Friday, July 30, 2010

Post offices and financial inclusion

An expert committee report: Harnessing the India Post network for financial inclusion has been released. This is a joint effort between Department of Post, Department of Financial Services, Department of Economic Affairs and Invest India Economic Foundation. It has some interesting new ideas on the unique role of post offices in financial inclusion, and the way to best harness these strengths while retaining a useful sense of the public/private divide.

Also see:

Thursday, July 29, 2010

Monetary policy is easy; Financial regulation is hard

I wrote a column in the Financial Express today, titled Monetary policy is easy; Financial regulation is hard, where I contrast the complexity in public administration of doing monetary policy versus the complexity of getting to good financial regulation.

Friday, July 23, 2010

Independence of regulators and independence of the central bank

I have a column When should a government agency have autonomy?, in the Financial Express today. This is a hot subject in India today, in the aftermath of the ULIPs ordinance. While on this subject, also see:

One feature of the ULIPs crisis which has not been widely appreciated is the role of the banks. While much opprobrium has been directed at insurance companies and insurance agents (both individuals or specialised financial distribution companies), banks are big players in selling insurance products. Their misconduct in selling represents a failure of RBI supervision. Most major banks are part of this scandal. The few customers who have protested have been sorted out, with a no-media clause in the resolution agreement that prevents the story from getting out.

Friday, July 16, 2010

Interesting readings

The top selling Indian newspapers according to Amazon's kindle subscriptions.

India's courts may be in a slow process of reshaping India into a liberal democracy. Here is a Supreme Court ruling which blocks the Maharasthra government from interfering with the rights of a citizen to read a certain book. Sadly, it was done on a technicality.

Manish Sabharwal in the Financial Express on an important new initiative of the Ministry of Labour.

Eric Bellman in the Wall Street Journal on the rise of Madras in automobile manufacturing. There is much strength there in electronics manufacturing also.

Dhiraj Nayyar in the Indian Express on the interfaces between mobile telephony and banking. [also see].

Kerala is Number 1 by Mahesh Vyas in the Business Standard.

On the difficulties of ULIPs and the recent ordinance, see Dhirendra Kumar in the Financial Express.

A story by Steve Lohr and John Markoff in the New York Times suggests that low end outsourcing to India could be under attack from new technology.

B. S. Raghavan in the Hindu Business Line on inflation targeting at RBI.

Hindustan Times and Mint have built an interesting new web page : The Indian innovation revolution.

We in India are very convinced that it is good to have a world where every single individual is numbered and trackeable. But there are many nice things about anonymity and the creation of anonymous personas. See this story of _Why, a person who did some amazing things anonymously, and then shut down this life when it looked like his anonymity was under threat. The idea of being able to create and live multiple anonymous invented personas has long been a meme in the hackish community - e.g. see True names by Vernor Vinge.

An interesting interview by Samir Sachdeva with Nandan Nilekani in Governance NOW magazine.

As I read Lose a general, win a war by Thomas E. Ricks in the New York Times, I was struck by this remarkable flexibility of labour contracts, which must work wonders for shaping incentives correctly.

Tarun Ramadorai on empirical analyses of the efforts at banning short selling of recent years.

David Friedman has released a free pdf of the 2nd edition of his important book The machinery of freedom. Hmm, that's a good strategy: authors should open source edition $n$ when they start on edition $n+1$. Also see: a surge in interest in Friedrich von Hayek's The road to serfdom.

Ruuel Marc Gerecht has some interesting ideas in the New York Times on the use of information technology to assist the resistance in Iran. I wonder if similar ideas can be deployed on the problems of China as well.

Tom Wright has an article in the Wall Street Journal about Zeeshan-ul-hassan Usmani, a Pakistani scientist working on explosions and suicide bombings. Also see Pervez Hoodbhoy on Pakistan's existential problems.

Calzolari, Levi, Navaretti, Pozzolo, writing on voxEU, show that multinational banks were a source of stability in the crisis. Also see Internal capital markets and lending by multinational bank subsidiaries by de Haas and van Lelyveld, in the Journal of Financial Intermediation.

Ila Patnaik on the Chinese exchange rate regime and its implications for India.

Inflation targeting turns 20 by Scott Roger, in Finance & Development, March 2010.

Edward Glaeser reviews a book by Joel Mokyr on what made the industrial revolution. It makes you think about the nascent capitalism that we see in India.

Anyone interested in the world of the Internet and computer technology must read:
The State of the Internet Operating System by Time O'Reilly: part 1 and part 2.
John Naughton in the Guardian.
Clive Thompson in the New York Times on IBM's computer that plays `Jeopardy'.
What's the greatest software ever written? by Charles Babcock, in Information Week
The Steve Lohr and John Markoff story about speech recognition, and system-building around it, mentioned above.

Thursday, July 15, 2010

Call auctions and their use for the opening price on the stock market

In a SEBI circular today, we have movement on the use of call auctions for the opening price of the stock market. For more in this subject, see Call auctions: A solution to some difficulties in Indian finance by Susan Thomas, June 2010.

Who has the best sources?

Tamal Bandyopadhyay has amazing sources. He got the full text of RBI's letter about the Protect Insurance Companies Ordinance. And, he has got a copy of the elusive MoF FSDC White Paper. Tamal, please release these on wikileaks! Also see Shaji Vikraman in the Economic Times.

And, see C. Rangarajan's comments in the Indian Express.

Monday, July 05, 2010

Opposition moves today

Today, opposition parties are trying to coordinate demonstrations and a `Bharat Bandh' all across India. We've got empty roads of the kind not ordinarily seen:

The focus of these protests is: High inflation.

In many other countries, the political landscape has been one where politicians are relatively reckless about inflation, and the economists and central bankers are the ones preaching the virtues of low and stable inflation, asking for an independent central bank which does only one thing: deliver low and stable inflation.

We find the opposite configuration in India: the RBI (and the economists who run with RBI) criticise inflation targeting, and preach in favour of non-transparency and multiple objectives. I suppose this is a reflection upon the professional skills of economists and central bank staff in India. Most economists in India are brought up on traditional `development economics', which is a different skill set when compared with macroeconomics. Somehow, left wing economists (e.g. the EPW) have come to think that price stability is not that important, and leftist ideas have a remarkably big footprint in India, when compared with what we see in economics worldwide. Another dimension is the self-interest of RBI, which is likely to be pleased at being a central planning agency for Indian finance, and to not be held accountable for anything.

But all is not lost. We might not get central bank reform and inflation targeting through the traditional channel (the pushing by economists and central bankers). But we've got politicians who care deeply about inflation. Indian politicians are convinced that high inflation leads to losing elections. At some point, some team at the Ministry of Finance is going to get sick of the repeated inflation crises, and of having to take responsibility for delivering low and stable inflation.

Saturday, July 03, 2010

India's inflation problem

RBI raised rates, saying that they are concerned about inflation. What is the state of inflation in India? I find it useful to look at an approximate `core WPI' that is obtained by removing food and fuel from the overall WPI. This has to be done carefully because some food is present in WPI Manufacturing.

The right way to think about inflation is to not compute the year-on-year change in prices -- this shows the average inflation over the last 12 months. The right path is to compute month-on-month changes. This requires care about seasonality. These results are taken from the website:

MonthPoint-on-point change (annualised)
2009 Sep    1.61
2009 Oct    -0.11
2009 Nov    9.67
2009 Dec    5.12
2010 Jan    9.33
2010 Feb    2.93
2010 Mar    27.49
2010 Apr    -4.07
2010 May    34.86

In September and October 2009, inflation was at sub-target levels: this was a time to cut rates. After that, inflation has reared up again. In particular, the rise in prices in March when compared with February was 27.49% (annualised). And in the most recent data, the rise in prices in May when compared with April was 34.86% (annualised). In other words, if prices rose for a year the way they rose from April to May, this would yield 34.86% YOY inflation within 11 months.

We find it useful to smooth this using the three-month moving average:

It makes sense for RBI to raise rates under these conditions.

Will it help matters?

Only a little.

In a well functioning market economy, small changes in the short rate by the central bank propagate all across the economy, into myriad asset prices, through the `monetary policy transmission'. In India, given the malfunctioning Bond-Currency-Derivatives Nexus and the lack of competition in banking, very little happens in the economy by way of reduced aggregate demand when RBI raises rates.

One feeble channel which works is : when local interest rates are higher, more money comes into India, which gives a stronger rupee, which helps control inflation. This effect is also weakened owing to capital controls which interfere with such adjustments.

In short, RBI was right to raise rates; inflation is a serious problem; but RBI is mostly ineffectual in fighting inflation given the weakness of the financial system and thus the monetary policy transmission.

What about the impending impact of the fuel price hike?

What about the impending impact of the fuel price hike? I have mixed feelings on this. If monetary policy was well structured in India, economic agents would have firmly grounded inflationary expectations. In that hypothetical world, economic agents would know that the central bank surely pursues an inflation target. The central bank would say what it would do, and it would do as it said. Under these conditions, the central bank governor would merely point out to agents that the oil price shock was but transient, and that the central bank will ensure that the inflation target will hold in the medium term. As a consequence, economic agents would shrug off the oil price shock, and it would not feed into broad-based inflation.

This is not the world that we live in. Inflationary expectations in India are not grounded. We do not know what RBI will do. Worse, RBI staff repeatedly gives out speeches promising us that they have multiple objectives, that the specific mix of objectives will change from time to time without transparency. So we are repeatedly reminded that RBI is not focused on inflation. In addition, the financial system is weak owing to a lack of financial sector reforms, so even when RBI moves against inflation, they are mostly ineffectual. Hence, monetary policy in India has little credibility in fighting inflation.

Hence, the shock from the fuel price hike will feed into broad-based inflation to a greater extent. Hence, it should matter to RBI's thinking about the outlook for inflation. You reap as ye sow.