent weeks.


    • The demand-supply balance of coal especially in the case of thermal power sector has worsened in the last few months, owing to both disruption in domestic supply and lower imports.
    • Water logging in coal bearing areas due to heavy rains in the month of September and early October hindered dispatches from coal mines; lower coal imports due to surge in international coal prices also contributed to the demand supply mismatch.
    • The government has ramped up coal supply to build sufficient stocks at thermal power plants and the situation has eased considerably in recent weeks.
    • With the upturn in energy demand, global coal demand also surged in 2021 as it constitutes a substantial part of total world energy consumption.
    • In the medium to long term, increased transition to green sources of energy will reduce India’s dependence on coal and help meet India’s commitment made at COP26 in Glasgow.


Reserve Bank of Australia’s first economist: Leslie Melville [Who was RBI’s?]

December 14, 2021

Selwyn Cornish of Reserve Bank of Australia profiles the first economist of the Australian central bank – Leslie Melville.

In 1930, when officials from the Bank of England came to Australia to assist Australian governments with their budgetary problems, they found that the original Commonwealth Bank, then Australia’s central bank, did not have an economist on its staff.

They urged the Bank’s Governor to appoint a qualified economist and recommended Leslie Melville, Professor of Economics at the University of Adelaide. Melville joined the Bank in March 1931. Some two decades later, when he left to become Vice-Chancellor at the Australian National University, Dr HC Coombs wrote to him saying that he had ‘made a contribution to the theory and practice of central banking which is without equal in the world’.

As Melville’s 100th birthday approached in 2002, the Australian National University decided to hold a public lecture in his honour. Governor Ian Macfarlane was invited to give the inaugural lecture. He concluded that Melville was ‘one of the most distinguished Australians of the past century’.

The 20th Melville Lecture will be given in early 2022 by the Treasury Secretary, Dr Steven Kennedy. Ahead of this event, the latest records to be released in the Bank’s new digital archive, Unreserved, include Melville’s papers in digitised form. This article traces Melville’s life and career, and his significance as the Bank’s first economist.

Interesting way to use central bank’s archives and educate public via these Bulletin article.

Who was the first economist of RBI? RBI’s first history volume 1935-51 mentions Dr BK Madan as the first Director of Research-

With an increasing part of the time of the Officer-in-Charge of the Department taken up in maintaining personal contacts with the Provincial Governments, and the growing specialisation in the work of the Statistical and Research Section, it became clear that there was need for a competent economist to be entrusted with the duty of collecting and maintaining all the varied statistical and economic material so essential for the shaping of central banking policy.

A post of Director of Research to be in charge of this Section was therefore created early in 1941 and Dr. B. K. Madan who, since 1940, had been the Economic Adviser to the Government of Punjab became its first incumbent in the middle of that year. After holding higher positions like Economic Adviser and Executive Director, Dr. Madan became a Deputy Governor of the Bank in July 1964.

In the middle of 1943, the Research Section was expanded for undertaking a fuller study of problems of central banking and wartime fiscal and monetary developments as a background to the proper consideration of questions like controls, planning for reconstruction and development and international currency and exchange arrangements that were likely to arise in the post-war period.

Towards the end of that year, the Bank arranged to obtain the services of Mr. J. V. Joshi, the Deputy Economic Adviser to the Government of India, on loan as Senior Economist for the purpose not only of advising the Bank on economic matters including currency and central banking, but also for reviewing and suggesting improvements to the existing machinery for collection’ and coordination of economic intelligence; Mr. Joshi was later to become the Bank’s first Economic Adviser.

Mr. Joshi served the Bank for over a decade. After a four-month spell as Deputy Governor, in a leave vacancy in the latter half of 1952, Mr. Joshi worked as an Executive Director for two years, retiring in January 1955.

In an earlier post, I had discussed about the first chief economists of various commercial banks.

One hopes RBI engage in history similarly as RBA….


The impossible trinity of India’s banking policy

December 9, 2021
Last November, a storm brewed in stock markets over an RBI Internal Working Group (IWG) report, constituted to review the ownership structure of Indian Private Sector Banks. The storm was due to one IWG recommendation that the RBI could consider allowing large corporates/industrial houses to become promoters of private banks. A year later, the RBI in a December 2021 press release said that it had accepted 21 of the 33 IWG recommendations, staying silent on the controversial recommendation.

My new piece in moneycontrol reflecting on this tussle over corporate ownership in banks.

I argue that behind all this is RBI trying to achieve three goals of banking policy: competition, scale and financial stability. Achieving this trinity is near impossible, and the RBI has always had to settle for two of these three goals.

Prof Aswath Damodaran lecture at NSE: Understanding valuation as a human life cycle

December 9, 2021

The three day NSE-NYU conference started yesterday.

The conference started with a paper, followed by an engaging discussion on CBDCs with Dr. Duvvuri Subbarao, Dr. Darrel Duffie and Dr. Viral Acharya.

However, what stole the limelight was the keynote lecture by Prof Aswath Damodaran. He explained succinctly how companies just like humans follow a life cycle. A company takes birth as a startup, grows through teens, adulthood. middle age, old age and finally death.

Lecture is here and lecture slides are here.

Cryptocurrency Bill: What happens when RBI issues a digital currency?

December 1, 2021

Apart from banning private cryptocurrencies, The Cryptocurrency Bill 2021 also plans to create a framework for RBI to issue central bank digital currency.

My article in Moneycontrol on the questions and issues that will arise once RBI issues CBDC.

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