Financial Markets and the Economy - Intersections

( The following article appeared in Bloomberg Quint on March 30, 2020, link below: https://www.bloombergquint.com/coronavirus-outbreak/all-that-needs-to-be-done-to-fix-a-covid-19-wrecked-economy  ) Policy at the time of Covid-19 When a financially constrained household is hit by a severe medical emergency, it faces a dreadful, unspeakable dilemma – balancing monetary cost with the human outcome. With Covid-19, whole nations, India included, face this predicament.  Whatever choices we make, we will likely incur significant humanitarian and economic costs. In addition, the duration and extent of this crisis remains very unclear as yet. Against this backdrop, we need a two-fold economic policy response. First, we need an emergency response to avert a humanitarian disaster. At the same time, we have to consider life after Covid-19. Our already vulnerable economy will suffer a body blow, and in the end, we could find ourselves at policy crossroads.   ...

( The following article appeared in Cogencis on March 23, 2020, link below: http://www.cogencis.com/newssection/chome/covid-19-and-indias-fisc-monetary-options/ ) Covid-19 and India’s Fiscal & Monetary Options  Covid-19 is first a medical challenge, with a sizeable human cost. Even as our good doctors & health authorities address the crisis though, we must consider the implications for the economy, financial markets, fiscal and monetary policy, and regulatory interventions.  Addressing the Economy – Fiscal Response The war against Covid-19 could be long and arduous. Livelihoods will be lost, demand will slump, and businesses will struggle. Economic activity will sharply reduce, before eventually limping back once the medical emergency has been addressed. This could take a long time. Even fiscal hawks (present company included) will attest that we need a pump now to make up for lost economic activity. In a war, we have to borrow from our future....

( The following article appeared on Moneycontrol on March 13, 2020, link below: https://www.moneycontrol.com/news/business/economy/policy-indian-economy-is-fighting-two-battles-but-its-not-that-bad-5029431.html ) The Indian economy is battling a war on two fronts now – the global market dislocation on the back of the covid-19 pandemic, and the vulnerabilities of our own domestic economy.  The Bigger Global Battle The first – and bigger battle for now - is clearly the fluid worldwide risk-off context. As it is, amidst trade wars and geopolitical flashpoints, the world had entered 2020 fearing an economic slowdown. The added battle against the covid-19 pandemic will almost certainly result in a sharp reduction in worldwide economic activity. That could result in bankruptcies, layoffs, and credit defaults, even as whole societies battle serious health hazards.  As these primal fears play out, markets are experiencing sharp dislocation. Yesterday’s 10% fall in th...

( The enclosed article appeared on CNBC TV18 online on February 20, 2020, per link below: https://www.cnbctv18.com/views/money-creation-and-rbi-how-the-central-bank-modulates-banking-liquidity-explained-5332721.htm  ) Money Creation & RBI – An Explainer In an earlier note (see “How the banking system works & money is created – an explainer”, published on January 28, 2020 on CNBC TV18), we had explored banking liquidity and credit creation from the perspective of the banking system. We now explore questions relating to the Reserve Bank of India (RBI). Does a Cash Reserve Ratio (CRR) requirement control money creation? How do Basel liquidity and capital stipulations impact economic activity? Does the RBI need to regularly inject liquidity to support credit creation and economic growth? What tools does the RBI have to modulate banking liquidity, and what constitutes ‘deficit monetization’? A Recap Let’s start with a quick recap of the arguments of the pre...

( The following article appeared in Bloomberg Quint on February 10, 2020, per the link below https://www.bloombergquint.com/opinion/our-experiments-with-truth  ) Our experiments with truth For a nation that has adopted “Satyameva Jayate” – truth alone shall prevail – as its motto, we have trouble dealing with the truth. We are yet to acknowledge the full extent of non-performing assets in our financial services ecosystem. We skirt around the truth in our budget math. We publicly applaud reforms such as Uday, Sashakt, Samadhan and bank consolidation, but privately complain that these are just not enough.  Some would argue that truth is overrated, or even dangerous. I make the case that truth – particularly around the state of our financial services and public finances – can show us the way to achieving our immense economic potential.   The truth about asset quality As far back as in 2012, Credit Suisse showed that many of the large infrastruc...

( The following article appeared in CNBC TV18 on January 28, 2020, per the link below: https://www.cnbctv18.com/views/how-the-banking-system-works-and-money-is-created-an-explainer-5143971.htm  ) Banking & Money Creation – An Explainer Here are some basic questions that take us deep into the fascinating world of banking and money. Why don’t banks lend out the current “banking liquidity surpluses” to clients, rather than dumping them with the RBI? Before June 2019, banks were running “liquidity deficits”. Why didn’t banks then raise client deposits to fund the deficits, rather than constantly borrowing from the RBI? Are our banks lazy, preferring to deal with the RBI rather than do business with their clients? Let’s try and address these and other related questions in this explainer. Balance sheet of Indian banking system To start with, consider Table 1, an admittedly simplistic snapshot of the balance sheet of the total Indian banking system, at t...