Articles by S K Verghese

Financial Innovation and Lessons for India S K Verghese It is necessary to take a close look at the main features of the current wave of financial innovation and evaluate objectively what it has achieved and at what cost. It is also important to identify the lessons the financial change and innovation in foreign markets offer to countries like India in shaping our future financial policies.

THE momentum of the wave of innovation, liberalisation and globalisation of financial markets, which began in the early 80s, continues unabated even today. Normally innovative impulses and techniques originate in the relatively free domestic markets of the US and later spread to the eurocurrency markets and to the domestic markets of the major countries. In some respects the recent financial developments have improved the facilities by offering a broad range of financial instruments and also hedging facilities both to borrowers and' lenders to protect against exchange and interest rate volatility. But the mortality rate of most financial instruments is so high that it raises the question whether most of them have been actually required or whether they are just fads. Besides, what is perhaps inadequately recognised is that the very features of the current financial markets themselves contribute greatly to the violent fluctuations in interest and exchange rates by promoting massive capital flows between countries. Today the capital flows and the fund and foreign exchange transactions that are taking place in the markets are far beyond the genuine requirements of world trade and investments. The financial markets have assumed a life of their own. Genuine financial services for trade and production activities have been marginalised, although the raison d'etre of the financial markets and financial intermediation is to act as a handmaiden of production. In the present conditions, internationalisation and liberalisation of domestic financial markets have the potential danger of increasing the instability of both the financial and the real sectors of the economy.

In the context of major changes taking place in interrnational banking and in the international financial markets, the institutional structure and technical expertise of Indian banks operating overseas will have to be revamped and made more responsive to market developments. This paper first traces recent developments in international banking and finance and then assesses the past performance of Indian banks overseas and their future prospects. The author concludes that unless prompt measures are taken to consolidate the overseas operations of all Indian banks in order to develop a few viable banking units abroad, there is a danger of being overwhelmed by the revolutionary changes taking place in the international banking world.

Depreciation of Rupee S K Verghese All indices of (he trade-weighted exchange rate (TWER) of the rupee show that the bit-by-bit depreciation of the value of the rupee has resulted in a significant cumulative depreciation of about 30-35 per cent in the nominal exchange rate of the rupee during 1982-86. The government's objective in effecting the small, step-by-step devaluation appears to have been to offset the higher rates of inflation in India relative to those of our trade partners.

Management of Exchange Rate of Rupee since Its Basket Link S K Verghese Exchange rates of the major currencies have been floating for over a decade now, This period has witnessed high volatility and persistent misalignments of the principal currencies. The implications of exchange rate instability for balance of payments, costs and prices, and above all investment, have been matters of intense debate among financial analysts and policy-makers. The growing volatility of exchange rates and instability in exchange markets have posed special problems to all countries, but these problems are specially intractable for developing countries.