Sunday, November 30, 2008

The Scientist's Rating on my blog!!

Sounds crazy!!  But the analysis of my writings by 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!!