Financial Markets and the Economy - Intersections

As with every formal ecosystem, there have always been two opposing narratives around the Indian financing ecosystem.  The first is the official, sanitized version, visible in formal settings. This is pro-establishment, shows deference to those in authority, is upbeat, and offers lots of photo-ops alongside a few suppressed yawns.  The alternative narrative, in contrast, is whispered, informal and gossipy. These are the uncensored, wild, chats around the water cooler that sneer at the official narrative.  A healthy ecosystem will pull up the alternative narrative towards the official one. Sadly, as multiple banking scandals now come to light, gossip has clearly taken center stage, and the official narrative is Absent Without Official Leave.  For those in authority wanting to make a difference, sifting through the gossip can be very useful. It can surface misconceptions that need to be corrected, and highlight blind spots. While the current focus...

With all the activity in our bond and currency markets, this is a season ripe for blog sequels. Here are two for the price of one.  Bond markets – self-inflicted wounds & self-medication (See  https://ananthindianmarkets.blogspot.in/2018/04/mpc-yesterday-jules-verne-caesars-wife.html ) Indian bond yields have yo-yoed the past six months – 10-year GOI yields moved from 6.80% to 7.78% down to 7.13% and are back again to over 7.70%. These are big, jagged moves by any standards.  Yes, the macro context has changed in the interim. Our combined fiscal deficit has expanded, current account deficit (CAD) has widened, crude oil prices are higher, political outlook is murkier, and yields and volatility have risen globally. It is only natural to expect an increase in our own bond yields and market volatility.  However, a big chunk of the whipsaw in our bond yields is homebrewed – by the government, RBI, MPC, and dealers, alongside weak communication al...

Around the world in 112 days… India’s 10Y benchmark bond yield closed yesterday at 7.13%, returning to levels last seen in mid-December 2017.  Yields have been through a remarkable roller coaster the past four months, reaching a dizzying peak of 7.78% in March. This rise and fall in yields were caused more by the government, RBI and the MPC, than by other external factors or agents. Yields went up thanks to a higher borrowing program, tough love from the regulator (or a lifeline denied, depending on your point of view) and fiscal slippage, all leading to a market in sulk. Yields then reversed with a surprisingly lower H1 FY19 borrowing plan, an accounting lifeline finally granted (after all!), and yesterday, a set of literally  underlined  lower inflation projections from the MPC.  So, did you enjoy the ride? Some ongoing market volatility may actually be desirable, as a vaccine against complacency. But self-induced volatility on the back of policy ...

My 2-bits : the MPC statement tomorrow should err on the side of sounding more hawkish than the market expects. If the MPC went purely by its CPI mandate, it can actually afford to be more benign than it was in February. After all, with lower vegetable prices, average CPI inflation for January - March 2018 will likely end at 4.6%, well short of the 5.1% MPC estimate. In addition, the initial forecast for monsoon is encouraging, and many analysts now project a more benign FY19 CPI path than the MPC did. However, the MPC should look beyond this. After all, projecting India’s CPI is like throwing darts at a board. Who knows where food, oil and commodity prices will be in 6-12 months time. What bears watching instead is financial stability, and there is ample cause to be cautious here. First, the fiscal situation looks tough – on both expenditure and revenue fronts. In the run-up to general elections, the government will be under severe pressure to spend on farmers, rural...

When government bond yields moved up to 8% last month, besides public sector banks (PSBs), retail investors were missing from the market. While the absence of PSBs raised eyebrows, there was no surprise around the lack of direct retail participation. That is the sad reality of Indian debt markets – our tax regime for bonds has ensured that direct retail participation will continue to be minimal, even if levels look attractive for savers. There are some policies that seem anomalous, and yet survive without change year after year. I save such cases in a folder named “Dilbert”, after Scott Adam’s satirical cartoon strip. One item in this folder is our differential taxation policy for bonds, within the larger issue around taxation of savings.  Taxation of savings The larger issue of taxation of savings probably has enough material to fill a whole Dilbert volume. Ask our RBI Governor, who chafed about the high and multiple layers of tax on capital and investments. Al...