[Samurai]

Originally Posted by vrprabhu

It would be helpful if you could give a brief as to the above. Thanks in advance.

I am not clear what you are asking for, please elaborate. Perils of financialization of economy is an open secret.

https://www.livemint.com/opinion/col...606351845.html

Instead of taking lessons from 2008 crisis, folks are repeating that mistake in in India these days.

[vrprabhu]

What I wanted to understand was like -

1. Any specific co-relation between stock market swings (boom / bust cycles) with the economy.

2. How the stock market can hold economy as a hostage.


Something in the lines of the following example - USD is weak (interest rates are close to ZERO), the rupee isn't appreciating much - as there are factors like inflation, export / imports, FII inflows, falling crude (?) etc. which will get affected if the appreciation is market driven, and hence, I guess RBI is compelled to keep buying the dollar to keep the exchange rate at an 'expected' level. (Six month futures for INR/USD were up to the tune of ~ Rs. 77/- per dollar at the time of COVID-19 outbreak. It is now at ~ Rs. 73/-. If compared with other currencies vis-a-vis USD, it should have been closer to Rs. 70/-)

[Samurai]

^^^ I'll address this in a detailed post another day. Not getting time for detailed posts these days.

Meanwhile, I got a good view of the ECA which was recently amended.

https://the-ken.com/the-nutgraf/cloth-vs-india/

It is behind paywall, but you can read it for free by supplying your email.

[SmartCat]

Originally Posted by vrprabhu

Something in the lines of the following example - USD is weak (interest rates are close to ZERO), the rupee isn't appreciating much - as there are factors like inflation, export / imports, FII inflows, falling crude (?) etc. which will get affected if the appreciation is market driven, and hence, I guess RBI is compelled to keep buying the dollar to keep the exchange rate at an 'expected' level. (Six month futures for INR/USD were up to the tune of ~ Rs. 77/- per dollar at the time of COVID-19 outbreak. It is now at ~ Rs. 73/-. If compared with other currencies vis-a-vis USD, it should have been closer to Rs. 70/-)

Unlike some countries (Eg: China, Saudi Arabia), India does not have a target USDINR rate. The value of Indian Rupee is market driven. However, RBI intervenes in the market to reduce the volatility of INR by selling and buying dollars. It takes the opposite side of the market movement, if such movement is large. Such RBI intervention (to reduce volatility) is beneficial for both importers and exports - else USDINR might jump up and down every week like Vodafone Idea stock

Developing countries cannot afford to have "target" currency rate. Having such targets or currency pegs can clean out a country's reserves. Historically, the root cause of financial crisis hitting many countries is CURRENCY crisis - Govt/central bank trying to "fix' exchange rates
https://en.wikipedia.org/wiki/Currency_crisis

If you let the currency market decide the exchange rates, it automatically sorts out many financial problems. Thankfully, RBI knows this.

One can easily find out if a country is meddling with exchange rates - by just eyeballing the long term rates with USD. This is how USDPKR (Pakistani Rupee) graph looks - it is very clear that Pakistani Central Bank is meddling with the exchange rates (trying hard to keep it at a particular level, but eventually failing).



Meanwhile, this is how USDINR (Indian Rupee) graph looks:

[carboy]

Originally Posted by SmartCat

One can easily find out if a country is meddling with exchange rates - by just eyeballing the long term rates with USD. This is how USDPKR (Pakistani Rupee) graph looks - it is very clear that Pakistani Central Bank is meddling with the exchange rates (trying hard to keep it at a particular level, but eventually failing).

Attachment 2059389

Meanwhile, this is how USDINR (Indian Rupee) graph looks:

Attachment 2059390

What exactly in the 2 graphs shows the presence or absence of exchange rate meddling?

[V.Narayan]

Originally Posted by carboy

What exactly in the 2 graphs shows the presence or absence of exchange rate meddling?

In the Pakistan currency graph you see stretches where the currency stays almost at the same level -- horizontal line -- followed by a sudden spike and volatility. Those horizontal patches are clear signs of attempts {always eventually unsuccessful} by the central bank to 'hold' the currency at that level.

[ashokrajagopal]

Originally Posted by SmartCat

Unlike some countries (Eg: China, Saudi Arabia), India does not have a target USDINR rate. The value of Indian Rupee is market driven. However, RBI intervenes in the market to reduce the volatility of INR by selling and buying dollars. It takes the opposite side of the market movement, if such movement is large. Such RBI intervention (to reduce volatility) is beneficial for both importers and exports - else USDINR might jump up and down every week like Vodafone Idea stock

Smartcat, I am trying to understand at what point you define it as meddling. The pegged exchange rate was a common practice world over, of late it has not worked well.
INR and other such for example are not pegged, and if you let market run the rate, central bank should be hands off. But here central bank is interfering in open market to adjust the rates.
How is that not meddling ? Some countries are good at that while others are not. It's all meddling.
Without adjustment in currency market, say Taiwan would have been the new Japan of 90s.

[SmartCat]

Originally Posted by ashokrajagopal

How is that not meddling ? Some countries are good at that while others are not. It's all meddling.

You have a very wide definition of what constitutes meddling. As long as a central bank does NOT have a "target rate", anything else they do in the currency market is fair, logical and beneficial for that nation's businesses and people.

if you let market run the rate, central bank should be hands off.

That is a terrible idea - both for developed and developing countries. If you give the currency market a totally free hand, your currency can be subject to artificial moves (thanks to huge temporary capital inflows or outflows) & manipulation (by large hedge funds) that can directly affect the country's economy. It's the same reason why the stock market is not given a free hand. In the stock market, there are rules and regulations, and penalties on manipulation. But since currency market is a global market with no regulator, a central bank has to step in to control excesses and bring order.

Eg: Whenever there is a financial crisis, Japanese Yen strengthens rapidly (as it is considered a safe haven currency). Now this is an artificial or temporary strengthening of Yen. And when this happens, the Japanese Central Bank regularly acts to weaken the currency
https://www.bbc.com/news/world-asia-pacific-11127927

Your definition of the above move is "meddling", but I would call it an important job responsibility of Japanese Central Bank. I would call steps like these as "intervention" - they will NOT result in a currency/financial crisis.

- Reducing the volatility of currency
- Steps to reduce the effect of temporary strengthening or weakening of currency

But this is "meddling" - these moves will eventually result in a financial/currency crisis in developing economies:

- Attempting to maintain a "target" rate
- If a level cannot be defended anymore, a committee deciding on the devalued level.

[vrprabhu]

Originally Posted by SmartCat

.. I would call steps like these as "intervention" - they will NOT result in a currency/financial crisis.

- Reducing the volatility of currency
- Steps to reduce the effect of temporary strengthening or weakening of currency

Agree. But, I still get a feeling that the actual value of currency doesn't get reflected due to these 'market interventions'. It also lends a (false) sense of security for the currency - if the volatility is too pronounced, and reaches a point where the central bank cannot continue its intervention, won't there be a free fall thereafter?

Originally Posted by Samurai

^^^ I'll address this in a detailed post another day. Not getting time for detailed posts these days.

I will gladly wait - patiently!

In this meantime, I went through the earlier article you had quoted (perils of financilisation). While some of the observations are true, I don't quite agree with the conclusion. This is my take (will try to keep it as short as possible) :

The transition from a 'poor' economy to a 'developing' economy required massive investments in infrastructure. Private sector investment alone would not suffice (let us not get into an argument on license raj etc. here) - and the government would have to take the lead to pave the way - especially in areas where private sector investment was wary of. (PSUs were one of the means).

In fact, India did have development financial institutions i.e. undertake lending for developing infrastructure. Names like IDBI - Industrial Development Bank of India, ICICI - Industrial Credit and Investment Corporation of India, Shipping Credit and Investment Corporation of India - SCICI, Industrial Reconstruction Bank of India - IRBI, IFCI - Industrial Finance Corporation of India (DFIs collectively) may ring a bell, I guess. They did participate in investment funding requirements in large industrial projects across the country. (Once again, I won't go into what happened subsequently). There are others for smaller sectors too (SIDBI, NABARD)

The opening of economy and 'commercilisation' of financial sector (profit become the main motive) led to dramatic changes - and the foresight of long term funding requiring long term resources and hand-holding appear to have been lost. Why? Commercial Banks - especially PSBs - were lending to such projects, even though the gestation periods were long term and cash flow cannot be predicted precisely. Some of the DFIs are now purely commercial banks.

Amidst this, there was indeed the capital (share) market to meet the funding requirements of entrepreneurs - even one for smaller companies (remember OTCEI?). How many companies raised equity from the market to meet their long term investment is anybody's guess - what they raised was probably used to lever borrowing from financial institutions, including banks.

We are now at a stage where it is apparently un-profitable to lend for long term projects by commercial banks (with the current NPA norms, IBC provisions etc.) - but, despite various challenges, we seem to be convinced that things are working well!!

It looks like that we are cross roads - choosing the right route may take us to better conditions. Which is the right route - that is what remains to be seen.

[ashokrajagopal]

Originally Posted by SmartCat

That is a terrible idea - both for developed and developing countries. If you give the currency market a totally free hand, your currency can be subject to artificial moves (thanks to huge temporary capital inflows or outflows) & manipulation (by large hedge funds) that can directly affect the country's economy. It's the same reason why the stock market is not given a free hand. In the stock market, there are rules and regulations, and penalties on manipulation. But since currency market is a global market with no regulator, a central bank has to step in to control excesses and bring order.

Thanks for the great explanation, no contention that letting it run amok is a terrible idea.
Your explanations sometimes clearly point out the underlying concept of Free market is not "free" after all.
This paradigm also brings out the dollar primacy. Holding a dollar reserve for intervention becomes the most important thing in any central bank's arsenal. When such is the case, having a currency swap line with US Fed is the natural best case scenario. Of course, geo politics determines it all.

[V.Narayan]

Originally Posted by ashokrajagopal

Thanks for the great explanation, no contention that letting it run amok is a terrible idea.
Your explanations sometimes clearly point out the underlying concept of Free market is not "free" after all.
This paradigm also brings out the dollar primacy. Holding a dollar reserve for intervention becomes the most important thing in any central bank's arsenal. When such is the case, having a currency swap line with US Fed is the natural best case scenario. Of course, geo politics determines it all.

Despite being a dirty profit raking capitalist to my button holes I will say this - the term Free Market is a misnomer pedaled by the rich and powerful. It is a free market only for those with muscle and rarely for those without even though both may be participating. This applies to all markets be it stocks, or currency or commodities or real estate. A market is needed to address the needs of several stakeholders - big and small participants, the nation, the regulator who is responsible for balancing several priorities etc. Just like all pleasures of life are good when consumed in moderation so too free markets are best when managed with a light but strict touch of moderation. Others may hold a different view.

[ashokrajagopal]

Originally Posted by V.Narayan

Despite being a dirty profit raking capitalist to my button holes I will say this - the term Free Market is a misnomer pedaled by the rich and powerful. It is a free market only for those with muscle and rarely for those without even though both may be participating. This applies to all markets be it stocks, or currency or commodities or real estate. A market is needed to address the needs of several stakeholders - big and small participants, the nation, the regulator who is responsible for balancing several priorities etc. Just like all pleasures of life are good when consumed in moderation so too free markets are best when managed with a light but strict touch of moderation. Others may hold a different view.

Obviously, I have no contention here too; as is clear from what I usually write in this thread.
I sincerely wish more people understand this underlying reality which despite being so obvious is increasingly getting more and more obscure in civil discourse. At the end of the day, being at the lucky end of "free" market must instill humility and compassion towards the rest of the society, but most people go in the opposite direction.

I think I have written this in some other thread too; if every house had an elder like you, the world would be a much better place.

[DigitalOne]

Originally Posted by V.Narayan

Just like all pleasures of life are good when consumed in moderation so too free markets are best when managed with a light but strict touch of moderation. Others may hold a different view.

I don't think anybody can dispute these statements in a general sense. It is only when specific questions are discussed that disagreements prop up - for example, questions like "Should Air India/BSNL be privatised?", "What should be the threshold for a Wealth tax" . Learned members have argued here that BSNL/AI is what is keeping telecom/air tariffs low, not Jio or Indigo. That's when you bring in the popcorn .

[JMaruru]

Originally Posted by DigitalOne

Learned members have argued here that BSNL/AI is what is keeping telecom/air tariffs low, not Jio or Indigo.

These PSUs are underwritten by tax payer. If the customer does NOT pay the fair price, it invariably falls on the tax payer.

[OrangeCar]

Economists do not like large deficits. Rating agencies too. India targeted a fiscal deficit range of 3.5%.

There has been a CAG report of GST amount remaining in consolidated fund of India (and states' portion not being transferred out of it). Debates in economic circles about how it has helped window dress India's fiscal deficit. Link.

Now, another interesting article in Financial Express. The high collection of cess amounts, and its usage not going to its intended purposes. The article mentions the parliament approves cess collections for specific purposes, but GoI has not transferred these amounts to those purposes. This has also helped window dress deficit figures. The article also mentions Cess amounts collected has been going up over the recent few years.

FE Article

The point now is, how much can economic principles and economists help if the GoI does not project a true picture of finances. Does this not lead to an increase in trust deficit in the GoI?

Also, with such reports, if GoI were a listed stock, would it share price not go down? Or the market boom will keep it afloat. I wonder.