Financial Markets and the Economy - Intersections

(The following article appeared in Business Standard on November 30, 2019, per the link below: https://www.business-standard.com/article/opinion/in-the-midst-of-a-consumption-slump-119113000027_1.html ) Q2 GDP & beyond - what should we do next? GDP data released for the second quarter of fiscal year 2019-20 (Q2 FY20) sadly reaffirms that India’s economy is in need of serious repair. Despite the government pushing its spending up by a strong 15.6% this quarter, our economy registered a very disappointing real growth of just 4.5%. Worryingly, investments recorded only 1.0% growth, and manufacturing shrank by 1.0%. At just 6.1%, the nominal growth was the lowest of this GDP series. India is in the midst of an investment and consumption slump. There is pressure on policy makers for further fiscal and monetary support to the economy. However, focusing primarily on these would be a mistake on several counts. To begin with, the true extent and quality of

(The following article appeared in BloombergQuint on November 7, 2019: https://www.bloombergquint.com/opinion/economy-in-trouble-but-markets-at-a-high-why-the-divergence ) Divergence Between India’s Economy & Markets Here’s a topical debate for us students of economics and markets. Large swathes of India’s economy appear to be in distress. Yet, India’s key equity indices NIFTY50 and SENSEX are close to their all-time highs. How do we account for this divergence? What are the implications for policy makers? The Economy, Corporate Earnings, and Benchmark Equity Indices There is actually little divergence between economic data and corporate earnings. The divergence is instead between earnings growth and stock prices. Economic data suggests that both investments and consumption have slowed considerably in recent times, with several sectors of the economy battling deep, structural issues. NIFTY50 corporate earnings growth mirrors this economic n

(The following article appeared on Bloomberg Quint on September 3, 2019, URL below: https://www.bloombergquint.com/opinion/extracting-surpluses-from-rbis-revaluation-reserves ) Extracting surpluses from RBI’s revaluation reserves A key recommendation of the Bimal Jalan committee that reviewed RBI’s Economic Capital Framework (ECF) was a reiteration that RBI should not distribute surpluses from its very considerable revaluation reserves. Separately though, the RBI has now adopted a significantly different method of accounting for its currency and gold sales, that extracts realized income from its revaluation reserves. While details around this major accounting change are sketchy, we consider how this accounting methodology likely worked in FY19, and its implications for future. Under the new policy, it may now be possible for RBI to theoretically extract over INR 2 tn of income from its revaluation reserves in FY20, under the right circumstances.