Financial Markets and the Economy - Intersections

( The following article appeared on CNBC TV18 online on April 18, 2020 https://www.cnbctv18.com/views/view-govt-needs-to-print-money-and-spend-to-lift-economy-out-of-covid-19-mess-5720931.htm ) Fiscal Deficit, Monetisation & the Way Forward Let’s revisit some basic questions regarding our interest rates. Despite ample banking liquidity, and with overnight rates so low, why are Government of India (GOI) and State Government Bond yields still so high? What can we do to bring down these yields? The State of Our Fiscal Our fiscal deficit for the current fiscal year 2020-21 (FY21) will be far higher than budgeted. This is not up for debate – only the quantum of slippage is. The government’s receipts are going to plummet in these Covid-19 impacted times. Even after cutting back on some capital expenditures, we will also have to spend more than budgeted to stave off a humanitarian and economic crisis.  In FY19, the estimated total borrowing across central, stat...

( The enclosed article appeared on CNBC TV18 online on April 18, 2020: https://www.cnbctv18.com/views/view-easy-to-call-banks-lazy-but-one-needs-to-ask-why-arent-they-lending-5720721.htm) Banking Liquidity & Lending This may be a good time to ask some basic questions all over again.  Let’s start with liquidity and lending. The RBI Governor yesterday reminded us that banks are currently sitting on large amounts of surplus funds. What are these surpluses, and why aren’t banks lending them out to their clients? Surplus Banking Liquidity  The banking “surplus liquidity” – INR 6.9 lakh crore as on April 15 - is the extra balance that banks have in their CRR accounts with the RBI at the start of day, over and above statutory requirements. Since CRR balances earn 0% interest, banks today deploy these surpluses with the RBI at the LAF window and earn the reverse repo rate.  The banking system cannot “lend away” these surpluses.  Every loan g...

( The following article appeared on Bloomberg Quint on April 16, 2020: https://www.bloombergquint.com/coronavirus-outbreak/covid-19-response-can-modern-monetary-theory-come-to-indias-rescue ) Can Modern Monetary Theory come to India’s rescue? As Covid-19 pushes the world economy into recession, key developed markets are throwing between 5% to 20% of GDP of additional fiscal spend at the problem. India’s policy makers, however, are in a bind. Our economy and fiscal balance was far weaker than we cared to admit, before Covid-19 hit us. We must spend more now, just to stave off a humanitarian and economic crisis. But should our rallying cry be to “do whatever it takes”, or a more constrained “do whatever minimum we can survive with”?  One heterodox economic policy framework that could justify a higher fiscal spend is Modern Monetary Theory (MMT), advocated by the likes of Dr. Randall Wray. Critics of MMT such as Dr. Thomas Palley warn that MMT will sound especia...