Saturday, September 22, 2012

What the computer revolution has done

That computing has become immensely more powerful in recent decades veers on the cliche. I recently got a few reminders of precisely how much distance we have moved.

Cory Doctorow tells us that the computation that goes into one google query is roughly the same as all the computing done for the entire Apollo program.

Jay Goldberg is astonished to discover pretty powerful no-name tablets now go for $45. One can see whole new world opening up with ubiquitous use and firm-deployment of tablets.

And most astonishing of all: the ipad (2012) matches the floating point performance of the Cray 2 supercomputer (1989). That's a gap of 23 short years. Also note the completely different slope seen on the right hand set of dots:


Source: Slideshow by Jack Dongarra and Piotr Luszczek, linked to by Michael Larabel.

This story has been going on for decades but it isn't finished yet. Just this year, my laptop got four cores, and I'm steadily shifting all my R programs to utilise parallel processing. For all X, it's interesting and useful to ask How would X change if computation, communications and storage got cheaper and better?. On this theme, you may like to read this post -- The new world of computers -- from earlier this year.

As an old timer, I always worry that we used to do Things That Mattered using the Cray 2 supercomputer, like forecast the weather or simulate nuclear explosions, whereas the bulk of the ipad's compute power is being deployed to watch cat videos on youtube. We have yet to re-imagine our world in terms of these new powers.

Friday, September 21, 2012

Finance and law: Call for papers

National Seminar on Financial Law & Policy: An Inter-disciplinary Approach (December 1, 2012) Organised by National Institute of Public Finance and Policy, New Delhi in collaboration with National Law University, Delhi

The National Institute of Public Finance and Policy (NIPFP), New Delhi invites papers for a national-level seminar titled "Financial Law & Policy: An Inter-disciplinary Approach" to be held at the National Law University, Delhi (NLU Delhi) on December 1, 2012.

Background

The financial sector in India is currently governed by more than sixty legislations along with a plethora of rules and regulations. This has led to a lot of ambiguity in the legal framework applicable for doing business in the country. The problem gets compounded by the fact that many of these legislations were enacted more than sixty years ago, with objectives and purposes that are largely not in sync with the realities of the present day globalised competitive world.

Realising the need to address these issues and for formulating a legal framework geared up to facilitate growth of the financial sector in the future, the Government of India set up the Financial Sector Legislative Reforms Commission (FSLRC) on March 2011 under the chairmanship of Justice (Retd.) B.N. Srikrishna. The mandate of FSLRC involves overhauling these existing legislations and laying down a policy and legislative landscape geared towards creating a more coherent and dynamic financial environment. This exercise will also involve identifying regulatory gaps and overlaps seen in the existing system. In this regard FSLRC is focusing towards of rewriting and harmonizing the existing financial sector laws in the country, to bring them in tune with the requirements of a modern financial system.

In an evolving financial world, FSLRC intends that the new legislations will cater to the requirements of a large and fast growing economy. This is indeed a unique challenge not only because it is the first time in the history of independent India that such a large scale organised legislative reform initiative is being undertaken but also since the work involves absolute cutting edge inter-disciplinary research involving law, economics and finance.

For fulfilling its mandate, FSLRC has entered into a Memorandum of Understanding with NIPFP whereby NIPFP is engaged in providing research and technical support services to FSLRC; managing the process of conducting the core legal, public policy, economic research for the various working groups established by FSLRC and drafting of the relevant draft legislation.

However, this ambitious reform will be meaningful only if a culture of inter-disciplinary thinking and research can be encouraged in Indian academia. In this context the NIPFP is organising a national level seminar on "Financial Law & Policy: An Inter-disciplinary Approach" at NLU Delhi, on December 1, 2012.

Topics

To engage with a wider audience in a constructive debate over the various issues of contemporary relevance raised in FSLRC's Terms of Reference (available at http://finmin.nic.in/fslrc/fslrc_index.asp), the broad issues from which the authors may choose are:

  1. Appropriate means of oversight over financial regulators and their autonomy from the government;
  2. Consumer protection as an aspect of financial regulations;
  3. Role of the Central Bank in financial market regulation and supervision
  4. Resolution of financial firms;
  5. Principle-based or ruled-based legislation: what will work in India?
  6. Unified regulator or sectoral regulator: which will work in Indi?
  7. Financial Regulation and competition policy
  8. Emergency powers in systemic risk situation
  9. Legal process in financial regulation

Procedure

The author(s) has to submit the completed, original and unpublished paper with the Seminar Co-ordination Committee by November 1, 2012 (23.59 hrs). The Seminar Co-ordination Committee will be responsible for evaluation and selection of the top 5 papers. The authors of the 5 selected papers will be invited to NLU, Delhi to present their papers before an elite panel composing of legal practioners and members of FSLRC.

Word Limit: The paper must not exceed 5000 words (excluding footnotes or endnotes).

Format: The paper must be in Times New Roman font, character size 12 and with 1.5 spacing. Footnotes or endnotes must be in Times New Roman font, character size 10 and with single spacing. No specific style of footnotes/endnotes is required. However, the footnotes/endnotes must be written in a uniform style and provide necessary information.

Submission Procedure: The Paper must be mailed to ankur.saxena@nipfp.org.in in soft copy (pdf format) by November 1, 2012 (23.59 hrs) along with:

  • Duly filled-in attached registration form (soft copy)
  • Presentation in .ppt/.pdf format that the author seeks to use in the course of the presentation (optional)

Please note that the subject of the mail should be 'Paper submission'.

Eligibility: Papers may be contributed by any person (academicians, researchers, practitioners, students etc.) interested in contemporary financial regulations.

Co-authorship: Papers may be works of joint authorship.

Publication of selected papers: The 5 selected papers will be published on the NIPFP website with appropriate disclaimer.

Composition of the Seminar Co-ordination Committee

The Co-ordination Committee Comprises of:

Chairman:

  • Mr. Dhirendra Swarup, Member Convenor, FSLRC

Moderator:

  • Prof. Ajay Shah, Professor, NIPFP

Evaluators:

  • Mr. Rajshekhar Rao, Advocate, Supreme Court of India
  • Mr. Somasekhar Sundaresan, Partner, J. Sagar Associates
  • Mr. Risham Garg, Assistant Professor of Law, NLU Delhi

Contact Person:

Mr. Ankur N. Saxena, Legal Consultant, NIPFP, email id: ankur.saxena@nipfp.org.in

Other Relevant Information

Crucial Dates

  • The last date for submission of the completed paper: November 1, 2012 (23.59 hrs)
  • Intimation of shortlisted papers: November 15, 2012
  • The date of seminar: 1 December, 2012

Expenses:

The authors of the selected papers will be provided boarding and lodging facilities at NLU Delhi.

Venue: National Law University, Delhi Sector 14, Dwarka, New Delhi- 110078

REGISTRATION FORM

National Seminar on Financial Law & Policy: An Inter-disciplinary Approach

Name of the Author(s):

Designation:

Institute/Organisation:

Title of Proposal/Paper:

Contact Number:

Email :

Monday, September 10, 2012

Interesting readings

Rajdeep Sardesai on the problems of law and order in Bombay. Nothing is more important in the priorities of the State than the police and the courts.

In recent weeks, we're seeing fresh attention on the flaws of the HR processes of government. Shashi Tharoor in the Indian Express on the IFS, and Sundeep Khanna in Mint.

Trampling on the individual in India:
- Sending cartoonist Aseem Trivedi to jail is ridiculous.
- Vijaita Singh in the Indian Express about the government interfering in grants to think tanks, followed by an editorial on this.
- As Robert Kaplan says, underdevelopment is where the police are more dangerous than the criminals. Here's a story about the police in Gurgaon.
- Meghan Davidson Ladly writes in the New York Times about the struggle for freedom that many women in Pakistan are facing. We can't say we're finished with this. What fraction of India faces this level of social backwardness?


N. Sundaresha Subramanian has a great first draft of history, telling the story of Sahara in the Business Standard. This is a great vindication for K. M. Abraham and C. B. Bhave, and a reminder of the importance of the recruitment process in government. Also see great reportage on Firstpost : Sahara will have to sell realty assets to pay off investors by Raman Kirpal; ROC: The dog that did not bark when Sahara came in by R. Jagannathan.

I recently blogged about checks and balances that will keep Indian capitalism safe. I guess I am picking up ideas from the zeitgeist. On related themes, see: The old India is dead. Wake up, netas and business babus by R. Jagannathan on Firstpost; A long way from 1984 by Pratap Bhanu Mehta in the Indian Express and an editorial Behind the curve in the Business Standard.

Many people in India like to invest in gold and in real estate. I would like to remind them that the analytical case for these is weak. Here is some new evidence on gold, and here are some older arguments about real estate.

Sunil S. in Pragati magazine about India's electricity grid problem.

Mobis Philipose in the Mint writes about an intruiging development: a `Intermediaries and Investor Welfare Association (India)' has filed a petition in the Delhi High Court alleging that algorithmic trading is bad. I wonder who is behind this.

On the theme of the transformative impact of google maps, see How Google Builds Its Maps, and What It Means for the Future of Everything by Alexis C. Madrigal.


Sebastian Mallaby has a great response (originally in the Financial Times) to the Apple-Samsung patent violation case. If you're in the US, you need to run, not walk to buy cool Samsung equipment, or buy it when you travel abroad.

The Euro crisis is back from vacation by Adam Davidson, in the New York Times magazine.

If Xerox PARC invented the PC, Google invented the Internet by Cade Metz in Wired magazine.

Why sex could be history by Kira Cochrane in the Guardian, about a new book by Aarathi Prasad.

Some of the biology that we learned in high school is getting overturned.

Sunday, September 09, 2012

Did the Indian GDP just jump up by a basis point?

Google made two important announcements:
  • The database underlying google maps is now of the quality required to support turn-by-turn navigation. Every smart phone or tablet that can use google maps just became a GPS device that is capable of giving you turn-by-turn navigation including giving you instructions in audio.
  • In six cities, they now have realtime traffic data available as an overlay on google maps. You can look at the map and it will show you what segments of what roads are congested.
This will, I assume, enable cool things within applications like Google Now to work: it knows your calendar, it analyses traffic conditions, and tells you at the right time "Now it's time for you to leave". Similarly, we can now use Google Places ("search for a coffee shop close to where I am right now"). It shows you the list of what's available, you touch one of them, and it's now ready to give you turn-by-turn directions to go there.

Industry sources say there are roughly 26 million smart phones out there that are able to use google maps. In other words, we have just had 26 million satnav devices added to the Indian capital stock. And, we've added realtime traffic data for the subset of these that are in 6 cities. Millions of people have just had a jump in productivity.

An interesting Fermi problem : Will this add one basis point to GDP? At first, I thought this was hard because it'd require making assumptions about how much time each satnav saves for the person, that person's output per minute, and so on. But a reverse calculation is illuminating: 1 basis point of GDP is Rs.1000 crore or Rs.10 billion. Divide by 26 million smart phones and you get : a flow of increased output of Rs.384 per satnav per year. In other words, if each satnav device adds Rs.384 of output to the owner's life per year, then Google's turn-by-turn navigation added 1 bps to GDP. And I'm not even counting the impact of realtime traffic data. This number (Rs.384 per satnav per year on average) seems plausible to me.

You may like to see this material on map databases in India.

Friday, September 07, 2012

Indian capitalism is not doomed

India's problem of crony capitalism

The rise of modern capitalism in India in the 1990s was at first viewed in optimistic terms. A new breed of companies were born, who seemed to exhibit a new kind of competence, international competitiveness and high ethical standards. We could start putting our old mistrust of corrupt business houses behind us.

These hopes were substantially dashed by the fresh emergence of crony capitalism. Doing business in many areas in India involves an extensive interface with the government. In these areas, the weaknesses of the State generated an opportunity for crooks. At first, the financial system sent massive resources into dubious companies, with an attitude of being blind to anything but profits. When these companies controlled vast resources, and were shown the promise of even bigger valuations to come, they embarked on systematically undermining the State. Through this, we got a feedback loop: The crooks came up where the State was weak, and their activities further undermined the State.

In some cases, we saw rotten companies spring up in one part of the economy where the State was weak, and once these companies were up and running, they turned their attention to related fields and devoted themselves to undermining State institutions in related fields. Through this, the gangrene spread from one area to the next.

In the the early 1990s, we could hope that India would smoothly moving up to the ranks of middle income countries, powered by world class local companies in addition to global companies building operations here. These hopes have substantially receded. The heart of the Indian story is now about the feedback loop between rotten companies and the State. If we manage to bootstrap ourselves out of this, we have a bright future. But will be be able to bootstrap ourselves out of this? Many countries got mired in this `middle income trap': we shouldn't assume that our destiny is rosy.

At first blush, stopping the rotten companies seems infeasible. These are typically efficient and competent firms in a day to day tactical sense. They are staffed with hard-driving amoral people (typically incentivised very strongly using high-powered incentives), who fully understand the weaknesses of the system and attack it. Considerable resources are invested into subverting politicians, bureaucrats, judges and the media. The Indian system is rotten and ripe for attack. It's like computer criminals attacking Microsoft Windows. Resistance is futile. Indian capitalism is doomed.

There is, however, an array of homeostatic forces in place which are generating push back. Some crooked companies have faced enforcement actions by arms of the State. In some cases, India has had good discussions in the public domain which has generated checks and balances. In addition, while many people are devoid of ethics and will support the latest nouveau riche entrepreneur who is throwing cash around, a large number of people get revulsed by the sight of this, and quietly and doggedly refuse to cooperate.

Enforcement in India does not work perfectly. The key point of this blog post is that medium grade enforcement has far reaching implications. The key insight is to look at the way the goals of labour and capital (i.e. investors and employees) are reshaped by medium grade enforcement.

The perspective of the investor

The enforcement push back against rotten firms is yielding results. Many crooked companies have grossly underperformed the index. Some have experienced enforcement actions and have experienced jaw-dropping returns. Some have experienced dogged opposition from pockets of high ethics in the system, which have effectively led to systematic and sustained under-performance of the index over five- and ten-year periods. The stock market has become wary about ethical issues. As Shekhar Gupta says in the Indian Express yesterday:

If you draw a simple chart of the large companies that have lost the most value on the stock markets over the past three years, you'd notice that almost all of these were doing business on the same cusp of politics, finance and natural resources. To that extent, you have to admit that the market has been the first to sense the rot and has applied a stunning self-correction, severely punishing those responsible for it.

There was a time when investors used to be oblivious about ethical standards of portfolio companies. The attitude of the investor in the 1990s used to be I don't want to know how you do business; I will hold my nose since you stink; but as long as you will produce returns, I will happily invest in you. This attitude has been thoroughly broken. The investors who pursued such strategies have often been devastated. Even if you have only 10% invested in a crooked company, if you get -80% returns on it, this generates a -800 basis point returns drag on your overall portfolio performance. As a consequence, portfolio managers have started caring about the ethical standards of portfolio companies.

Enforcement does not have to be 100% perfect for it to impact on the decision making of investors. Even if there is only a 10% chance of getting caught and thus getting -80% returns, that is a big risk from the viewpoint of the investor. From the viewpoint of the investor: Why take the risk? Why not make a thorough analysis of the ethical standards of a company one element of the security selection process?

The problem of freedom of speech

Journalism is printing
what someone else does not want printed.
Everything else is public relations.

-- George Orwell.

India is supposed to be a liberal democracy, and a free press is supposed to write vigorously about misdeeds (link). By and large, this has not worked out as it was meant to be. On one hand, it is quite easy for the bad guys to corrupt the media. Whether this is done through gifts of shares to a media company, or through advertising and sponsorship, it is fairly easy to obtain a supportive media. In addition, defamation is a criminal offence in India: a legacy of colonial law that we have not yet been bright enough to undo. Putting these together, the bad guys have a nice combination of carrot (throwing money at the media) and stick (litigation).

Analysts and financial intermediaries are supposed to make a living out of spotting problems in firms. Here also, there is quite a bit of corruption which impedes speaking freely. Few are willing to go against the latest nouveau riche entrepreneur who is throwing cash around, including his efforts at buying respectability. The mainstream strategy is to participate in the gravy train, and look for ways to part the fool and his money.

This is a real shame: India should be much better than China in the role of freedom of speech acting as a check against corporations. However, the Indian media has largely caved in the face of carrot and stick: it is largely doing public relations.

At the same time, there is strong demand among investors for skills in identifying the crooks, given that this is an important investment fundamental. The problems of the conventional media and financial firms, which inhibit naming the crooks openly and in the public domain, has created a business opportunity in this space. Supply has come up to fill this demand; a new breed of companies has come up, reflecting this need. Examples of firms with these capabilities include Ambit Capital, Veritas Investment Research, Forensic Asia, and Espirito Santo. Numerous investors are building in this analysis into their portfolio process, and this is helping to channel capital away from dubious companies.

Foreign firms seem to be more prominent in this field of research and analysis from the viewpoint of ethical standards, because they are relatively immune to the problems of intimidation through courts and police in India, and because they are relatively cutoff from the reciprocity that binds everyone in the world of business in India. See Veritas' report on Indiabulls has put in contrast the research by India-based analysts in the Economic Times by Uday Khandeparkar. But even they are not immune to the problems of the Indian legal system. Now we have a new investment tool: sell shares of the companies that embark on such litigation.

The weaknesses of freedom of speech in India have thus emphasised a greater role for information processing and analysis away from Indian shores. I am reminded of what is going on in China, where some of the most important short sellers who are bringing out the misdeeds of Chinese companies are located abroad: it's too dangerous to do the same things within China. We in India are evolving towards a similar structure of information processing.

The perspective of the employee

In the modern world, a vital determinant of the success of an enterprise is the kind of people it is able to attract. Here also, at first, there was a relatively amoral attitude on the part of most young people: I don't want to know how you do business; I will hold my nose since you stink; but as long as you offer me the highest wage, I will join you. But over the years, it has been demonstrated that this is a bad strategy:

  • The sight of senior employees going into Tihar Jail has given out powerful messages to everyone in Indian companies that good people should not hang out with crooks.
  • The second phenomenon is reputational damage. It makes business sense for an individual to engage in fair play. I have been in recruitment conversations where a person is being discussed but his name gets shot down as he has not been careful about the company that he keeps. Birds of a feather flock together. I recently heard a senior person say: ``I knew XXX was a rotten firm when a bunch of corrupt people from SEBI joined it''. Low ethical standards in people and in firms go together; a cloud of mistrust envelops them.
  • Gradually, as regulators develop and refine the doctrine of `fit and proper' such people will increasingly suffer career damage. We aren't fully there in Indian finance yet, but it will increasingly be the case that a name is shot down for a CEO position because he was part of a team that was caught doing nasty things by SEBI or RBI.
  • These factors are particularly important for the best and the brightest. If you are the best and the brightest, why would you suffer even epsilon risk of going to jail? Why would you run with crooks if this could hamper your rise to CEO? Why would you suffer reputational damage, and not be able to hold your head high at your class reunion?

These factors are inhibiting the flow of talent to dubious companies. I know of several situations where a person was made an offer, and chatted about this with his friends, and turned it down. It was just too much of a risk to be seen in the wrong company.

Second rate people recruit third rate people. Once a firm is contaminated with a series of low grade staff at senior levels, it becomes increasingly hard to draw in top quality talent, which drags down capabilities all across the board.

I believe this is one of the factors which has generated systematic under-performance in the stock price of dubious companies. It isn't just the case that they are in danger of enforcement actions. It is also the case that on an every day basis, they find it harder to operate well given that they generally fail to recruit as well as their competitors.

How might Indian capitalism develop?

If the crooks had thundered ahead producing super-normal stock market returns, and attracting the best talent, I would have been truly gloomy. What is fascinating about the Indian story is that things have worked out differently. Some dubious companies have cratered with -80% returns over short periods. Others have generated substantial under-performance when compared with the index over 5- and 10-year horizons. The best people are avoiding rotten companies. Putting these together, the bad guys are finding it difficult to obtain both capital and labour, which are seeking out better firms.

Wall Street tells Main Street what to do. At a time when the investors did not care about ethical standards of portfolio companies, and only asked for earnings growth, this sent out powerful signals into the economy (a) Favouring rotten firms and (b) Encouraging rotten entrepreneurs to setup firms so as to harvest the opportunities available by selling shares. We got a precipitous collapse of ethical standards in India in the last decade in India, partly because that is what a financial system that was oblivious to ethical standards was encouraging. Some of the most rotten companies rose to the top. Now that the investors and the employees are seeing things differently, this is sending out signals into the economy (a) Favouring healthy firms and (b) Encouraging healthy entrepreneurs to setup firms so as to harvest the opportunities available by selling shares. We will also see some chameleons turn a new leaf: You will see the oddest of characters preaching purity.

Vishal Kampani pointed out a remarkable fact to me: Some of the biggest successes of the last decade have been the old `Bombay Club' companies. All too often, they have outperformed when compared with the hard-driving unethical nouveau riche entrepreneur. What is going on? I would conjecture that there is a survivorship bias. A large number of different strands of corporate DNA compete. Over the long run, the survivors are those where elements of policy and strategy are of a certain kind. The old rich of the `Bombay Club' are not paragons of virtue, but they have developed certain good practices which are conducive to survival and stock market returns.

I am reminded of the mighty German Wehrmacht in the Second World War. At the level of tactics and operations, it was second to none. In the short run, it generated the most amazing achievements in battle. After the campaigns from September 1939 till December 1941, many contemporary observers thought that Germany was unstoppable. But at the same time, Germany was making profound mistakes at the levels of strategy and policy. No amount of operational art could overcome those fundamental mistakes in strategy and policy.

In similar fashion, we tend to get very impressed by the hard-driving take-no-prisoners nouveau riche entrepreneurs and their hypercharged sidekicks. Their dynamism and willingness to play dirty seems to be unstoppable, particularly given the weaknesses of politicians, bureaucrats, judges and media in India. But it appears that in India, these strengths in tactics and operations have often been unable to overcome fundamental mistakes in strategy and policy. Indian capitalism is not doomed.

Sunday, September 02, 2012

Has monetary policy in India helped or hurt?

Carlos Vegh and Guillermo Vuletin have an article Overcoming the fear of free falling: Monetary policy graduation in emerging markets, in `The role of Central Banks in financial stability: How has it changed?', Federal Reserve Bank of Chicago, 2012. They have drawn on this to write a column on voxEU titled Graduation from monetary policy procyclicality.

In an ideal world, monetary policy should stabilise business cycle conditions. When times are good, the central bank should raise rates, thus reining in a boom. When times are bad, the central bank should cut rates. As an example of how this might not arise, recall that on 16 Jan 1998, in what was arguably a pretty bad time for the Indian economy, RBI raised rates by 200 basis points. Economists have a delicate and damning phrase for monetary policy that fuels a boom and exacerbates a bust: it is termed "procyclical" monetary policy.

Vegh and Vuletin construct a measure of monetary policy procyclicality : the correlation between the cyclical component of the short-term interest rate and GDP. This is computed for a large number of countries for the 1960-1999 period. Here is the result:

The bars in black are advanced economies and the bars in yellow are developing countries. There is a striking pattern: All the countries with a negative correlations -- i.e. interest rates are raised in bad times -- are developing countries. This is a striking demonstration of the faulty monetary policy frameworks that are found in developing countries: Every country which suffers from procyclicality in this period is a developing country.

India fares pretty badly in this list: Starting from the bottom, we have Uruguay (Rank 1 from the bottom), Chile, Mexico, Venezuela, Gambia, and then India (Rank 6 from the bottom).

Things got better after 1999. Vegh and Vuletin repeat the analysis for 2000-2009 and find that India did much better. The correlation swung to a positive value. India moved up, to the middle of the distribution. You could find one developed country -- Japan -- which did worse than India in this period.

In my assessment, there are two elements to this story: (a) Is there room to manoeuvre for monetary policy and (b) Is the monetary policy process properly constructed? The first is largely a question about exchange rate flexibility. If the central bank pursues exchange rate goals, this uses up the instrument of monetary policy. The second is about how monetary policy is conducted.

The figure above shows how India's exchange rate regime evolved towards flexibility. The structural break dates (23 May 2003 and 23 March 2007) are computed using the methodology of Zeileis, Shah, Patnaik, 2010. For 4.74 years, we had INR/USD volatility of 2.31% per year. On 23 May 2003, the contradictions of this regime became unbearable, and the exchange rate regime changed: volatility jumped up to 3.93% per year: a rough doubling. On 23 March 2007, the contradictions of this regime became unbearable, and the exchange rate regime changed: volatility jumped up to 9.05% per year: another rough doubling.

From 23 March 2007 onwards, we have finished 5.43 years -- the longest single period out of the three shown here -- in this zone of high exchange rate flexibility. On the subject of the Indian exchange rate regime, you may like to read this post.

I believe these changes have substantially, though not completely, freed monetary policy of the burden of pursuing exchange rate goals. This is one half of the story of Indian monetary policy reform. The second half is that of setting up a sound monetary policy process. Now that you have a lever of setting the short rate in your hands, what would you like to do with it? The first stage is a relatively easy and nihilistic one: it requires getting out of trading in the currency market. By 23 March 2007, this was completed. The second stage is harder: it requires institution building. We have not yet begun on this phase.

This increase in exchange rate flexibility is consistent with the Vegh & Vuletin calculation which shows that the procyclicality of Indian monetary policy was reduced in the 2000-2009 period.