Relying too much on interest rate cuts
August 26, 2015
Monetary policy is no magic wand that will deliver growth. Our demand-constrained economy needs a fiscal stimulus Today, world over economic policy is geared towards resuscitating economies through monetary policy. All central banks have been entrusted with the task of lowering interest rates and adopting unconventional policies like quantitative easing to revive growth. Yet the progress has been uncertain and most of them are still struggling to come to grips with the meltdown that took place after the Lehman crisis. In India discussions invariably come back to the RBI. There is a demand to keep lowering interest rates. Just how important is monetary policy? More importantly, can it be a singular tool for bringing about growth under ceteris paribus conditions?
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RBI’s role needs to change: Draft Indian Financial Code prises open the black box of monetary policy making
August 10, 2015
Financial sector regulation in India has developed in an ad hoc manner in response to evolving requirements. Consequently, it suffers from substantial prudential weaknesses and regulatory arbitrage that makes for heightened risks for both investors and financial consumers. By putting together a modern law for governing the complex financial sector, the draft Indian Financial Code (IFC) represents a quantum jump forward. When enacted, IFC will replace 19 extant laws, some of which, like the RBI Act and Insurance Act, date back to 1934 and 1938 respectively. IFC should therefore be made effective sooner rather than later. It should certainly not be allowed to flounder on the specious grounds of its impact on RBI autonomy. It is, therefore, indeed a pity
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Why we need a new Nifty (and Sensex)
August 10, 2015
It has taken years of coaxing, cajoling and haranguing to get India’s pension monies to trickle into its stock markets. Recently the elephantine Employees Provident Fund Organisation has promised to put Rs. 5,000 crore out of its annual mop-up of Rs.1 lakh crore into domestic equities. Recent tax breaks are also making the National Pension Scheme, which invests up to half its corpus in equities, a hit with retail savers. All this suggests that a lot of retirement money belonging to Indian savers, in line with global ‘best practices’, is soon likely to find its way into index funds. As Nifty and Sensex ETFs (exchange traded funds) dominate this space, a flash-flood of pension money might rush into the Sensex
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Lowering interest rates is not a good idea
August 7, 2015
The Reserve Bank (RBI), on June 10, yielded to pressures of Centre and business community and reduced the repo rate by 0.25 per cent from 7.50 per cent to 7.25 per cent, keeping monetary variables like CRR and Bank Rate constant. This was to please the various actors in the economy. There has been a cry for long, particularly since the regime of DV Subbarao (Raghuram Rajan’s predecesssor) to reduce the repo rate (interest rates). Interest rate are closely related not only with higher demand for quantity of money and cost to company, but also to many other factors. For instance, given the quantity of real goods production and services, a decline in interest rate augments the demand for funds,
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