Tuesday, December 30, 2008

Japanease Slump and its Implications

Japanease stock index Nikkie touched 39,000 mark in late 1980s, today it is struggling around 9,000. Virtually there was zero growth for last two decades in the Asia's largest and world's second largest economy. Fiscal measures, monetary measures all failed one after another in bringing back the normalcy.  When one look into the reasons (Irrational credit expansion and reality boom) that caused the downfall of the Japnease economy, one certainly get scared of their future prospects from the current juncture.  

Here i would like to initiate for a year end debate on the possible causes for the continued slump in the Japnease economy. Particularly i invite the arguments on the following issues:

  • Reasons for the failure of fiscal and monetary measures in Japan
  • Why an average Japanease citizen save so high? (even after realising that their savings and investments have gone for a vain)
  • Possible measures to be adapted to cure the Japanease truma
  • Implications of prolonged Japanease slump to the current debacle of the global financial system
As i mentioned it is the year end debate, i request your valuable arguments and comments by the end of the current year.  I also hereby promise that your contribution will be duly recongized in my forth coming blog post on the same issue.

Saturday, December 6, 2008

ILA PATNAIK on FIIs (Financial Express)

Why did stock prices drop even though massive net sales by FIIs, or an en masse flight by FIIs from the country, did not happen? Stock prices are determined by the beliefs of lakhs of market participants across the country. These are the people who are watching industries, individual companies and making forecasts about the future performance of the companies. Some foreign investors participate in this kind of active stock speculation, but the bulk of it is done by domestic individuals. When global business cycle conditions became worse, these speculators started downgrading their optimism about the growth of profits and dividends on the part of Indian companies. This gave lower stock prices. The channel runs from news to forecasts to (primarily domstic and individual) speculators to stock prices.

Why does the media talk so much about FIIs even though their influence on stock prices is small? From the viewpoint of brokerage firms, what matters most is trading volume, because their fees are proportional to volume. Whether FIIs buy or sell, they generate fees for brokerage firms. FIIs tend to do business with a few large brokerage firms located in South Bombay who are focused on institutional investors. For these firms, FIIs are important customers. Journalists and television commentators tend to talk with a few big brokerage firms, and tend to think that FIIs are very important. They miss out on the thousands of stock brokers spread across the country, doing mostly retail business, who account for the bulk of activity on the stock market. The belief of the big institutionally oriented brokerage firms in Bombay, that FIIs are very important for their business, has got rubbed off into a broadly held belief in the media that FIIs are the most important participants in Indian financial markets.

Curtsey of Financial Express

Friday, December 5, 2008

IMF Guidelines!!?

The confidence in the financial markets across the world has been badly shaken. Almost all the countries are embarking on adapting possible measures to mitigate the damage. IMF in its recent Global Financial Stability Report (GFSR) came up with few principles that could form the basis for designing the measures for a restoration of confidence in these exceptional circumstances (i dislike to admit it as "crisis"). They are:

1. Measures should be comprehensive, clear and operational procedures have to be transparent. 

2. Measures taken by the countries across the globe should be consistent in order to maximize their impact while avoiding the adverse effects on other countries. (such as competitive devaluation of the respective currencies should be avoided)

3. Ensuring rapid response on the basis of early detection of strains.  This requires a high degree of coordination within each country among the different set of authorities and in many cases across borders.  (The acomplishment of this principle would have saved the edifice of the Northern Rock as it has been effectively done by the rare coordination of authorities in India in avoiding the possible Run on its second largest bank)

4. Measures adapted by the governments across the world should assure that the current interventions are temporary and taxpayers interests are protected. Governments should be accountable to all its stakeholders and conditions for the support (by way of bailouts) should include private participation in downside risks and taxpayers participation in upside benefits. Intervention machanisms should minimize possible moral hazard problem.

Additions and constructive comments are encouraged!!

Sunday, November 30, 2008

The Scientist's Rating on my blog!!

Sounds crazy!!  But the analysis of my writings by http://www.typealyzer.com reveals how i think .........Check it out, here is the report

INTJ - The Scientists
The long-range thinking and individualistic type. They are especially good at looking at almost anything and figuring out a way of improving it - often with a highly creative and imaginative touch. They are intellectually curious and daring, but might be pshysically hesitant to try new things. 

The Scientists enjoy theoretical work that allows them to use their strong minds and bold creativity. Since they tend to be so abstract and theoretical in their communication they often have a problem communcating their visions to other people and need to learn patience and use conrete examples. Since they are extremly good at concentrating they often have no trouble working alone. 

What do you think.........??

Friday, November 21, 2008

Similar thought!

Here is an interesting piece from Ajay Dua (Formar Secretary, GOI), who expressed the similar ideas (expressed in my earlier blog posts) on present crisis and its policy implications.

Also see the Ajay shah's piece in financial times

Wednesday, November 19, 2008

Unviable Suggestion!!

The present crisis over turned the basic idea of the capitalism that "the state should assume the role of facilitator rather than the role of regulator". It is quiet evident from the recent acts of the notable 'leaders of capitalism' as United Kingdom nationalized the private commercial and investment banks (pearls of capitalism), United States embarked on entering into the governing bodies of yesturdays corporate kingdoms. With the yesturday's statement, the Government of India took the anti-capitalist movement to the next levels.  Given the status of the economic environment, i propose to critically evaluate the Govt of India's move in asking the industry to cut the prices of the goods produced by them.

During the last couple of months, the Govt of India infused Rs. 2,80,000 crore through a host of monetary measures and another Rs 1,00,000 crore through various fiscal measures. Thanks to the cordinated efforts by Ministry of Finance and RBI, the inter bank rates have (virtually) came down to the normal levels (though i suspect the normalcy in terms of transactions among the banks). Here, one should question the effectiveness of the measures so far taken by the MoF and RBI. These have been initiated at a time when the transactions among the banks were virtually non-existent, call money rates were at their hights of around 23% and most importantly the banks were no where near the position of either continuing or renewing the expired credit lines to the corporates. As noted by the pink papers, these measures are successful as they claimed to be drived down the inter bank rates. Here one should understand the real picture  what made the inter bank rates to reach the normal levels?.  It would have been appreciated if the RBI & MoF measures improves the confidence among the banking community over the solvency of their peer and if they transferred the newly infused liquidity to the real economy through continuing and extending the credit lines to the industry. Hardly there is no evidence on this front, there is no evidence of either new or renewed credit lines (without additional restrictions) to the industry; there is no evidence of healthy inter bank transactions. Hence, it is very clear that the RBI & MoF measures reduced the demand for call money (thereby interbank rates) by boosting  the banks with the large chunk of easy money which has no signs of reaching the proposed ends (moreover it is reaching back to government coffers as banks are now heavily purchasing the government securites). Essentially, these measures so far taken have neither yielded  fruits to the (real economy) industry nor to the banking sector as they failed to improve the confidence among the ultimate economic agents (consumers).  Moreover, the steep fall in retail sales have jeoparadized  the industry (which never had the chance of earning super normal profits given the fierce competition resulted from opening up of the economy) prospects by resulting in accumulated inventories, and increased credit bills. At this stage, the viability of the earnest Minster of Finance statement may be questioned? It makes me to suspect that the Govt of India is still in the dreams of "strong fundamentals" and not yet ready to accept its vulnerability to the crisis. 

In this situation, the government should have the sole goal of 'improving the confidence' among the economic agents.  It may be effectively achieved by relying heavily on fiscal policy measures. That is increasing the benefits to the unemployed (social security measures), infrastructure spending  to boost the aggregate demand. The agrument against infrastructure spending in the prevailing situation is that they take too long to show the impact, but such an arument has no validity as the chances that this slump will be over anytime soon are virtually zero.  Hence, it may be reasonable to get such projects get rolling and slowly injecting the confidence among the economic agents.!! (as i blogged for quite some time ago).

(Constructive comments and suggestions are encouraged!!)

Monday, November 3, 2008

II. Derivatives and Monetary Policy: Implications for the Transmission Mechanism of Monetary Policy

The goal of the monetary policy is to ensure non-inflationary growth in the economy.  The intentions of the monetary policy are mostly transmitted through the financial sector, mainly through influencing the interest rates, exchange rates and availability of bank credit. Though there are wide variances in the financial structures in various countries, these issues assume greater significance in almost all the institutional arrangements.

Through Interest Rates:

With their low transaction costs and flexibility of product designs, derivatives increase the speed of portfolio adjustments and thus lead to the faster transmission of interest rate changes. On the other hand, financial derivatives are also the perfect instruments for the individuals who now can seperate the interest rate risk of an investment from its production risk at least for a while. The influence of monetary policy will sooner or later will get reflected in the real economy because the insurance obtained through derviatives will eventually expire. Moreover, the monetary policy so heavily influences the cost of such insurance. In a way financial derviatives provide inexpensive and efficient transmission of information to the modern and globalized economy.

Through Exchange Rates:

In the world with financial derivatives, it is much easier to engage in speculative positions on a particular country's currency without having any relationship to that country. It is not posible in the world without such derivative products. These kind of transactions effectively transmits the impulses of monetary policy to other parts of the region.

Through Bank Credit:

Monetary policy influences the volume and structure of bank credit if it were to control credit costs. The availability of financial derivatives in such an economy would likely to undermine the efforts of monetary policy given their capacity for substitution. This implies greater significance for the 'interest rate channel' than a 'credit chennel'.

(The author is greatly benefited from the writings of Gerd Hausler)

Constructive comments and suggestions are encouraged!!

Saturday, November 1, 2008

I. Derivatives and Monetary Policy: An Introduction

I deeply regret for the delay in posting my discussion on this issue at the promised time. I really put a lot of effort in gathering and analysing the existing information about this topic.  After a deep thought i have decided to post my arguments on this issue through a series of 5 blogs.  At the outset, here i will provide the framework for such a proposed series. I hope you will receive it with the right spirit.


It is generally perceived that the central banks deal with derivatives exclusively in the context of supervision and regulation. There are few central banks (small) that gained the first hand experience with derivatives when trying to manage their exchange reserves more professionally. Ofcourse, this is a commercial action which may be significant in individual cases, but is not of a core cencern of a central bank. Given the exploding size of derivatives markets today, it is crucial to understand the impact of derivatives on monetary policy in particular and on today's financial environment in general.

The possible issues araising from the interaction of derivatives and monetary policy may be classified into four categories:
  1. Impact of derivatives on the various aspects of the transmission mechanism for monetary policy.
  2. Influence of derivatives on the targeting of monetary policy.
  3. Usefullness of derivatives market in designing the monetary policy especially in providing policy makers with the valuable information about the market expectations.
  4. Derivatives as an operational tool for the monetary policy purposes.
The discussion over these issues will be presented through the following series of five blog posts.

Constructive comments and arguments will receive due recognition!!

Tuesday, October 21, 2008

Break the Path Dependent Ideas!!

Eversince sub-prime crisis  initially unearthed during April 2007 in United States, it has been widely written and extensively discussed by the independent scholars, policy makers and so on saying that: the fundamentals of the Indian economy are extremly strong, India has not yet been integrated to the world economy. Hence, the possible impact of the crisis in the western financial system will be very mild on the Indian economy.  By naively subscribing to this view, RBI has maintained the real interest rate as high as 4% (three month rates), SEBI continued to control capital inflow by many ways such as restricting Paricipatory Notes untill early September 2008. Where as the central bank of US (Federal Reserve) kept the credit policy so loose that short term interest rates are in the negative territory during the period.

Almost a year later now after September 2008 which experienced the major collapse of financial system in the western world, we are now feeling pinch and observing the worst part of the effect in our economy.  Our stock markets have fallen steeply by almost 40%, inter bank call rates touched the peak of 23% unearthing the worst ever credit crunch. This resulted in either fully or partially abondened credit lines to the corportes and there by affected the indusrial production. The real estate markets in India have slowed down and the home prices in most of the cities are falling sharply.  In a way high degree of distress has been witnessed in the overall economy. This has disproved the perception of our policy makers over the 'strong fundamentals' and 'decoupled of the economy with the rest of the world', that is based on the position of India 10 years ago. 

 Coordinated effort of RBI, SEBI and Ministry of Finance:

Similar to most of central banks of the developed world, Ministry of Finance and SEBI led by the Indian central bank has now (after realising the true picture) come out with a series of positive steps to correct the system during the last three weeks. a 250 bps cut in CRR, a special window of Rs 20,000 crores to MF to ease the redemption pressure, reliease of Rs 25,000 crores under the loan weaver scheme, a 100 bps cut in the (repo rate) policy rate, a de facto 100 bps cut in SLR, the reversal of the mistakes on PNs of October 2007 and ease of FDI norms. All these measures seems to bringing back the normalcy in to the system as they resulted in bringing down the call rates to around 6% and reduced the panic selling in our stock markets (Indices have taken the northward direction!!) In a way RBI and SEBI exhibited the greater maturity in dealing with the present borrowed crisis without resorting to possible politically motivated measure of "banning of short selling".  Hence, it may be highly commendable to break the subscribing to the path dependent thinking process and accept the Indian economy as nascent market economy in arraiving at policy decisions !!

(The author has highly benefitted from the writings of Ajay Shah, Ila Patnaik and Arthur M Okun)

Comments and suggestions are encouraged!!

Monday, October 20, 2008

New dimension to Trade theory

You might be well aware of David Ricardo's 'Theory of Comepetitive advantage' which advocates that the countries which are relatively competitive enough in producing different goods/services should participate in trade ( E.g. you are a better baker and i am a better shoe maker, the trade between us improves the prospects of both of us). This basic idea of trade relevence dominated the thought of International economics and trade, in a way it laid the path of economic thinking of international trade.  

Paul Krugman is one of the first to realize that those kinds of path dependent models only explained about half of the trade in the world, and he became the first one to explain economicially why it (also) made sense that countries that are similar should trade as opposed to courtries that are differnt. He explains that  such trade between the countries that are similar, enables specialisation and large-scale production, which results in lower prices and greater diversity of commodities. The development of large scale production for the world market has contributed significantly for the enhancement of standard of living of most of the countrymen (mostly in developing counries)  by the way of attracting more people to cities and higher wage rates.  Paul in his path breaking work on trade theory showed how economics of scale influence trade and urbanization.

(The author has greatly benefited from the writings of Simon Kennedy and Rich Miller)

Comments and further contributions are encouraged!!

Saturday, October 18, 2008

Current Recession: Policy Implications

Before going ahead with this weekend blog let me Congratulate PAUL KRUGMAN who has been honoured with the Noble prize for the year 2008 in Economics. His theoretical contributions to International trade and economic geography are detrimental in bagging the highest honour. In his recent piece in Newyork Times, the 2008 Noble Laureate in economics said that "it is politically fashonable to rant against government spending and demand fiscal responsibility.  But right now, increased government spending is just what the doctor ordered, and concerns about the budget deficit should be put on hold". In the following piece of my blog, i will try to relate his statement with the current global financial condition (I dislike to call it as "crisis").

Stock markets are finding new depths in most of the days, money markets, credit markets are vitually shut down. In addition to that we saw the falling retail sales so as the industrial production. All these prevailed conditions makes me to remember the recent recession of late 1990s resulting from technology bubble. The policy response to such recession was a success story.  The Federal Reserve could engineer that recession by cutting interest rate which resulted in the increased employment opportunites. But the current prevailing situation is different from that of the situation prevailed during late 90s in many ways. For quiete sometime Federal Reserve has been resorting to  interest rate cut to prevent the unemployment rates from raising for several other reasons of global slow down. This brought us to see the fed rate at around 1%, but there is no sign of declining trend in unemployment rates. Moreover, the decline in the retail sales caused the accumulated inventores, forced reduction of the industrial production and further retrenching of jobs. As per the old dated economic text books the current economic situation is precisely referred as the "Economic down turn" as a synonym to "recession".  How long our markets have to suffer from such epidemic? , is the trillion dollor question!!

In this situation there is not much can be done by the central banks. On the other hand, as J.M. Keynes advocates a lot that government can do through its fiscal measures - increasing the benefits to the unemployed (social security measures), infrastructure spending  to boost the aggregate demand. The agrument against infrastructure spending in the prevailing situation is that they take too long to show the impact, but such an arument has no validity as the chances that this slump will be over anytime soon are virtually zero.  Hence, it may be reasonable to get such projects get rolling and slowly injecting the confidence among the economic agents.!!

Constructive comments are honoured!!

Friday, October 17, 2008

Right time to embark on "TRADING"!!

"Be fearful when others are greedy, and be greedy when others are fearful," Buffett .

Economic news is scaring,  with the financial markets are in a mess, raising unemployment figures and faltering of business activities , everywhere pessimism and fear component is at its helm among the investment community.  Taking cue from Buffett, the smart young lad has entered into the market purely with greedy and took a position on a scrip which recently got the beating at bourses purely to have a feel of market.   Let us wish him the "Vibrant experience!!".

Comments are encouraged!!

Mild Thunder!!

We are at the end of the crucial week which saw greater turbulance in the financial markets in the early phase. But towards the end, it looks like we are approaching the normalcy.  As noted by Mr Kamath, ICICI is heading towards normalcy and now focus has shifted from ICICI and Reliance com to RIL and TCS , the scrips of which were bashed at the boarses. The present normalcy may be attributed to the Indian central bank efforts to fight the liquidity crunch by slashing the CRR by 250 basis points and the special window offered to the MF.  These measures also accompanied by the Ministry of Finance release of long standing refinance of loan weavers amounting to Rs 25000 crores into the system.  These measures eased the liquidity situation and brought down the inter bank call rate to 6.9%.  

Given the positive surge set in yesturday all over the global markets, our markets are expected to open positively and hope mild upward surge!!

Comments are encouraged!!

Thursday, October 16, 2008

Basic Statistics: Hypothesis Testing

Hypothesis is a tentative assumption about the population parameter.  Such a tentative statement is called Null hypothesis and the one opposite to such tentative statement is alternative hypothesis. Usually the research hypothesis is expressed as the alternative hypothesis.

Type I and Type II errors: As hypothesis tests are based on sample information there will be the possibility of errors.

Type I error: Rejecting the null hypothesis when it is true
Type II error: Accepting the null when it is not true or false

Level of significance: It is the probability of making a type I error when the null hypothesis is true. The applications of hypothesis testing that only control for the type I error are called as "significance tests".

Most of the hypothesis tests control for the probability of making type I error, they do not control for the probability of making type II error.  Hence, though we decide to accept null, we can't determine how confident we can be with that decision. Because of the uncertainity associated with making a Type II error, it is suggested that the use of the statement "do not reject null" instead of "accept Null".  In effect by not directly accepting null, one can avoid the risk of making Type II error.  

Whenever the probability of making Type II error is not controlled, the optimal conclusions should be 'do not reject the null' or 'reject the null'.

The constructive comments and additions are encouraged!!

Wednesday, October 15, 2008

Derivatives and Monetary policy


1. How the growth of derivative markets affecting the influence of monetary policy?

My arguments will be posted during this Diwali holidays (I deeply regret for the delay)!!

Constructive comments/arguments are encouraged!!