Watching markets work: ICICI Bank

Last night, the US S&P 500 dropped 8.79%. There have been only two such days in its history: 19 October 1987 (-22.9%) and 26 October 1987 (-8.64%). The VIX rose to 46.72. There have been only three such days in its history: in 1998 and 2002.

I watched the ADR of ICICI Bank with curiosity through this. There was a lot of discussion about ICICI Bank last night so I wondered if this would influence the price of the ADR. And, I wondered whether the sharp negative shock to the S&P 500 would influence the price of the ADR. By and large, it has not. The ADR closed 12.47% down, which just reflects yesterday's price discovery in India. It's interesting to ponder what this means for both the Indian economy and for ICICI Bank.

OTC derivatives and exchange-traded derivatives

Mulling over the global financial turbulence induces a focus on problems such as credit rating agencies and OTC derivatives. I have an article in today's Financial Express on the role of OTC and exchange-traded derivatives. You might like to also see this older material: link, page 152--153 of the Mistry report, link, link, link.

The role of the credit rating agencies

Credit rating agencies were one key element of the global financial crisis of 2007 and 2008. Read Elliot Blair Smith on Bloomberg (part 1, part 2), James Ward in the Financial Times, and Mihir S. Sharma in Financial Express.

Talk on global financial crisis and its implications for us in India

link.

Turning point for options trading

Writing in Mint, Mobis Philipose points out that Nifty options trading appears to have crossed a decisive turning point, and looks at some of the factors at work. Click on the chart above (from his article) to see it more clearly. From Jan 2008 to September 2008, Nifty options activity went up from below 200k contracts/day to roughly a million contracts a day, even overtaking the extremely active Nifty futures. I feel this is only the beginning, for the full impact of SEBI's DMA announcement hasn't yet played out.

The brainpower and systems that are doing this on Nifty will readily do this for the currency, once the ban against exchange-traded currency options is lifted.

You might like to see NSE's monthly publication with facts about derivatives trading.

3rd Research Meeting of the NIPFP-DEA Research Program on Capital Flows and their Consequences

The program is up.

`Ideas exchange' with Percy Mistry in IE & FE

Indian Express has an `ideas exchange' with Percy Mistry and Financial Express has a front page piece related to this.

Day 13 of the currency futures

Top 10 underlyings in NSE's derivatives trading today, measured by turnover in crore rupees:

1	Nifty	39,555
2	Reliance	1,540
3	ICICI	1,200
4	SBI	1,139
5	Bank index	898
6	Reliance Capital	732
7	Reliance Infra	586
8	Mini Nifty	577
9	L&T	460
10	INR/USD	458

What does it take to make a land market work?

Writing in Hindustan Times, Gautam Chikermane ruminates on the legal dimensions of India's eminent domain crisis. You might like to see two blog posts on this in the past: link, link.

I feel that the lack of property as a fundamental right in the Indian constitution is a key flaw in our situation. Power corrupts, and it is not surprising that the State has abused this power. But if we go one step further and think: Suppose property was made a fundamental right in the Constitution, does this get the job done? Why is it that one can landup in the US and buy 2000 acres of land while it's hard to do this in Maharashtra? What else is required by way of making a land market work, other than strengthening the property rights of citizens? And in a well functioning land market, what is the appropriate `eminent domain' mechanism that should exist?

Bad measurement of industrial production in India

Read Mahesh Vyas in Financial Express on the problems of India's Index of Industrial Production (IIP), and how they're giving you a wrong picture of business cycle conditions. Also, the new CMIE Monthly Review for September is out. (You might want to see the background to this).

Serious quantities on the near month currency futures

At closing time today, here's what the order book for the September INR/USD futures looked like:

The contract size is $1000 so a quantity of 500 corresponds to $0.5 million. Compare and contrast against where we started on 29th morning. At that time, the spread was Rs.0.0025, i.e. 1 tick, but the quantities were tiny. Now, we're seeing substantial quantities - in the top five prices there was a total mass of $28.1 million, summing across buy and sell. The total quantity in the book (going beyond five prices) was $50.6 million.

Will globalisation come apart?

Many people, most prominently Larry Summers, worry about the weak political support for globalisation in industrial countries. Intellectuals with a sense of history point to the terrible breakdown of the `first globalisation' which started with British control of India (1858), telegraph lines linking Britain to the US (1866) and India (1870) and the Suez Canal (1869). This globalisation effort ended with the first world war. Concerns about the political foundations of globalisation are now at a new high, with the war in Georgia.

I have an article in Financial Express today where I argue that despite the difficulties that we see today, this second globalisation will not come apart as the first did.

The EU and NATO are playing a complementary role to OECD

I emphasise the role of OECD as a core of liberal democracies with market economies that (a) dominate the world economy and (b) will not introduce either trade barriers or capital controls. These countries are now the stable ballast for globalisation. Shlomo Avineri has a fascinating article After Communism: Travails of Democratization in Dissent magazine in which he emphasises the role of the EU in stabilising the turbulent politics of Eastern Europe that is often reminiscent of conditions of the early 20th century. He says:

THE ROLE played by the European Union turned out to be essential. It is true that the postcommunist countries that joined the EU (and NATO!) didn't live up to all the entrance criteria. Still, their membership provided both an implicit guarantee against any Russian neo-imperial encroachment and something of an insurance policy against slippage back into pre-1939 semi-authoritarianism. Even if anti-EU sentiments can be heard in the mainstream right in Poland and Hungary, EU membership locks countries into democracy, liberalism, and market economics.

Russia

These questions are freshly relevant in the context of Russia and China.

Writing on the Project Syndicate, Richard C. Holbrooke and Ronald Asmus take stock of Russian relations with the West after the invasion of Georgia. Peter Baker, writing in the New York Times, sketches the geopolitical significance of Russia, and Simon Sebag Montefiore puts these events in a hundred-year perspective.

Daniel Gross argues in Slate that international economic integration will restrain Russia. The early indicators are that Russia has suffered some economic pain as a consequence. In this FT article is a sentence: The million-headed hydra of the bourgeoisie has sent a signal: change your course, comrades! wrote the popular internet columnist Dmitry Oreshkin on www.ej.ru in a joking reference to the communist background of Russia's leadership. The Russian stock market has taken quite a beating. Russia is the worst of 88 countries this summer by stock market performance. Will the people who lost wealth have a voice in influencing the Russian State? Writing in FT, Anders Aslund argues that the best path for the West lies in continuing its economic engagement with Russia.

China

Alongside the Middle East and Russia, the third element of Authoritarianism 2.0, and the political threat to global prosperity, is China. Robert Haddick has a good article on the difficulties that the rise of China presents.

In the article by Shlomo Avineri mentioned above there is a passage that got me thinking:

....the pre-1939 histories of Poland, Hungary, and the Czech Republic provided important keys to their post-1989 development. Czechoslovakia, for instance, was a democratic, secular republic before the Second World War and for a short period after. It had an active multiparty system; parliamentary life; a free press; religious tolerance; and a centuries-old tradition of representative institutions, albeit of feudal character, linked to municipal autonomy and academic freedom; as well as a developed market economy.

Polish and Hungarian histories were more complicated, but both countries enjoyed forms of representative systems for centuries. They were not democracies, but they did create traditions of elections, representation, and limited government. Even though Polish and Hungarian politics were basically authoritarian before the Second World War, a remnant of parliamentary life survived. Even if they were not as industrialized as Czechoslovakia, Poland, and Hungary did undergo significant economic modernization, did possess a fiercely independent, politically organized peasantry, and boasted academic traditions on a West European model. Despite obvious differences among the three countries, they could, after communism, claim to be reviving early institutions and traditions. There were even some political veterans around who managed to survive Nazism and communism. In short, there were historical models on which a postcommunist edifice could be established and legitimized, sometimes with exaggerated pride. In the Polish case, the churchs relative autonomy under communism helped create the infrastructure of a civil society. Another factor was the legacy of upheavals in 1956 and 1968. After the rebellions were repressed harshly, the regimes later relaxed and allowed a modicum of free space, economically as well as intellectually.

These elements were largely missing in Russia. Before the Bolshevik takeover in 1917, there were few elements of civil society. This was one reason for the failure to establish a liberal constitutional regime between February 1917 (when the tsar was overthrown) and October. Pre-1917 Russia was an agrarian society and was not yet emancipated totally from the long legacy of serfdom. Elected institutions did not exist (efforts to create them in 1905 ended in repression. The country was ruled from abovebureaucratically, autocratically, hierarchically; the Orthodox church was subservient to the state; religious and national minorities faced constant oppression; the university system was subservient to the state. Soviet communism, so different from the emancipatory spirit of Marxism (rooted in Enlightenment traditions) was another layer of oppression grafted upon a servile society. So, despite some courageous dissenters, Soviet reform started from above as we noted. While Poles, Hungarians, and Czechs could look back and try to emulate a real (or imagined) precommunist legacy, Russians could not do likewise. Even the historical model of modernization associated with Peter the Great was authoritarian. It was conceived as state-building from above, not democratization nor liberalization.

When the system collapsed, Russia found itself in a vacuum. Mediating institutions of civil society were missing. Yes, individuals in Moscow and St. Petersburg could talk of modeling the New Russia on Locke and the Federalist Papers or retrieve the writings of Herzen and Belinsky, but there were no institutions or popular institutional memories to serve as legitimizing tools. No real political parties emerged for presidential or Duma electionsjust lists centered on personalities. The only exception is the unreformed Communist Party, which managed to retain some of its membership.

This perspective on the different trajectories of the successful East European countries -- Poland, Hungary and Czechoslovakia -- when compared with the failure of Russia, illuminates our thinking about China. The elements of a history, culture and tradition of civil society, dissent, respect for the individual, and democratic discourse that were absent in Russia of 1917 and thereafter are equally absent in China. This suggests that the cost and complexity of political change in China will be high.

India

In India, we inherited a very good experience of political mobilisation based on non-violence from 1914 (when Gandhiji returned to India) till 1947. We lost our way after independence and lurched into a deep failure in the Emergency, where we became just like any other mediocre third world dictatorship. But from 1979 onwards, we have now built up a 30-year experience of a fairly well functioning democracy.

This is, of course, a work in progress and a lot remains to be done for it to deliver a humane society which cherishes the individual. The state of human rights in India is bad. One pillar of liberal democracy - intellectual life in the universities - has run steadily downhill for the last 50 years. While we have freedom of speech, this has weak legal foundations, banning `offensive' books is routine, criticising minor historical figures on Orkut is dangerous for life and limb, and the government has substantial control over electronic media.

While we have problems in absolute terms, in relative terms the difference is stark. When we compare India against either Russia or China, we have been lucky on inheriting good initial conditions in terms of the 1917-2008 period. Enlightenment values have roots in India in a way that they do not in the countries where the recent 100 years have been dominated by State brutality, and a multi-generation process of destroying the intelligensia.

The oil subsidy is causing an indigestion

by Jeetendra.

The problems caused by the oil pricing policy are becoming daily more apparent. For the past few weeks, there have been reports of long lines at diesel pumps, particularly in Chennai and Pune, and electricity shortages. Writing in Business Standard, Urjit Patel points out that the problems of oil pricing are not confined to the energy sector -- they extend all the way to the financial and currency markets. And the attempts to solve these problems are only creating new problems.

The problem: oil companies are short of money

The fundamental problem is that the price controls are causing upstream oil companies to bleed cash, since they have to pay world prices for their petroleum imports but can only collect a fraction of these prices at domestic pumps. For some time, they have temporised by borrowing from banks. But now they have hit their credit limits. So, they need a cash infusion, quickly.

Solution: give the oil companies "government oil bonds"

A simple solution to the problem could have been this: government could have compensated the oil companies for their "underrecoveries" with regular government bonds. Then, the oil companies could have sold the bonds in the market, converted the rupees into dollars, and used the dollars to buy crude oil. But the government didn't do this. Instead, it created special "government oil bonds", which the oil companies have been unable to sell, at least not for anywhere near their face value.

Why are banks demanding such large discounts on these bonds? On the face of it, this seems very strange. After all, the oil bonds are IOUs from the government, and will surely be honored in full. The answer: these bonds, unlike regular government bonds, are not "SLR eligible". Which means banks cannot use them to fulfill their Statutory Liquidity Ratio (SLR) requirement. Nor can the banks discount these bonds at the RBI, in case they themselves need cash. So, the banks don't want them. Which means the oil companies are stuck.

Problem: the bond market is segmented

Why did the RBI choose to create a special oil bond, forcing a segmentation of the bond market? The answer, most likely, is that this was done to contain the fiscal deficit.

The huge oil subsidies are putting tremendous pressure on the government budget, imperiling the fiscal targets. Paying the subsidies by issuing bonds has the signal advantage that such spending is kept off budget. But it has the disadvantage of increasing the government's interest expenses. Expenses increase because the amount of government debt increases. Then, they could go up some more because the increase in government debt might lead to a rise in interest rates. It's a simple matter of supply and demand: the higher the supply of bonds, the lower the bond price -- which means the higher the interest rate.

By making oil bonds a separate category, not eligible for the SLR, the RBI could preserve demand and supply in the regular bond market. Banks would ignore the oil bonds and bid aggressively for regular government bonds to meet their SLR requirements, thereby keeping interest rates low and keeping the government interest burden down.

But this "solution" created two new problems. First, it segmented the government bond market. There are now two completely different prices for government bonds, depending on whether they are SLR-eligible or not. This is a major impediment to market efficiency and development. For how can private firms price their bonds accurately, when even government bonds for similar maturities have two different prices?

The second problem is that the special oil bonds failed to solve the original problem. The oil companies still need cash.

Solution: RBI's Special Market Operations scheme

The RBI then responded by creating the Special Market Operations (SMO) scheme. Under the SMO, the central bank purchases the bonds from the oil companies, in exchange for foreign currency from its reserves. That way, the oil companies can unload the paper they don't want, and get the foreign exchange they need to pay for their imports.

Problem: Undermining monetary policy

Urjit argues that the SMO doesn't really solve the problem. It just shifts it to the central bank. After years of effort to clean up the RBI's balance sheet, the central bank is now getting stuck with illiquid government bonds. That's a problem because the essence of modern central banking is exchanging one liquid asset for another. When the economy is short of money, central banks buy bonds and inject cash. When the economy has too much money, it does the reverse. In both cases, central banks need paper that can be readily bought and sold.

It is true that central banks do occasionally buy illiquid paper. In fact, the US Fed and the ECB are doing this right now. That's because they're facing a financial crisis, forcing them to help out financial institutions in order to safeguard the overall system. That's one of their core responsibilities.

But India has no financial crisis.

Also, when central banks do purchase illiquid paper, they normally demand large discounts. This has not been done with SMO. Indeed, the whole point of the exercise was to ensure the opposite -- that the oil companies did not have to suffer a "haircut" when selling the bonds into the market.

Problem: Undermining exchange rate policy

Besides affecting the RBI's balance sheet, a further problem with the SMO is that it distorts exchange rate policy. The scheme has forced RBI to channel foreign exchange not to the market in general, but to specific companies. Again, this is a retreat from the efforts to create a modern, market-friendly, and firm-neutral approach. This is not a minor retreat. So far, the central bank has swapped no less than $4.4 billion under the SMO, and there are reports that further swaps are in the offing.

There is no free lunch

Problems of a few percentage points of GDP cannot be wished away! Oil subsidies, sounded, at first, like a `mere' distortion of the oil sector. But such magnitudes are very hard to digest, and inexorably impinge on monetary and fiscal policy. The price controls are distorting market prices for bonds and foreign exchange, undermining financial and currency market development, and reversing progress toward a modern central bank.

We started with the core problem: price controls. Then, there had to be special bonds, with a forced fragmentation of the bond market. Then, the SMO had to be created, undermining monetary and exchange rate policy. We keep scrambling from one problem to the next. One can only imagine the amount of staff time at MOF and RBI that has been wasted on this. It would have been better utilised doing genuine economic reforms.

The currency futures market on 2 September

NSE hasn't setup intra-day data release for the currency futures market. I got impatient and setup something by myself, a Unix scripting solution that polls their website. I had this up and running by the afternoon, and managed to capture 1009 distinct observations of their `market-by-price' (`MBP') for the near month (September) contract yesterday (from 1:41 PM to 5 PM). NSE's term `market by price' or `MBP' pertains to the quantities available for both buy and sell at the best five prices. This is unprecedented transparency when compared with the history of currency trading in India. Today (3rd) I got around to looking at this data. This was Day 3 of the currency futures market, where trading had started on 29th August.

The time-series of the spread

For a frame of reference, by and large, the OTC market has a spread of Rs.0.0025 for quantities of $0.5 million, which corresponds to 500 contracts on the currency futures market. Now, the OTC market is an opaque market and customers get bad deals; the fact that there is a spread of Rs.0.0025 there doesn't mean that customers get such tight execution. Yet, it's a natural reference point for understanding where the exchange-traded product has come.

On the currency futures, the tick size is Rs.0.0025 so to attain the spread of the OTC market, the spread has to be one tick. Here's a picture of the spread in the data that I captured:

Click on the image to see it more clearly. The dashed blue line at the bottom is at the spread of Rs.0.0025, the smallest value this can attain and the typical spread of the OTC market. It was often bigger within the day; occasionally it exceeded Rs.0.02 or 2 paisa.

Distribution of the spread (in ticks)

Here's the distribution of the all the observations of the spread. The spread is expressed in ticks - one tick is Rs.0.0025, 4 ticks is 1 paisa, and so on.

Click on the image to see it more clearly. The modal value - the value that's observed most often - is 1 tick. Roughly 45% of the time, the market is at a spread of 1 or 2 ticks. Not bad. But there is a fair bit of occurence of large spreads with values of more than 1 paisa. It's rarely above 2 paisa.

The intra-day time-series of bid and offer

Here's the intra-day time-series of the bid and the offer:

Click on the image to see it more clearly. There were periods when the market was sleepy (e.g. near 15:06). But when the prices were moving (e.g. near 15:54), numerous values in the MBP were getting modified every few seconds. It was almost as good as a stock. The currency futures did roughly Rs.180 crore on this day - which is as good as many stocks.

Suppose I want everything that's available in the MBP

I thought to myself: Suppose I want the entire quantity that's visible in the MBP. Note that I'm not talking about the `total order quantity' for buy or sell that's shown on the NSE screen. That doesn't mean much because the prices can be pretty bad. I focus only on the top 5 best prices and sum up the quantities available here. I sum up both buy and sell quantities. Here's the intra-day picture of how much quantity is available:

Click on the image to see it more clearly. For the bulk of the day, the quantity available was in excess of $0.5 million. Note that I'm summing across quantity on the buy side and quantity on the sell side. I'm only trying to get a sense of the mass that's visible on the MBP.

When this number crosses $1 million, i.e. when the quantity available on one side is roughly above $0.5 million, there is a potential for arbitrage between the OTC forward market (where the market lot is $0.5 million) and the screen. Someone would be able to toss a market order for 500 contracts on the screen, and do a reverse trade on the forward market.

How bad do these prices get, if one takes everything visible in the MBP? I draw a graph here of the worst price in the MBP on both buy and sell sides. Note that if you put in a market order for the full quantity available in the MBP, as you walk down the book, you are getting many different execution prices, and I'm only showing you the worst bit.

Click on the image to see it more clearly. Here we see a gap between the worst buy and the worst sell of 5 to 10 paisa.

Conclusion

I think this market is quite ready for hedging/speculative customers doing quantities of 10-100 contracts (i.e. $10,000 to $100,000). This is a large audience and so there's plenty of action in store. The big milestone will be where someone will be able to toss in a single market order for 500 contracts ($0.5 million) and back-to-back do an arbitrage against the OTC market. When these trades begin, this market will quadruple in size, i.e. it will come in the list of NSE's top 10 underlyings of the day. For more analysis of the outlook for currency futures, see Jayanth Varma's blog post and followup.

India's inflation problem

I wrote an opinion piece in Wall Street Journal today on this subject.

Transcript of speech by P. Chidambaram at the launch of currency futures trading at NSE, 29 August 2008

Smt. Shyamala Gopinath, Deputy Governor of the Reserve Bank of India, Shri Bhave Chairman SEBI, Shri S B Mathur Chairman NSE, Shri Ravi Narain Managing Director and CEO NSE, Smt Chitra Ramakrishna, Mr. Justice Shri Krishna, Chair persons of Banks, Shri K P Krishnan, Joint secretary Ministry of Finance, Distinguished guests, Ladies and Gentlemen.

It's a proud day today and I stand before you to dedicate to the financial services community, a new product - Currency Futures. May I begin by warmly thanking the Reserve Bank of India and Securities Exchange Board of India for jointly developing this product and I congratulate the National Stock Exchange for having the distinction of being the first exchange to commence its trade. I wish all success to NSE and I am hopeful that the other two exchanges which have received in-principle approval and other exchanges will soon offer this product.

I see before me on the screen the first trades that is being put through. I am not a trader and I can't qualify ever to become a trader, but if it makes any sense and I am sure it does to a large number of you. Someone is buying at 43.8250 and someone is selling at 43.8400, hope one of them at least makes a profit.

In the budget speech for 2008-2009, I said, and you will allow me to quote:

We propose to take measures to develop the Bond, Currency and Derivatives markets that will include launching exchange traded currency and interest rate futures and developing a transparent credit derivatives market with appropriate safeguards.

As you are aware the above proposal emulated out of one of the key recommendations of the high powered expert Committee on making Mumbai, your city, our commercial capital, an international financial centre.

That Committee had pointed out that Indian IFCs handicapped by three key markets that are missing in India's financial system, namely (1) Properly Functioning liquid corporate and sovereign bond market (2) Spot currency trading markets and (3) Broad derivatives markets that include exchange traded as well as tailored derivatives for the management of currency, interest rate and credit default risk.

Similar recommendations have been made by other Committees such as the Patil Committee, the Parekh Committee and the Raghuram Rajan Committee.

Therefore, the budget announcement proposed on BCD nexus the following: (1) Launch of Exchange traded currency futures and that is what we are doing today. I am glad that we have been able to implement a budget proposal within six months of the proposal.

The BCD nexus has to be taken forward the launch of exchange trade interest rate futures, the development of credit derivatives markets to remain on the agenda and I request the Reserve Bank of India and SEBI to work together to implement these budget announcements as early as possible.

In today's globalised and integrated business environment, many entities are impacted by currency risk either directly or indirectly. Exchange traded currency futures market provides an excellent opportunities to hedge currency risk for different kinds of participants.

The electronic nation wide trading facility, with the backbone of efficient clearing mechanism and efficient risk management system, will benefit universal participants including corporates, banks and individual investors.

As Shri. Ravi Narain mentioned, currency futures contract will be allowed, to begin with, only for USD / Rupee. and for participations by Indian residents. The regulations would with experience gained in the functioning market, consider how and when it can further open up for trading in other currencies as well as for permitting participation by foreign institutional investors and non-resident Indians. I see this as an important step towards going forward on financial innovation in the country. History shows that financial innovation has been a critical and persistent part of the economic landscape over the past few centuries.

Financial markets have continued to produce a multitude of new products including many new forms of derivatives, alternative risk transfer products, exchange traded funds and variants of equity. We in India have adopted all these slowly, some of these products but with considerable success. However, I may note that many years after these ideas were mooted we had to wait. For example, stock index futures took 5 years to be offered to investors after it was first conceived; exchange traded funds for Gold took 4 years to become a reality; interest rate derivatives though launched in 2003 have not taken off. These experiences highlight the risky environment that financial innovation faces in this country. This should change.

Galileo I believe said doubt is the father of invention; if I may add, doubting Thomases are impediments to progress.

We need to continue to innovate and improve in the design of financial products, its customer service as well as all India delivery. I hope this will be kept in mind when regulators review the next steps on the exchange traded futures markets. I urge them to move rapidly and with an open mind that are necessary in such situations. After having launched currency Futures we need to revitalize the exchange traded interest rate derivatives market. We need to offer exchange traded credit derivatives and we need to strengthen the corporate bond market. These three products are high on the priority list of government and I ask the co-operation and support of RBI and SEBI and others to move forward rapidly. These 3 markets are important (Bond, Currency and Derivatives), it is important that these markets develop rapidly in-order to attract domestic and foreign participation have vibrant trading in spot and derivatives, have healthy speculation and arbitrage to ensure liquidity.

As Shri. Bhave cautioned, some of these products are indeed complex. But the complexity of the products should not deter us from making a beginning. Everybody has a responsibility to explain the complexity of the products to the customers, so that the customers can chose the products that he or she desires. We need to draw the right lessons from developments around the world. We need to innovate, while the same time we need to ensure that the complexities are understood, the risks are mitigated and there is reward for those who are willing to take the risk.

As the Deputy Governor mentioned the foreign exchange market in India has acquired a distinct vibrancy as is evident from the range of products, participation, liquidity and turnover. According to figures with me, the average daily turnover in the foreign exchange market which was about 25.8 bn US $ during 2006-07 has increased to 48.1 bn US $ during 2007 - 08 reflecting large cross border trade and capital flows.

Finally, let me conclude by saying, the financial sector needs to be opened up to greater competition so as to be able to provide a world class financial services at competitive rates. We should work towards removal of entry barriers to domestic corporate player and foreign financial firms in all segments of the financial services industry.

The most successful parts of Indian finance, I may say, are those in which non institutional participants have taken a lead and engaged in healthy speculative price discovery. This large mass of retail participation in financial markets is a unique edge that India has when compared with other international financial markets. However, considering that we are striving to project Mumbai as an international financial centre, the capabilities and strength of institutional investors also need to be harnessed.

This class of investors, (the institutional investors) brings with it sophisticated analytical tools and quantitative techniques, pools of capital and helps link Indian finance with the rest of the world. Thus our strategy should be to remove constraints on the Institutional investors to allow them to reap the benefits of financial market innovations and in turn assist these markets with depth and liquidity.

Globalization, ladies and Gentlemen is no more a choice, it is an opportunity for developing countries. It is an inevitable reality for all countries of the world. Today international financial markets are becoming increasingly integrated. London and New York are the world's premiere financial centers. Closer home we see Singapore, Hong Kong and now more and more Dubai, playing the role in Asia. Where does that leave us? Where should we position ourselves? We have the potential in us to develop Mumbai as a great centre of international financial services.

The Percy Mistry Committee report and the Raghuram Rajan Committee report had laid out for us the road ahead for India's financial system. To prepare the system for the challenges of the future, some of the themes of these reports are what I have touched upon in my brief speech this morning. And hope that the regulators will take the clue from here and herald the next generations of financial sector reforms and put India in a league of nations known for their financial markets.

Congratulations to all of you. Thank You.

My productivity crashed in recent days

From 9 AM to 5 PM IST, all I seem to do is wander over to the NSE web page with the live display of currency futures. You go to that page and wait. The data there refreshes in realtime. A blue background is a number that just went up and a red background is a number that just went down.

On the left hand column, click on any of the contracts. E.g. click on USDINR 250908 and it shows the top five orders and their prices for the near month futures. This level of transparency is unprecedented in the Indian currency market which was hitherto all OTC. We know from international experience that even in markets where the bulk of the turnover is OTC, the transparent exchange-traded screens account for the bulk of price discovery.

With data for `number of contracts': in your mind you multiply by 1000 and you have the depth in USD. For a frame of reference, here's the starting point, the order book at 9:17 AM on Day 1 of the currency futures.

I have been quite impressed at activity before 9:55 AM and after 3:30 PM. The reason is that the great electronic mob of the equity market trades from 9:55 AM to 3:30 PM and it requires considerable changes in their behaviour to adapt to a market that trades for longer. In addition, I would expect (say) a speculator trading on Infosys futures to reduce his risk by doing offsetting trades on currency futures. So I would expect the bulk of activity to be from 9:55 AM to 3:30 PM. This could, however, cut in the other direction also: I've heard NCDEX people say that their activity tends to go down when NSE is trading, since the eyeballs of the equity market tend to get captured by the immense action there. Given the sheer size of the equity market, financial firms tend to deploy their best staff to focus on harnessing that revenue stream, which tends to generate neglect of other products.

On the currency futures, it doesn't seem to be all bank activity, for one sees a delicious amount of activity with small sizes. As a thumb rule, when I see an order of quantity 100 (i.e. $100,000 or Rs.44 lakh) I think to myself that it's a bank. But for orders of 10 or below, I'm pretty certain it's an individual. A quantity of 5 roughly replicates the contract size of the Nifty futures.

Critical appointments watch

Position	Date	Outcome
Chairman, Finance Commission	November 2007	Vijay Kelkar, 14 November 2007
Comptroller and Auditor-General	January 2008	Vinod Rai, 17 December 2007.
Secretary, Dept. Financial Services, MOF	January 2008	Arun Ramanathan, 8 January 2008.
Chairman, SEBI. link, Video on 24 January	February 2008	C. B. Bhave, but do see this, 14 February 2008.
Two members of SEBI		M. S. Sahoo, 14 July 2008; K. M. Abraham, 21 July 2008.
Chairman, IRDA. link, link	May 2008	J. Harinarayan, 11 June 2008
Governor, RBI. link link, link, link, link	September 2008	D. Subba Rao, 1 September 2008
Chairman and members of Competition Commission. link, link, link

Also see:

• Who will fill the hot seats by Tamal Bandyopadhyay in Mint. 4 January, and the associated Experts speak on regulators.

The task at RBI

I wrote a column in Financial Express today about the task at RBI.