Monday, March 30, 2009

Materials from the 4th Research Meeting of the NIPFP DEA Research Program

All the slideshows and papers are up on the web.

Of broader interest within this collection is the presentation India in the Great Recession.

2 comments:

  1. Dear Sir,
    Why is Indian Rupee not a major world currency? Are our gold reserves not so strong? I think India should support the move for SDR as a world currency. Moreover the basket of currencies for SDR should include INR, Yuan too.

    One single world currency will solve out so many problems. The better shaped economies are just not willing to share the burden of poor economies.

    Please enlighten the readers with your views on one single world currency.

    J.B.
    Kolkata

    ReplyDelete
  2. 1. "Indian firms (financial / non-financial) who were doing
    money market operations overseas
    I They knew their calendar of dollar liquidity requirements
    I When Lehman died, they got worried about achieving
    rollover in London
    I Borrow in India, convert to USD, take money out of the
    country
    I RBI tried to sell dollars - but ‘impossible trinity’ kicked in.
    This exacerbated the problem.
    I Companies hedged themselves: money was going to
    come back so buy INR at a future date."

    I have pointed this out to you before. There is no question of the impossible trinity kicking in if the transaction was fully hedged.

    1. buy spot $.
    2. Sell forward $ = sell spot $ + buy/sell swap.

    This transaction is simply a $ borrowing collateralized by INR. This would reflect in swap points collapsing, but no impact on spot.

    If what you say is exactly what happened, RBI does not need to intervene in the spot FX market at all. But INR liquidity will certainly be strained as you correctly point out.


    2. You also suggest that a floating exchange rate would have lowered capital inflows by negating the one way bet mentality.

    This suggestion would not stand the test of history.

    Time and again, post-Brettonwoods FX markets and exchange rate expectations have proved unruly requiring central bank intervention. Please do not forget Plaza, Louvre...$/Yen interventions of 1994 and 1998 and the last major coordinated intervention to support the euro in 2000.

    High vol in real exchange rates post-1973 has bevildered economists.

    Empirical evidence suggests that there is no self correcting mechanism in the short-term. To the extent it works, PPP operates over long periods. Half life of a deviation from PPP is about 3-5 years.

    The reason, in my view, is that exchange rate economics is a big failure and there is no good model to anchor exchange rate expectations.

    If the central bank does not step in time and again, history suggests that it would have to intervene when the market has taken the currency to the extremes with deleterious macro-consequences.

    ReplyDelete

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