Financial Markets and the Economy - Intersections

The enclosed article appeared in The Hindu on February 3, 2022 - link below: https://www.thehindu.com/ opinion/op-ed/creating-jobs- by-increasing-capex/ article38367086.ece?homepage= true Creating jobs by increasing capex  The thrust on capital expenditures is laudable, but it comes with caveats and risks Ananth Narayan If we had to look for a single metric that held the key to us achieving our immense economic potential as a nation, creation of gainful jobs, particularly for our underemployed youth and women, would perhaps be a strong candidate. Data from the International Labor Organization (ILO) suggest that India’s employment to population (over the age of 15) ratio has steadily dropped from 55% in 2005 to 43% in 2020. In 2020, it was 52% in Bangladesh, 63% in China and 73% in Vietnam. Specifically, women form just 20% India’s nation’s workforce, while they comprise between 30% and 50% of the workforce in the other three countries. Further, CMIE data suggest that across manufac...

(The following article appeared in Bloomberg Quint on May 31, 2021 per link below: https://www.bloombergquint.com/opinion/funding-indias-economic-recovery-the-prudent-way ) Funding India’s Economic Recovery the Prudent Way   Last week, the Reserve Bank of India (RBI) declared that it would transfer a surplus of INR 99,122 crores to the Government of India (GOI), around twice the amount budgeted.    As we battle the pandemic, this feels like welcome news. Is there more where this money came from?    Committees have agonized over how much surplus the RBI should transfer to the GOI. Let’s avoid that end of the debate. Instead, let’s evaluate the outcomes of such transfers on the economy.    We argue that RBI surpluses spent by GOI amount to money creation, funded by forced, cheap, short-term banking loans to the sovereign. These reduce real interest rates and penalize savers. In the current context, this entails risk of asset price and general inflation, ...

 (A version of this note appeared in Mint per the link below: ) https://www.livemint.com/industry/banking/why-rbi-urgently-needs-a-forex-policy-11620227308648.html   India’s Exchange Policy Framework Unlike monetary policy, which is conducted under the explicit mandate of inflation targeting, foreign exchange management is left to the discretion of the Reserve Bank of India (RBI). For many years now, RBI has maintained that it does not target any value of the Rupee and only steps in to control some unstated measure of currency volatility. However, the sheer magnitude and nature of RBI intervention leaves it as a substantial determinant of currency rates, irrespective of its stated policy or intent.    The core of RBI’s intervention policy through fiscal year 2020-21 (FY21) was excellent. It acted as a volatility heat sink amidst massive foreign exchange inflows. It prevented excessive INR overvaluation that could have impeded India’s domestic output, employment, and ...

(The following article appeared in MoneyControl.com per link below: https://www.moneycontrol.com/news/opinion/economy-foreign-exchange-and-bonds-a-balancing-act-6598181.html ) Economy, Foreign Exchange, and Bonds – A Balancing Act   Rarely do policymakers ever have it easy. Even so, the particular context that RBI now faces is perhaps trickier than usual. In this note we will consider the context around inflation and the real economy, and then explore possible options for the RBI around monetary policy, foreign exchange intervention, and bond markets.   An Uneven Recovery   India’s economic recovery from Covid-19 has been brisk, but uneven.    India’s vaccination drive is gathering steam, and we will hopefully avoid a Covid-19 second wave. Consumption has recovered and sustained – witness robust GST collections for the past five months - even before all services fully resume. Government spending continues. With all this, listed companies have registered excellen...

 (Versions of the following article appeared in Ideas for India & Mint today, links below: https://www.ideasforindia.in/ topics/money-finance/budget- 2021-22-case-for-a-bad-bank. html https://www.livemint.com/industry/banking/how-to-make-india-s-bad-bank-workable-11613911668500.html ) The Case for a Bad Bank One of the key announcements in the 2021-22 Union Budget was around the formation of a ‘bad bank’. As outlined in the Budget speech by Finance Minister Nirmala Sitharaman:  “ The  high level of provisioning by public sector banks of their stressed assets calls for measures to clean up the bank books. An Asset Reconstruction Company (ARC) Limited and Asset Management Company (AMC) would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realization.”   Why would such an ARC be needed, when we already have an Insolvency and Ban...