Financial Markets and the Economy - Intersections

(The enclosed article appeared on moneycontrol.com per link below: https://www.moneycontrol.com/news/opinion/are-there-large-open-positions-in-indias-currency-markets-9071791.html ) Are there large open positions in India’s currency markets?   In recent times, there has been some debate around the extent of External Commercial Borrowings (ECBs) raised by Indian borrowers that are ‘unhedged’, i.e., where the borrower has left the currency risk open.    Beyond just ECBs, the larger question is whether there is any pent-up complacency or vulnerability in the overall market positioning that could give rise to one-sided currency flows depending on the unfolding news and sentiment.   One way to gauge the direction and possible extent of such positioning would be to compare RBI’s net intervention in the currency markets with the net durable flows into the market.  We find that a significant accretion to RBI’s currency buffers over the last three years was funded by less durable flows, suggest

(The following article appeared in Moneycontrol.com, link appended below:  https://www.moneycontrol.com/news/opinion/should-banks-raise-more-deposits-8990121.html ) Should the banking system “raise more deposits”? Indian banking loans are now growing more than banking deposits. As of July 15, 2022, banking credit grew by over   INR 15 lakh crores over the past year, while banking deposits grew by less than INR 13 lakh crores.    The same time a year ago, in contrast, banking credit had grown by just INR 7 lakh crores, much less than the INR 16 lakh crore growth in banking deposits.    Does this portend a funding issue that banks should look to address now? To understand this better, let us consider how the overall banking system funds itself.    Deposit creation – linkage to loans   A key route to banking deposit (and money) creation is the very act of giving fresh banking loans.   When a bank gives out a loan by crediting the borrower’s account (including with another bank), fresh dep

(The following article appeared in Moneycontrol.com, per link below: https://www.moneycontrol.com/news/opinion/a-re-look-at-rbis-extraordinary-steps-in-2013-to-stabilise-the-rupee-8887771.html ) The 2013 RBI FCNR(B) Swap Window – Review & Takeaways   In the wake of recent volatility in our currency markets, some commentators have – somewhat prematurely - recalled the extraordinary steps taken by RBI in 2013.    To recap, post the taper tantrum of mid-2013, besides other steps, the RBI announced two special swap windows in September 2013.    First, it offered to swap US$ raised by banks from foreign currency non-resident (FCNR) deposits of maturity 3-year and above into INR, at a concessional rate of 3.5% p.a., about 3.0% cheaper than the market at that time.  Second, it allowed banks to raise foreign currency funding and swap them into INR at a concessional rate of 1% below market.    Collectively, the two swap windows brought in US$ 34B at a crucial time for India, with US$ 26 bn

(The following article appeared in Moneycontrol.com, per link below:  https://www.moneycontrol.com/news/opinion/why-india-needs-retail-participation-in-fixed-income-markets-and-how-8779601.html) Why India needs retail participation in fixed income markets …and what can be done about it   Today, retail participation in domestic debt markets is more than just a ‘nice-to-have’. Amidst persistent inflation, uneven growth, rising inequity and other economic stresses, retail participation in debt markets can provide policymakers with added degrees of freedom. We explore how and consider what holds back retail debt investments. When banks give out loans, they credit beneficiary accounts and create fresh money. Similarly, when banks make loans to the government and the government then spends, fresh money is created. During times of persistently high inflation such as now, creation of fresh money is worrisome for policymakers.   In contrast, when savers directly lend money to borrowers (includi

(The following article appeared in moneycontrol.com on 21Jun2022: https://www.moneycontrol.com/news/opinion/rbi-can-afford-to-let-rupee-depreciate-a-bit-8714721.html ) RBI’s Exchange Rate Choices For long now, RBI has used a banal statement to describe its foreign exchange management policy – ‘we do not target any specific level for the Rupee; we only intervene to control excessive volatility’.   Reality, however, is complicated. RBI often finds that it must make involved choices, and sometimes intervene in exchange markets to an extent that it practically sets market prices.    As an example, take the pandemic impacted fiscal year 2020-21 (FY21). India saw a flood of foreign currency inflows in that year. With domestic consumption and imports contracting sharply, India’s current account balance (the sum of India’s net goods and services trade and remittances) swung from a deficit of USD 25 bn in FY20 to a surplus of USD 24 bn in FY21. Add USD 44 bn of net Foreign Direct Investments (F

 (A version of this article appeared in Moneycontrol.com on 09June2022 per link below https://www.moneycontrol.com/news/opinion/can-rbi-quell-indias-inflation-8661921.html ) Can RBI Quell India’s Inflation?   The Monetary Policy Committee (MPC) today raised their estimate of India’s fiscal year 2022-23 (FY23) Consumer Price Index (CPI) inflation to 6.7%, a full 1.0% higher than their previous estimate two months ago. Given the trends in energy and commodity prices in the wake of the Russia-Ukraine conflict, continued strains in global supply chains, and the incomplete pass through of much of these increased costs, our actual FY23 inflation could well cross 7.0%.    Since 2016, when India formally enshrined inflation targeting into the RBI Act, the MPC is mandated with keeping inflation within a range of a target CPI inflation (currently set at 4%, +/- 2%) by changing the policy repo rate appropriately. Even as most economists welcomed this development, from an MPC perspective, controll