1. Debt inflows: Maybe there is worry here that allowing FIIs to invest substantially in rupee denominated debt, will allow them to sell out when they sense rupee depreciating, further exacerbating the falling rupee? + also increasing cost of raising/re-financing debt? (Only the latter would happen if they sell out their $ denominated debt). Not saying I agree if this is their thinking, but just a thought.
2. OTC vs exchanges. A few months ago (actually pretty much all of the past 18 months), liquidity on exchanges have been confined to near term maturities. So for anything long dated exchanges don't do much in increasing long dated liquidity and def not volatility. For example, I remember seeing absolutely no liquidity on exchanges for longer dated (9 months+) options on FTSE and N225. On the other hand there was significant activity in the OTC (inter-broker dealer mkts). I'm not saying there was high trading activity but there were substantial quotes - which you don't get in exchanges if illiquid. In fact you had banks marking vol/dividends purely from quotes by December. Rolling over positions could be an option, but that requires active management which would incur a cost. Again I'm all for promoting participation on exchanges but just saying...
3. Do the RBI officially state that they are pegging the INR/USD rate? What levels do they aim for? or is it just for reduction in volatility?
1.As this paper http://www.growthcommission.org/storage/cgdev/documents/ito.pdf on the link provided by Ajay yesterday states, external fund flow liberalisation needs to be preceded by internal financial liberalisation so that the threat of foreigners living en masse can be countered by a stron domestic market. 2.Is not it amazing that we as common citizens are still putting up with license quota permit raj in banking. Why do we have to travel kms to a bank branch and wait in long queues? Why no private banks in smaller towns and cities? Why should I take the service of a liquid mutual fund to buy GoI bond? 3.Duke, if you are not aware, RBI has a policy of maintaing a REER ~1 against a basket of currencies.
What are the excuses for RBI continuing with this stupidity and its Governors still being praised ad nauseam for maintaining stability.
Thanks, was not aware at all. Do you know the weighting in that basket?
My savings have decreased in INR terms by ~20% (vs GBP). So doesn't look like they are doing their job very well. Are they trying to keep the currency cheap a la China to boost exports or simply to decrease volatility? or both?
They are (savings) nothing to write home about anyway :)
The proof of pudding is in eating. You can brand RBI's risk aversion as caricature but the examples cited by Mr. Shah are feeble and tad belabored. Truth is that Indian economy is 'decoupled', in a limited sense and for the time being, from the global pandemonium for taking 'unacceptable level of risk' of not opening up. Truth is the gap between academic intellectualism and market place reality is growing.
I believe the original post is implying that due to their fx policy, the RBI has limited scope to use monetary policy effectively to tackle recessions (and business cycles generally).
This temporary decoupling you mention, in my opinion, is more to do with the very large public sector banking presence in India. (I think they hold ~70% of banking assets in the country.) Whether or not these benefits outweigh the opportunity cost of less liberalization is another matter entirely and open for debate.
@Duke Views well taken. RBI takes measures based on specifics of India, warts and PSBs et al and not what textbooks say. Wiki says " Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff rather than another bargain with a more certain, but possibly lower, expected payoff" which is a conscious decision on part of RBI. Imagine what if RBI had not restrained the realty bubblers of India in time; even USA the persuader of open economy is resorting silly to restrictive practices. Look what the Corporates did, given the ECB / FCCB leeways. They speculated despite having sometimes better treasuries than Indian Basnks. How some of the private banks 'sold' derivatives to some clients flowing with the current. I guess RBI deserves some respect, granted that it can err sometimes (on the right side) and opportunity cost is always hypothetical. Thanks.
Agree with most of your points and I guess I understand where the RBI is coming from. However...
The opportunity cost is hypothetical, but the benefits are not. A lot has been said about 'decoupling', but this is only evident in the banking space. However, a decline in the rate of GDP growth (by about 5 percentage points yoy) + 40-50% losses in the stock markets does not bode well. Personally, I actually think we are as prone to bubbles as anywhere else.
Manish Sabharwal of ICAP (from http://ajayshahblog.blogspot.com/2007/01/difficult-questions-about-bond-market.html):
"Was NDS really important enough to overlook the opinion of the Attorney General of India that it is an exchange?"
If the NDS is de facto an exchange, can it be true that "RBI's approach has been rooted in two key principles: Limit it to a small club of banks and PDs, and limit it to `over the counter' (OTC) markets where firms bilaterally negotiate on the telephone"??
Could it just be that Mr. Shah is battling one caricature with another? What if it turns out that the RBI has in fact tried its hand at exchanges but that it has "failed"? And what if it has failed not because of the usual cartoon-reasons---"government bad"---but because there is a fundamental misfit between fixed income and exchanges?
Would this fundamental lack of fit change Mr. Shah's opinion of the RBI in this case? More importantly, would it make him think differently about planning the market?
NDS is indeed an exchange but it remains a club. NDS membership was never opened up, despite the creation of CCIL which would have made it easy to have heterogeneous credit risk.
In all other areas, RBI has battled for OTC and tried to block exchange.
The essence is to break away from both constraints.
Please note: Comments are moderated. Only civilised conversation is permitted on this blog. Criticism is perfectly okay; uncivilised language is not. We delete any comment which is spam, has personal attacks against anyone, or uses foul language. We delete any comment which does not contribute to the intellectual discussion about the blog article in question.
LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.
few points:
ReplyDelete1. Debt inflows: Maybe there is worry here that allowing FIIs to invest substantially in rupee denominated debt, will allow them to sell out when they sense rupee depreciating, further exacerbating the falling rupee? + also increasing cost of raising/re-financing debt? (Only the latter would happen if they sell out their $ denominated debt). Not saying I agree if this is their thinking, but just a thought.
2. OTC vs exchanges. A few months ago (actually pretty much all of the past 18 months), liquidity on exchanges have been confined to near term maturities. So for anything long dated exchanges don't do much in increasing long dated liquidity and def not volatility. For example, I remember seeing absolutely no liquidity on exchanges for longer dated (9 months+) options on FTSE and N225. On the other hand there was significant activity in the OTC (inter-broker dealer mkts). I'm not saying there was high trading activity but there were substantial quotes - which you don't get in exchanges if illiquid. In fact you had banks marking vol/dividends purely from quotes by December. Rolling over positions could be an option, but that requires active management which would incur a cost. Again I'm all for promoting participation on exchanges but just saying...
3. Do the RBI officially state that they are pegging the INR/USD rate? What levels do they aim for? or is it just for reduction in volatility?
1.As this paper http://www.growthcommission.org/storage/cgdev/documents/ito.pdf on the link provided by Ajay yesterday states, external fund flow liberalisation needs to be preceded by internal financial liberalisation so that the threat of foreigners living en masse can be countered by a stron domestic market.
ReplyDelete2.Is not it amazing that we as common citizens are still putting up with license quota permit raj in banking. Why do we have to travel kms to a bank branch and wait in long queues? Why no private banks in smaller towns and
cities? Why should I take the service of a liquid mutual fund to buy GoI bond?
3.Duke, if you are not aware, RBI has a policy of maintaing a REER ~1 against a basket of currencies.
What are the excuses for RBI continuing with this stupidity and its Governors still being praised ad nauseam for maintaining stability.
Thanks, was not aware at all. Do you know the weighting in that basket?
ReplyDeleteMy savings have decreased in INR terms by ~20% (vs GBP). So doesn't look like they are doing their job very well. Are they trying to keep the currency cheap a la China to boost exports or simply to decrease volatility? or both?
They are (savings) nothing to write home about anyway :)
The first shot has been fired. Wow!!!
ReplyDeleteThe proof of pudding is in eating. You can brand RBI's risk aversion as caricature but the examples cited by Mr. Shah are feeble and tad belabored. Truth is that Indian economy is 'decoupled', in a limited sense and for the time being, from the global pandemonium for taking 'unacceptable level of risk' of not opening up. Truth is the gap between academic intellectualism and market place reality is growing.
ReplyDelete@ Sankt
ReplyDeleteI believe the original post is implying that due to their fx policy, the RBI has limited scope to use monetary policy effectively to tackle recessions (and business cycles generally).
This temporary decoupling you mention, in my opinion, is more to do with the very large public sector banking presence in India. (I think they hold ~70% of banking assets in the country.) Whether or not these benefits outweigh the opportunity cost of less liberalization is another matter entirely and open for debate.
@Duke
ReplyDeleteViews well taken.
RBI takes measures based on specifics of India, warts and PSBs et al and not what textbooks say. Wiki says " Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff rather than another bargain with a more certain, but possibly lower, expected payoff" which is a conscious decision on part of RBI. Imagine what if RBI had not restrained the realty bubblers of India in time; even USA the persuader of open economy is resorting silly to restrictive practices. Look what the Corporates did, given the ECB / FCCB leeways. They speculated despite having sometimes better treasuries than Indian Basnks. How some of the private banks 'sold' derivatives to some clients flowing with the current. I guess RBI deserves some respect, granted that it can err sometimes (on the right side) and opportunity cost is always hypothetical. Thanks.
Agree with most of your points and I guess I understand where the RBI is coming from. However...
ReplyDeleteThe opportunity cost is hypothetical, but the benefits are not. A lot has been said about 'decoupling', but this is only evident in the banking space. However, a decline in the rate of GDP growth (by about 5 percentage points yoy) + 40-50% losses in the stock markets does not bode well. Personally, I actually think we are as prone to bubbles as anywhere else.
Aninda, I deleted a comment of yours because you violated the rules of the game. Criticising me is perfectly okay, foul language is not.
ReplyDeleteManish Sabharwal of ICAP (from http://ajayshahblog.blogspot.com/2007/01/difficult-questions-about-bond-market.html):
ReplyDelete"Was NDS really important enough to overlook the opinion of the Attorney General of India that it is an exchange?"
If the NDS is de facto an exchange, can it be true that "RBI's approach has been rooted in two key principles: Limit it to a small club of banks and PDs, and limit it to `over the counter' (OTC) markets where firms bilaterally negotiate on the telephone"??
Could it just be that Mr. Shah is battling one caricature with another? What if it turns out that the RBI has in fact tried its hand at exchanges but that it has "failed"? And what if it has failed not because of the usual cartoon-reasons---"government bad"---but because there is a fundamental misfit between fixed income and exchanges?
Would this fundamental lack of fit change Mr. Shah's opinion of the RBI in this case? More importantly, would it make him think differently about planning the market?
NDS is indeed an exchange but it remains a club. NDS membership was never opened up, despite the creation of CCIL which would have made it easy to have heterogeneous credit risk.
ReplyDeleteIn all other areas, RBI has battled for OTC and tried to block exchange.
The essence is to break away from both constraints.