Financial Markets and the Economy - Intersections

( The following article appeared on CNBC TV18 online on September 24, 2020, per link below: https://www.cnbctv18.com/market/bonds/view-should-government-be-thinking-of-a-corona-bond-to-fund-fiscal-deficit-7002821.htm ) A Case for a Corona Bond   In the current Covid-19 context, with sharply lower tax collections on the one hand and the need for increased relief and eventually recovery spending on the other, the government has no choice but to run large fiscal deficits for some time.  In this note, we present a case for the government to fund some of this deficit by directly borrowing from savers through a special Corona bond, rather than from banks. We suggest that such a bond would help the cause of financial stability, by offering a reasonable alternative to savers, and by curbing the possibility of unwelcome inflation down the road.   Money Supply - Trends   Even as the economy takes a body through Covid-19, our money supply is registering robust growth.  ...

 (The following article appeared on CNBCTV18 online on August 4, 2020 - URL below: https://www.cnbctv18.com/finance/view-the-omissions-and-commissions-of-indias-mpc-framework-6535921.htm ) The Omissions and Commissions of India’s MPC Framework   India’s Monetary Policy Committee (MPC) is charged with setting the policy repo rate, and so containing CPI inflation between 2.0% and 6.0%, while keeping in mind growth.   Does the core premise of this framework, that policy interest rates can control inflation in India in the conventional sense, hold water?   Monetary policy is known to influence other parameters, such as the external sector, savings, investments, and employment. Does their omission from the framework make sense?   Interest rates go well beyond the policy repo rate. Does it make sense to limit the MPC to the policy repo rate alone?   We consider these questions in this article. In a sequel, we will explore alternative frameworks could be considere...

 (The following article appeared in Moneycontrol on July 13, 2020 - URL below: https://www.moneycontrol.com/news/opinion/a-relief-and-recovery-blueprint-for-indias-economy-5540151.html ) Indian Economy through Covid-19 – Relief, Revival & Execution   Considerable uncertainty persists on how the Covid-19 pandemic will pan out. Mercifully, there are a few silver linings.  The containment of the spread in Mumbai’s congested Dharavi offers us hope and pointers. Testing has steadily increased to over 300,000 per day. Authorities are working to improve our medical infrastructure and response.   However, the overall number of cases continue to rise, and sporadic reinstatement of local lockdowns continue.   How badly is our economy impacted? What relief steps have been taken so far, and what more can be considered? How can we prepare for economic revival beyond Covid-19?   How Bad is It?   Estimating GDP growth for the current fiscal year 2020-21 (FY21) is...

 (The following article appeared on CNBCTV18 online on June 19, 2020 - per URL below: https://www.cnbctv18.com/views/explained-should-govt-raise-money-directly-from-retail-savers-and-other-questions-6166931.htm ) Money and Economic Activity – A Perspective   Here are a few topical questions that test our understanding of money, banking and economics.   Will excessive government spending now crowd out private investments? Should the government now raise money directly from retail savers, perhaps by way of a special Covid-19 bond? Is precautionary savings behind the current rising levels of deposits? Can rising money supply eventually threaten our financial stability? If money supply has to be controlled later, how should it be done?   We explore these and other questions below. In the discussions that follow, we will frequently refer to prior articles Banking & Money Explainer and RBI and Money Creation .   Money Supply and Economic Activity   Let us fi...

 (The following article appeared on Livemint on June 11, 2020 - URL below: https://www.livemint.com/industry/banking/beware-the-approaching-financial-train-wreck-11591795968121.html ) Truth and the Path to India’s Economic Recovery   As India’s already weak economy takes a body blow from Covid-19, the sector that best points to both the current issues in our economy and a possible path to our eventual prosperity is our financial services ecosystem – across banks, Non-Bank Finance Companies (NBFCs) and debt capital markets.   For a while now, there have been clear symptoms indicating that all is not well with this ecosystem. It has been suffering from a  trust deficit, and despite all the liquidity in the system, it has been unable to finance India’s growth aspirations. However, we have avoided a full report and diagnosis, and dragged our feet on treating the core issues.                 ...