Archive for the ‘Indian Economy/Financial Markets’ Category

Commodity Price Shocks and Non-Performing Assets in the Indian Banking Sector

October 4, 2022

Abhishek Kumar, Rakesh Mohan & Divya Srinivasan of Centre for Social and Economic Progress (CSEP) in this working paper show correlation between bank npas and global commodity prices.

Non-performing assets in the Indian banking sector increased significantly in the 2010s, accompanied by a slowdown in credit and GDP growth rates. In this paper, we show that nonperforming assets in the banking sector and profit ratios in commodity-sensitive non-financial
sectors are highly correlated with global commodity prices.

To estimate the effect of movement in commodity prices on non-performing assets, we create nominal price and inflation exposure indices for banks using novel data on banks’ sectoral exposure and commodity prices. These measures capture banks’ exposure to commodity prices through their borrowers’ profitability and cash flow and act as income shocks for banks. Results from a range of models suggest that a 1% decline in nominal exposure increases non-performing assets by 0.20-1.35% and these models explain ~30% of the increase in non-performing assets.

Since public sector banks in general had higher exposure to commodity-sensitive sectors, they experienced a relatively higher decline in nominal exposure and a more significant rise in non-performing assets after the price crash of the 2010s. The increase in non-performing assets is followed by a decrease in credit growth. These results help us in understanding the origins of India’s twin balance sheet crises of the 2010s.

Need for Transparency in RBI’s Prompt Corrective Action Framework

September 28, 2022

The RBI recently took out the Central Bank of India from the Prompt Corrective Action Framework:

The performance of the Central Bank of India, currently under the Prompt Corrective Action Framework (PCAF) of RBI, was reviewed by the Board for Financial Supervision. It was noted that as per the assessed figures of the bank for the year ended March 31, 2022, the bank is not in the breach of the PCA parameters. The bank has provided a written commitment that it would comply with the norms of Minimum Regulatory Capital, Net NPA and Leverage ratio on an ongoing basis and has apprised the RBI of the structural and systemic improvements that it has put in place which would help the bank in continuing to meet these commitments.

Taking all the above into consideration, it has been decided that Central Bank of India is taken out of the PCA restrictions subject to certain conditions and continuous monitoring.

I had written earlier that RBI should be more transparent in reporting on pca framework. I had argued the regulaor should have kid of a dashboard which lists the banks in pcaf and the various metrics on which select banks are in and out of the list. Some critical information may not be shared but there is a need for more clarity on which banks are in and out of pca and the basis for the in and out of the list.


What the RBI can do to contain the rupee’s depreciation

September 27, 2022

Actually rbi should not do much and allow rupee to depreciate.

My explainer in moneycontrol.

Deficit financing to financing deficits

September 20, 2022

On March-1997, the government and RBI signed an agreement to end 4 decades of deficit financing.

In my article in financial express, I write on the 25 years of the landmark agreement.

Banking | History can help while banning/regulating digital lending apps

September 15, 2022

My new article in moneycontrol.

On September 7, the Reserve Bank of India (RBI) issued an alert list of entities not authorised to deal in forex, and to operate electronic trading platforms for forex transactions. Two days later, Finance Minister Nirmala Sitharaman chaired a meeting on ‘illegal loan apps and outlined multiple steps to prevent operations of such illegal loan apps’.

I look at Indian banking history and point how banks and banking much before regulation. We are seeing similar things today with mushrooming of digital entities offering financial services.

Taming Inflation in India

September 14, 2022

A team of economists from thinktank ICRIER (Deepak Mishra, Ashok Gulati, Shyma Jose, Ranjana Roy, Sanchit Gupta, Manish Kumar Prasad and Sabarni Chowdhury) in this brief note write on taming inflation in India-

this analytical policy brief may help to identify timely and robust policy actions to tame inflation . Specifically, we try to answer

    1. What lessons India can learn from global experiences and their policy practices to tame inflation?
    2. What are the plausible measures to control and stabilize surging inflation, especially food inflation, without trading off the growth revival of the economy?


Digital Lending | RBI must crystallise its guidelines towards a digital banking regulation Act

September 8, 2022

My new piece in moneycontrol on rbi”s recent guidelines on digital lending.


How the World Became Rich: The Historical Origins of Economic Growth

September 7, 2022

The question of what drives wealth of nations continues to inspire researchers for the possible answers.

Mark Koyoma and Jared Rubin have released a new book on history of economic growth. The new book updates all the literature and offer their take on what drives the growth. The authors have put up a website for the book and lots of other resources such as podcasts on the book and chapter slides.

Shruti Rajagopalan interviews the authors in her super podcast.

RAJAGOPALAN: One of the key things that I learned from the book is that the entire story is sustained economic growth. Every time you explain one of the countries that you’re looking at or one of the cases that you’re looking at, you talk about how different things start mattering. Yes, institutions matter, but so does geography, so does culture and so on. You guys are also doing this cross-country, cross-century comparison. I appreciate that there can’t be a single answer at the end of the book where you just write one sentence and say, “This is the reason. We’ve answered the question.”

What is a good way to think about this? Is it that it is the very contextual interaction between these factors that led to the growth in that particular case and point? Or is it that in those circumstances, the binding constraint was geography, or the binding constraint was culture, or the binding constraint was institutions?

MARK KOYAMA: That’s a deep question, Shruti, so a tricky one to answer. I think the quick answer is, both are plausible ways to read what we’re doing. The latter example where we go through these historical examples, we try and think which binding constraint here is plausible. For example, thinking about today, I’ve been told at least by development economists—some of whom are more skeptical about, say, institutions—they would say, even if you’re Botswana—Botswana is a relatively well-governed sub-Saharan African country, and it’s relatively high-income by sub-Saharan African standards, but it’s landlocked.

No matter how good Botswana’s institutions are, it’s always going to be more difficult for them to access, say, Chinese markets than it is for Vietnam to do so. For Botswana, maybe geography is a pretty binding constraint, but still not absolutely binding. They could still grow and do better, but they are constrained by their geography. I think it’s a perfectly respectable way to argue, to say, “Yes, in Botswana geography is a problem,” but say, “Venezuela or Argentina, it’s probably the political institutions which are the binding constraint.”

We go through, and we think that in the case of why didn’t the Dutch industrialize, the political institutions, they may have been overly oligarchic; that’s the criticism you could lay against them. But they were pretty good at restraining the power of the executive, the stakeholder, the equivalent of the king, and the Dutch Republic had almost no political power. They didn’t have the autocrats, the autocratic problem, let’s say, that China has or the Ottoman Empire had. I think it’s a perfectly respectful way to use our book and to think about these things.

Now, the first way of reading it was a bit different. That’s also a valid way to read the book because we definitely think that institutions interact with culture. That’s actually very much in line of [Joel] Mokyr’s work on the Republic of Letters. The book is called “A Culture of Growth,” but if you read that book and if you read our summary of it in “How the World Became Rich,” it’s actually institutions which underline it. There’s academic institutions like the Royal Society, there’s the framework of competitive states and there are things like the fact that there was a postal system that worked across Europe, which meant that people could communicate. There were academic journals.

Definitely, when we go through those factors, we almost always think that the interaction is where the interesting action is. It’s partly why we were dissatisfied with some earlier treatments of these questions because people would think, “Oh, it’s all institutions,” or “It’s not institutions, it’s all culture,” whereas clearly it has to be how these things come together. And that’s where a lot of the action is in terms of academic research, in particularly the intersection of culture and institutions.

Perspectives on the Pension Sector in India

September 7, 2022

Pension Fund Regulatory & Development Authority (PFRDA) has introduced Working Paper series in April 2022.

Deepak Mohanty, member PFRDA has written the first paper on pension sector in India:

India’s pension-sector (NPS plus APY), provides a flexible mode of old-age income security not only for salaried employees but also to the common person. In the recent 5-years, 2017-18 to 2021-22, subscriber numbers have multiplied over three-fold led by APY; and assets under management by over four-fold led by NPS. The annual rates of return in various NPS schemes since inception in the range 9.0-12.7 percent
and for APY at 9.4 percent have been very competitive vis-à-vis alternate saving instruments besides the primary benefit of steady income. The future expansion in  NPS is expected to emanate from the private sector – both the salaried and selfemployed. Steps at enhanced pension-literacy, both of the subscribers and the intermediaries, coupled with a nudge from the regulator and the Government along with encouragement to young-adults to join a pension scheme early would accelerate our movement towards a pension-society.


Assessing financial health of India’s State-Owned Enterprises

September 5, 2022

Ruchir Agarwal, Elif C Arbatli Saxegaard, Lesley Fisher and Xuehui Han in this IMF paper

India’s recently announced privatization strategy can facilitate a change in the composition of the public sector balance sheet toward high-return public sector investments in infrastructure and human capital where there is a clear role for government, leaving commercially viable companies for the private sector.

Against this background, this paper provides a description of the SOE sector in India, consider different criteria which can inform the scope and rationale for privatization. It also highlights takeaways from international experience with privatization, highlights the importance of improved governance and oversight of SOEs and showcases analytical tools that can help analyze risks from SOEs.

While this paper focuses on India, the framework for SOEs developed in this paper can be used to evaluate SOEs policy options in other countries.


Dynamics of Inflation in South Asia

August 30, 2022

Michael Debabrata Patra, Deputy Governor, Reserve Bank of India in this speech discusses inflation in south asia.

In South Asia, inflation is critical:

Despite the diversity of the South Asian region in terms of country size, economic and social development, geography, population, trade and political systems, this daunting spectre of inflation haunts us all. Food is a large part of our average consumption basket as well as our price indices – its share in consumer prices ranging across the region between 35 and 47 per cent. South Asia is most vulnerable to food inflation, given the large segment of our populations battling poverty. Moreover, this is a region in which it is rising food prices that can trigger second round effects leading to the generalisation of inflation and its persistence. Furthermore, dependence on oil imports has made our countries commonly vulnerable to terms of trade and supply shocks. Consequently, inflation dynamics in the region show strong co-movements, with common drivers. On the other hand, our policy frameworks are somewhat diverse, reflecting country-specific circumstances, and this will condition our approach to controlling inflation. Our exchange rate regimes also reflect this diversity.

Dealing with the inflation crisis has become complicated as we battle global spillovers on an ongoing basis. The region now faces a tremendous developmental challenge within which recovering the losses due to black swan events like the pandemic look the most formidable. Our countries have also experienced sharp increases in fiscal deficits and deterioration of the balance of payments. The future appears uncertain and gloomy against the backdrop of an unprecedented slowdown in economic activity, employment and export earnings. Risks to our growth prospects are slanted to the downside. The dark shadow of stagflation looms over us and our outlook.

What should South Asian central banks do?

We face challenging trade-offs in our day-to-day functioning and keen public scrutiny. Mostly unsung, our role has undergone a transformation in recent years. From lenders of the last resort, we have become defenders of the first resort. Hence, our response to inflation shocks such as the one we face today has to be predicated on managing expectations and fortifying credibility.

If credibility is high and the shock is transitory, inflation returns to equilibrium without the need for any monetary policy action. On the other hand, repeated supply shocks – which we are encountering now – trigger second round effects through cost pushes, expectations, exchange rate and demand channels, warranting pre-emptive monetary policy action.

Even with perfect credibility, monetary policy cannot look through the second-round effects of repeated supply shocks. If the inflation target is breached for a prolonged period, this could unsettle expectations and eventually get reflected in higher inflation. Higher credibility can reduce – not substitute for – the monetary policy response to second round effects of repeated supply shocks.

At the current juncture, our experience is that by frontloading monetary policy actions, credibility is demonstrated by showing commitment to the inflation target. Another dimension of monetary policy credibility is the timing of its response. A delay in the monetary policy response leads to a further loss of credibility, unhinging of inflation expectations and eventually, higher inflation outcomes with a higher sacrifice of growth.

Liquid Assets -Rain, rivers, coasts, and seas- Priceless and Undervalued

August 30, 2022

Esha Zaveri of Stanford University in this CASI article-

Rain, rivers, coasts, and seas have shaped our societies from the earliest days. Tales from classical antiquity to the Abrahamic religions to ancient Mesopotamia speak of how water changed the course of history. In India, the “crucible of the monsoon,” the annual drama of the moisture-carrying winds that bring 80 percent of the country’s rainfall between June and September, has long shaped everything from childhood to culture to commerce. Some of the first written accounts of managing rainfall variability date back to Kautilya’s ancient treatise Arthashatra, written in the 4th century BCE, which discussed ways to predict and adapt to monsoon rains. While rainfall variability is not a new phenomenon, what is new is the intensity of change as a consequence of climate change.

It is often said that if climate change is the shark, water is its teeth. Climate change is felt most deeply through water, with higher temperatures leading to droughts, floods, and increasing rainfall variability. Every increase in the degree of global warming is likely to intensify water-related risks. As concerns about what a hotter climate will bring grow, this important issue of too much water and too little water continues to occupy center stage in policy discussions. And even as uncertainties about the future fate of the monsoons remain and science evolves with new generations of climate models, scientists agree that changes in monsoon variability are underway and will continue. 

RBI Central Board: Strength in numbers

August 25, 2022

My new article in Financial Express on how RBI Board suffers from problem of chronic vacancies .

Privatisation of India’s public sector banks is like Waiting for Godot

August 24, 2022

The RBI recently released its customary monthly bulletin for the month of august. One of the research articles in the bulletin on privatisation of public sector banks (PSBs) created a storm in the financial markets, and media. So much so, the central bank had to issue an unprecedented clarification on the purpose of the article.

What did the research article/paper say that it led to so much controversy?

My article on the controversy in moneycontrol.

MC Explains | Why China is facing an economic crisis and how India can gain

August 22, 2022

My explainer on China’s economic crisis and what it means for world and India.

Governance, Efficiency and Soundness of Indian Banks

August 22, 2022

New RBI DRG study by Rachita Gulati, Sunil Kumar, S. Chinngaihlian, Rajendra Raghumanda and Prabal Bilantu.

This study adopts a granular research approach and empirically explores the nexus between governance, efficiency and soundness in the Indian banking industry at various disaggregation levels using the dynamic panel data models. Bank-wise composite indices of governance and soundness are computed using the non-parametric “Benefit-of-the-Doubt” approach, and the risk-adjusted profit efficiency scores for banks are estimated by employing the data envelopment analysis approach. The analysis has been completed utilising a unique bank-level panel dataset obtained from publicly available information on corporate governance in the individual bank’s annual report for the period from 2008-09 to 2017-18. The key findings from the study are as follows:

    1. Although banks in India have made significant progress in adhering to governance standards over the recent years, the current level of compliance is not adequate to mark the existing governance structure as “socially efficient”.
    2. The Indian banking industry remained reasonably sound from 2008-09 to 2012-13, before the early signs of a decline in asset quality and profitability were observed in 2013-14. In recent years, private banks have by and large shown an improvement in their soundness position. However, a low level of soundness remains a challenge for public sector banks (PSBs) because the above trend was more pervasive for PSBs.
    3. There exist noticeable asymmetries in the policy priorities of banks on the dimensions of governance and soundness. Private banks demonstrated relatively better performance in adhering to governance norms pertaining to audit function, followed by risk management and board effectiveness during the study period.
    4. Profit-efficient banks are sufficiently sound to keep up capital buffers and absorb shocks, which may diminish destabilising effects. Therefore, to avoid the risk of bank failure in the long run, business practices that assure sustainable profits with proportionate risk need to be encouraged.
    5. Econometric findings from the study reveal that the degree of governance compliance in banks significantly explains their soundness level. Non-adherence to governance principles can undermine the soundness of the banking system.
    6. An emphasis only on stringent compliance with board attributes without due attention to other important aspects of governance, including risk management and audit functions, can have implications for bank soundness.
    7. In all, the study reveals that traditional equity governance principles not only determine bank soundness in India, but compliance with debt governance standards also assumes an important role in determining bank soundness, particularly in the aftermath of 2014.


Privatisation of Public Sector Banks: An Alternate Perspective

August 18, 2022

In the Aug-2022 bulletin, RBI researchers Snehal S. Herwadkar, Sonali Goel and Rishuka Bansal present an alternative perspective to big bang  privatisation of public sector banks;

Privatization of public sector banks (PSBs) has been widely viewed as a key area of pending reforms in India. This article empirically examines the performance of PSBs relative to private sector banks (PVBs). Using data envelopment analysis (DEA), it finds that while PVBs are more efficient in profit maximization, their public sector counterparts have done better in promoting financial inclusion.

The labour cost efficiency of PSBs is higher than PVBs. Empirical evidence also suggests that lending of PSBs is less procyclical than PVBs and thus PSBs help the countercyclical monetary policy action to gain traction.

Against the backdrop of these findings, a big bang approach of privatization of these banks may do  more harm than good. The government has already announced its intention to privatize two banks. Such a gradual approach would ensure that large scale privatization does not create a void in fulfilling important social objectives of financial inclusion and monetary transmission.

SME Exchanges in India: Empirical Analysis of Firm Attributes and IPO Characteristics

August 17, 2022

Shromona Ganguly of RBI in this paper analyses the SME exchanges in India

This study throws light on some of the characteristics of SME (small and medium enterprises) exchanges in India in terms of underpricing, aftermarket liquidity and long run abnormal returns, using the initial public offering (IPO) data of SME-dedicated exchanges and firms’ balance sheet data. Using the propensity score matching technique, the study finds that firms listed in SME exchanges have higher profitability, liquidity and asset utilisation ratio as compared with other unlisted SMEs. It was found that SME IPOs preceded by a boom market period are more underpriced. Further, lack of aftermarket liquidity remains a problem in SME exchanges with the turnover ratios declining significantly even within the first 60 trading days after listing.

nice all round paper with many interesting things about sme and sme exchanges.

Indian economy @75

August 16, 2022

RBI DG Michael Patra in this speech takes one through 75 years of Indian economy:

I am deeply honoured to be invited to deliver this address as part of the celebration of the 75th year of our Independence. I thank Dr. Panda for inviting me and more than that, for the innovative drive and gracious hospitality – he and his team – which has made this event possible. At this defining moment, the elixir of energy, inspiration, new ideas and pledges awakens us to a bright and self-reliant future, marked by the fulfilment of our dreams. In many ways, Bhubaneshwar is the embodiment of this Mahotsav – a rich and glorious heritage; a happening present; and a smart city of the future – in every respect, Tribhuvan.

While my talk will attempt to kaleidoscope India’s journey through the last 75 years, the focus is on the future – India in the next 10-50 years.

It is said that there is nothing more powerful than an idea whose time has come2. I do believe with the all the strength of my conviction that India’s time has come. As the famous song marking the UN’s International Day of Peace goes3, you may say I am a dreamer, but I hope that after my talk, I will not be the only one. You too will dream with me, and the world will be as one. So, I invite you to join me in this journey of dreams as India takes off to make a tryst with destiny.

The speech has many graphs and charts which make it interesting.

In the end, Patra says Indian economy to be second largest by 2031:

If India capitalises on its opportunities and overcomes the challenges that I have addressed in the time available for this talk, it is widely believed that India will bend time. So, revisiting the purchasing power parity projections I alluded to earlier, it is possible to imagine India striking out into the next decade with a growth rate of 11 per cent. If this is achieved, India will become the second largest economy in the world not by 2048 as shown earlier, but by 2031. Even if it does not sustain this pace and slows to 4-5 per cent in 2040-50, it will become the largest economy of the world by 2060.

As I said in my opening remarks, you may think that I am a dreamer, but let me remind you that while history does not repeat itself, it often rhymes. The distinguished British economist, Angus Maddison, who specialised in the measurement and analysis of economic growth and development, has documented economic performance over long periods of time and across major countries in every continent of the world. According to his work, India was the largest economy of the world with the highest share in world GDP during 1 to 1000 AD. Over the next 600 years, India intermittently fell to the second position, but reclaimed the position of the world’s largest economy by 1700 AD with a share of 24.4 per cent of world GDP. Since then, there has been an inexorable loss of share. Ladies and gentlemen, the time has come to halt the decline, reverse it and repossess our rightful place on the world’s stage.



Indian bank commenced its business on 15 August 1907

August 16, 2022

Talk about destiny. A Bank which named itself Indian Bank and started business on 15 august 1907, only to realise that 40 years later that 15 august is also going to be India’s independence day.


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