Financial Markets and the Economy - Intersections

The MPC’s role yesterday was like that of the policemen who arrive at the climax of old Hindi movies, after the battered hero has singlehandedly managed to subdue the villains. There is no dearth of macroeconomic villains today – widening twin deficits, uncertain global environment, and inflation fears to name a few. However, by rising by over 60 bps since the last policy, the bruised bond market had pretty much done the MPC’s job for now. For its part, the MPC delivered – it didn’t waste any needless bullets, and it stuck to its script. It came across as calm and balanced, and gave perfectly reasonable projections for CPI (5.1% for this quarter, 5.1%-5.6% for H1 FY19, and 4.5%-4.6% for H2 FY19).   That seems to indicate that they would look through spikes in inflation, much as they looked through dips in mid-2017, as long as the market (and the hero) behaves. The MPC has been truly flexible, and used the +/-2% leeway well. Eye of the beholder One section that sto...

In the ongoing Indian government bond market soap opera, one subplot relates to RBI’s dividend payment to the government. After three years of paying out all of its net income as dividend, for fiscal year 2016-17 (FY17), the RBI board retained INR 131.9B of its income for its own books. Given current fiscal stress, this led to murmurs, including suggestions that RBI should now pay an ad-hoc dividend to the government. Any hasty roll back of this kind, without debate and consensus, would severely risk RBI’s credibility. That said, we do need to debate the appropriate level of capital buffers on RBI’s balance sheet. There has been work done on this – by the Subrahmanyam Group (1997), Usha Thorat Group (2004) and the Malegam Committee (2013). More needs to be done. Central Bank balance sheets and income statements can be tricky to grasp. In addition, this issue can excite touchy, ideological arguments about government credibility and RBI independence. This is not th...

For a while, ignore the breathless headline that INR is at a 2.5 year high against the USD. Also ignore the valid counter-argument that looking at USDINR alone is misleading, and that INR actually weakened by 7% against the EUR the past year. Both statements are true, but tell us very little about the “right” value of INR.   Let’s instead take a look at the USD inflows that are adding to RBI’s growing FX reserves. A significant chunk of the inflows chase the prospect of better “carry” in INR, and are reversible. Though this is not acknowledged or debated enough, our monetary policy framework and RBI’s specific FX intervention methodology have played a role in making this “carry trade” attractive. Dollar, dollar everywhere… Over many quarters now, RBI has intervened and bought USD in FX markets. In fiscal year 2018 (FY18) till October 2017, RBI purchased over $17B in the spot market and over $20B in the forward market. What are the sources of this plentiful USD? ...