Monday, October 31, 2011

Is this the FM a leading Emerging Economy can afford?

In my unusual inebriated state of mind, I was casually going through a news item on my favourite news paper "Google News - Business" section on 31-Oct-2011 at about 22:45 hrs. The first news items caught my mind - obviously, being a Relationship Manager in an Indian Bank, I would be focusing my news on issues relating to "interest rate scenario", "inflation", "exchange rate", "industrial index of production", "euro crisis", and such similar or related news articles.

So, my eyes caught the first news item on the Business section of Google News at this time viz., "Inflation to ease soon, says Pranab Mukherjee" on TOI published at Oct 31, 2011, 10.17PM IST

It spoke of one of the statements made by Finance Minister of my country (India) on the RBI's decision last week to raise key policy rates for the thirteenth time since March, 2010, to tame the rate of price rise. Mr. Mukherjee said, "There was some liquidity excess which was required to be mopped up and through the adjustment of interest rates, efforts have been made to mop it up."

My basics tell me that there are two simple and straight forwards tools that RBI (any Central Bank for that matter) uses as part of Monetary Policy. They are 1) Interest Rate - via Repo and Reverse Repo Rates [Increase in rates would make credit available at higher costs] and b) Liquidity - via Cash Reserve Ratio (CRR) [Increase in CRR would mop up liquidity from the economy and any decrease would release liquidity into the economy]. I am still not able to understand how Mr. Mukherjee could say that an increase in interest rates would mop up excess liquidity in the system.

With such people becoming FMs to one of the leading Emerging Economies, what would be the fate of Fiscal Policy Interventions, Much needed Reforms, and the aspiration of the people of the nation to become one of the economic super powers.

Sunday, August 07, 2011

US Rating Downgrade - India Perspective

I feel following is the likely impact on certain key Macroeconomic parameters of India on account of downgrade of US Long Term Credit Rating from AAA to AA+ by S&P.

Impact on Currency
As the credit rating of US been downgraded, there would be a definite impact on its currency. Considering that US has become a riskier place that it was a few days back, the US$ would no more be treated as much a safe heaven as it was treated earlier. As a result, the demand for US$ would reduce to a certain extent. This should escalate value of INR relative to US$.

Impact on Exports
As the INR appreciates, its exports become relatively seem costlier. Hence the India’s competitive advantage may be construed to be impacted negatively. However the US tax rates would undergo an upward revision, as a measure to cut the deficit by more than $2 trillion by 2013. This would increase the pressure on the US companies to reduce other costs. As a result, the US companies may resolve to outsource more to relatively cheaper destination like India. Hence India’s services exports, including IT exports, are expected to have a positive impact.

Impact on Imports (mainly crude)
Given that USD is likely to depreciate, the imports (which are mainly denominated in US$) would become cheaper and more affordable. The same would be the case with the India’s crude imports.

Impact on Inflation
Considering the fall in crude prices, the Indian government would do good if they take a decision to reduce the fuel prices. This should also help in reduction in inflation. However, considering that Indian currency is expected to appreciate relatively, there is a strong possibility of moderation in inflation.

Impact on the India’s US Treasury Holdings
India has invested $41 billion in US Treasury Bonds. Assuming all the investments made by India are in 10 year US Treasury bonds. Presently, the 10 year treasury rates are quoting at 2.7% p.a. Considering that due to the downgrade the long term treasury rates are expected to increase by 70 basis points (Source: News Item on Jul 27, 2011 at Bloomberg’s website by Michael J. Moore and John Detrixhe U.S. Downgrade May Cost $100B a Year: JPMorgan), India’s investments in US are expected to diminish in value by about $2.7 Bn. However this is a notional loss. It can’t be safely assumed that RBI wouldn’t just sell these investments. Considering the increased yields/ rates, the value of the bonds on maturity would not alter.

Further, it is worth noting that the US short term rating has not been downgraded and continues to remain at A1+, the best credit rating. Hence the impact on the short term rates/ bond prices is expected to be minimal.

Impact on equity markets and FDI
India is now relatively less riskier a place of investment that it was a few days earlier. Hence, there should technically be an increase in FII and FDI into India and shoot up the equity markets.

Tuesday, August 02, 2011

NEWS FROM EVERY CORNER OF THE WORLD

During most of our discussions at office on politics or economy, I keep wondering – now more frequently than ever – if I live in a different world. I am simply oblivious of most of the events being discussed vociferously. I quickly concluded that this state of oblivion is a symptom of some other stronger cause – a root cause. I leaned back and tried to understand what the root cause could be. After pondering upon this thought with a deliberate intention to avoid an attack of ‘Analysis Paralysis’ (or AP) – I have been a chronic sufferer of this critical disease, which fist attacked me during my education– realization dawned upon me that I have not been getting my daily dose of NEWS.

Although I tried my best, I could not escape a very mild attack of AP. I felt that the root cause actually should be being uninterested or being lethargic or for that matter, it could as well be being human. However, not belabouring further, I settled for ‘missing the daily dose of news’ conclusion. Soon my mind moved instinctively onto the next step of problem solving – Addressing the Root Cause. Immediately, I grabbed the newspaper lying next to me and tried to go through it. I felt that it was another impossible task and started exploring other alternatives.

Being a natural idiot, my natural choice was my dearest buddy with IQ levels of my standard i.e. Idiot Box – more fashionably called now Television. I wanted to have best of the Idiots so I purchased an LCD version of my buddy. However, I realized soon after my purchase that an idiot in any form (LCD/ LED/ Plasma/ CRT) is still an idiot.

I was surfing through the NEWS Channels. I randomly selected one Hindi channel, where some BREAKING NEWS was being broken open to the public. I was very happy. How fortunate am I? Tomorrow, I could contribute in the discussions at our office courtesy the BREAKING NEWS that a boy had accidentally fallen into a defunct bore well while playing near it as it was not closed. I will make others feel oblivious tomorrow.

I instantly became a fan of this channel and added it to my favourites – yes I have taken Tata Sky to add to the experience of viewing digital clarity picture on my LCD and also to make my life jing-a-la-la.

I soon became very appreciative of this channel. For the sake of people like me, this channel has been playing the BREAKING NEWS of this decade since six in the evening. By the way, you wouldn’t know that it was about quarter past eleven in the night then.

With obvious unforgettably encouraging experience, I changed the channel to another local NEWS channel. I was lucky again this was showing some other BREAKING NEWS. There was a peculiar scroll running on the bottom of the screen proudly proclaiming that ‘We are the first channel to broadcast this BREAKING NEWS’. I wanted to add this also to my favourites. However, it did not take more than an idiot of my sort to realize that this logic would turn all the NEWS channels favourite.

I also realized that the new generation, ever-more-responsible NEWS Channels – who have taken upon themselves the virtuous task of bringing important NEWS to the common man on time and from every corner of the world – are living up to their task. However, they haven’t taken ‘bringing important NEWS to the common man on time’ as serious a part of their responsibility as ‘bringing NEWS from every corner of the world’. Anyway, they have at least taken 50% of their task seriously, while many are happy not taking even 10% of their tasks seriously.