Financial Markets and the Economy - Intersections

This article appeared on CNBCTV18.com on 28th June 2018 https://www.cnbctv18.com/economy/where-is-the-indian-rupee-heading-the-rupee-story-quo-vadis-209641.htm The  rupee story  – quo  vadis ? So how will the  ongoing  INR story  likely  play out? L ike we always do, lets begin with a prayer.   Let’s pray t hat Trump’s Iran,  trade  and other  theatrics  don’t put us in a pickle. That  crude  oil prices  quickly  correct back below  US $60  a barrel .  That investors don’t  discover   still more  reasons to scramble out of emerging markets and India.  If our prayers are answered, we can pat ourselves on our backs,  scoff at the naysayers,  declare that everything is fine,  and  again   kick  our large  can  of  issues around exports , imports,  and  external and  internal   im balance s down the road.  What if our prayers are ignored? We’ll live through interesting times – again.  The vulnerabilities On the external side, our core  permanent  balance acros

The following article appeared on CNBCTV18.com on 21st June 2018 https://www.cnbctv18.com/economy/why-the-monetary-policy-fixation-on-inflation-is-fundamentally-wrong-167031.htm The ostrich and the impossible trinity At the June 6 th post-MPC press conference, the RBI Governor was asked for his views on use of interest rates to defend currencies. His factual response was “(India’s) monetary policy is determined by the nominal anchor that has been given to us through a legislative process, which is the consumer price index”.  This echoes the mantra of Indian monetarists – focus monetary policy on inflation, and everything else will fall in place. While it might sound catchy, this simplistic chant downplays many nuances. Amongst them is the “impossible trinity”, which argues that an independent monetary policy will impact currency markets and capital flows – whether intended or not. We saw this play out the last few years, with a flood of reversible, carry-seeking inflo

The following blog appeared on Bloomberg Quint on 9th June 2018  (https://www.bloombergquint.com/rbi-monetary-policy/2018/06/09/managing-indias-economy-those-who-cannot-remember-the-past) Over the past few decades, India has endured a few crises associated with external shocks. The 1991 crisis was triggered by the Iraq war. The currency crisis of 2013 came about after Ben Bernanke, then Chairman of the U.S. Federal Reserve, indicated that the U.S. quantitative easing program was set to taper. While external events did ignite the fires, India was especially vulnerable during those times by sitting on a proverbial powder keg of accumulated external and fiscal imbalances. Let’s first get a few of things out of the way. India is not facing any economic crisis at this stage. Comparisons with 2013 are unwarranted. As are comparisons between India and the likes of Argentina and Turkey in the current context. But there are signs of some external and fiscal i

Interest rates in India have moved up sharply the past 9 months. Oddly, there may be some consensus in both Delhi & Mumbai – for now - that interest rates need to stay high. High interest rates are the price we pay for a shaky external sector, and a shaky fiscal situation. Rupee & the likely Delhi concession Ministers and Babus - who instinctively clamor for 100 bps of rate cuts at any given time – are likely more worried about rupee and inflation this election year. Despite its recent recovery, rupee has weakened by 5% against USD in 2018. Add to higher crude oil prices, and a weaker rupee visibly hurts voters. In addition, we sadly look at rupee strength - mistakenly - as a direct measure of India’s economic virility. Delhi might concede – for now - that high interest rates are needed to draw inflows and stabilize rupee and inflation. There are, however, shortcomings to a brute-force interest rate and intervention approach to rupee stability.