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Saturday, October 25, 2008

Crisis watch, 25 October

The credit policy announcement

RBI's credit policy statement was a disappointment. Read the editorial in Indian Express and Rajeev Malik in Mint. It felt like the forward-looking policy activism that we saw at RBI in the last month had mysteriously been switched off. The editorial in Financial Express encourages us to not read too much in this since RBI reacts on a day to day basis anyway, so credit policy documents do not matter that much.

The prose in the credit policy on inflation and credit growth felt sharply out of touch with current conditions. Consider the following text:

114. Based on the above overall assessment of the macroeconomic of monetary policy for the rest of 2008-09 will be as follows : - Ensure a monetary and interest rate environment that optimally balances the objectives of financial stability, price stability and well-anchored inflation expectations, and growth; - Continue with the policy of active demand management of liquidity through appropriate use of all instruments including the CRR, open market operations (OMO), the MSS and the LAF to maintain orderly conditions in financial markets; - In the context of the uncertain and unsettled global situation and its indirect impact on the domestic economy in general and the financial markets in particular, closely and continuously monitor the situation and respond swiftly and effectively to developments, employing both conventional and unconventional measures; - Emphasise credit quality and credit delivery, in particular, for employmentintensive sectors, while pursuing financial inclusion.

All you have to do is to change the year and this text is timeless. A special time like this called for a thoughtful hand-crafted statement; instead all we got was traditional RBIspeak. This links up to the problems of RBI transparency. An essential part of RBI's opacity is this release of bulky and badly written documents. Central bank transparency requires sharp, analytically clear, well written, brief documents. Bulky, badly written documents communicate nothing and effectively hide the thought process and policy intent.

Real estate companies

Earlier this month, I had blogged about the credit crunch at real estate companies such as Unitech. Now Unitech is showing stock market returns over the latest 12 months of -91%. Shabana Hussain reports on the sharp drop of the Unitech stock price yesterday.

Nifty option strikes

In Economic Times, Shakti Shankar Patra continues to rightly complain about NSE's rules on options strikes.

Sri Lanka

In June 2008, Deane J and I had an exchange on the difficulties in Sri Lanka on running a pegged exchange rate while local inflation was much higher than that in the US. The situation seems to have gotten a bit worse.

Lack of leverage = larger mispricings

James Saft has one of the most insightful pieces on what is happening to the configuration of asset prices worldwide, on Reuters. I was thinking of similar things but he beat me to it.

1 comment:

  1. Ajay,
    The article is all fine, but we can't forget that, there is a solvency crisis behind the liquidity crisis. Even after leaving real estate aside, some investments/projects are not profitable, since they miscalculated the price of credit.


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