ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

C P ChandrasekharSubscribe to C P Chandrasekhar

IMF's Call for Complacence

The International Monetary Fund's World Economic Outlook of April 2016 bodes that emerging market economies, including India, are at risk of sudden capital outflows. The IMF once again makes a case for its conventional, much-discredited tools to manage this risk. To repeat these recommendations, that on many occasions have only worsened crises, is to encourage complacency.

Trade in Financial Services

Liberalising global trade in services, including financial services, has been on the cards for the longest time. Services trade negotiations at the World Trade Organization may "fail" at the Doha Round, but only because there has been no progress in agriculture and industrial goods trade.

Black Notes in the Stock Market

The 27 July blip in India's stock markets was triggered by the Supreme Court-appointed Special Investigation Team's report on black money. This report called for an identification of the owners of Participatory Notes, the instruments used for a good part of foreign investment in the stock market. The history of P-note investment goes back to the early 1990s since when they have served as conduits for making illegitimate money legitimate and have defied half-hearted attempts at control and dismantling. Their importance may have come down but they are unlikely to be banned because the government fears investor exit.

Government and RBI

The so-called stand-off between the Reserve Bank of India and the Ministry of Finance is not as significant as the media is making it out to be. There is little disagreement between the two on fundamental issues. The stand-off is a reflection of the government's effort to regain some influence over macroeconomic management, which is reasonable as the government is accountable to the people whereas the RBI is not.

Banking with a Difference

The establishment of the New Development Bank by the BRICS countries is a significant development which could have some impact on multilateral lending for infrastructure in the countries of the South. But if the new bank is to make a difference and alter the international development finance landscape, democratic forces in the BRICS countries and elsewhere should pressurise their governments to act in ways that differentiate the NDB from the currently dominant global institutions in terms of funding patterns, rules and terms.

The Next Internet Bust?

Facebook's recent colossal acquisition of WhatsApp is yet another sign that we are now in the middle of a new internet bubble. This bubble is different from that of the late 1990s in that it is being driven by excess liquidity in the system and the search for the "next big thing" like Google and Facebook.

Off-target on Monetary Policy

Disregarding international experience of recent years, the Urjit Patel Committee recommends that the Reserve Bank of India pursue a single objective of infl ation targeting. It focuses on the interest rate to control infl ation (by influencing inflation expectations), though experience has shown that in India this mechanism has a weak impact on inflation and a stronger one on output. It is a disappointing report drawing on a textbook reading of the New Keynesian model.

A New Growth Consensus?

The Reserve Bank of India and the government are taking contradictory approaches on liquidity and interest rates. The one eases liquidity but keeps interest rates high, the other promotes debt-financed consumption and pushes for cheaper consumer credit. This seems to be a new growth strategy based on a combination of liquidity infusion and interest rate reduction for consumer loans. But is this prudent? What of the fragility of the financial sector?

Macroeconomic Vulnerability and the Rupee's Decline

Underlying the recent dramatic depreciation of the rupee is a set of structural weaknesses that not only renders the high growth of the first decade of the 2000s brief and ephemeral, but also results in persisting infl ation and current account deficits even when growth decelerates. This combination of outcomes then feeds a downward spiral, of which rupee depreciation aggravated by speculation is one symptom. Unwilling or unable to address these structural weaknesses, the government is seeking a solution in enhanced foreign capital inflows and is therefore desperately wooing foreign investors. While the logic and potential success of that effort is uncertain, its cost is likely to be a turn to austerity that can convert a difficult macroeconomic situation into one of crisis.

Redistributing Regulatory Power

The Financial Sector Legislative Reforms Commission has exploited its ambiguous terms of reference to suggest a complete revamp of financial regulation. The recommendations, if accepted, would shift power from Parliament to "independent" bodies run by nominated experts and subject to scrutiny by a legal framework that might be capable of judging fairness of regulatory reach but not its appropriateness from the point of view of development. This is no legislative reforms commission but a commission that is serving as a vehicle to legalise a regulatory structure suited to a liberalised financial sector.

The Quiet Power of the Ratings System

Over the years, the ratings system and, therefore, the ratings fi rms have become a part of the regulatory framework in many countries which has given them enormous infl uence in the fi nancial system. But there is a basic confl ict of interest when a ratings fi rm is paid by an issuer to rate its offering. With an Australian court delivering a landmark judgment ruling that a ratings fi rm was guilty of "negligent representations", the stage is set for a number of court processes that will investigate the working of these powerful agencies.


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