Monday, June 20, 2016


Yesterday, June 18, 2016, Raghuram Rajan in an email address to his staff in RBI communicated that he is not going to seek an extension to his term as a RBI governor, which is ending on September 4, 2016 and will be going back to academia. The timing of his decision is debatable considering the upcoming Brexit voting but his decision may not be debatable considering recent mud-slinging on him.

Three years ago when then Prime Minister Manmohan Singh appointed Raghuram Rajan as RBI governor, I wrote about Rajan's challenges of dealing with Impossible Trinity. When he was appointed in 2013, India was facing problems of decade low growth rate, tumbling domestic currency and double digit consumer inflation.

A quick glance at Rajan's term shows us that he quite successfully dealt with all major problems through monetary policy framework. Immediately after taking the charge he helped the domestic banks to tap large chunk of legitimate foreign funds as deposits in India, which minimized the pressure on Rupee and reduced the volatility on a greater extent.

Under his leadership, RBI changed the inflation watch from old fashioned WPI index to more relevant CPI index and built consensus along with the government of getting a mandate of CPI inflation target 5% by March 2017. During three years of his tenure as RBI governor, he quite successfully brought down CPI inflation from about 11% to 5.7% and now on track to achieve the target. After being inflation warrior during his initial tenure, he adopted to monetary accommodative stance in latter part as he achieved the inflation controlling task.

In addition to monetary policy regulation, he managed to intervene before non performing assets of banking sector spread further and burst. Also, Rajan brought in more competition in banking sector by giving new licenses.

Now the big question for Narendra Modi and his government is who is going to fill the big void created due to Rajan's exit (Rexit). How the government will manage to change the perception of manner in which Rexit happened?

Wednesday, November 5, 2014

Effectiveness of Quantitative Easing (QE)

Last week, October 29, 2014, the U.S. Federal Reserve (Fed) concluded its $4 trillion QE programs   saying "there has been a substantial improvement in the outlook for the labor market" and "there is sufficient underlying strength in the broader economy". Many economists’ opinions on QE are divided,  some arguing in favor of it and some against it. Let’s have a look at the things, how they unfolded…

How it all started?
It all started with 2007-2008 financial crisis, to avert the ripple effects of the crisis, Fed started with reducing its fed fund rate and ended up with pumping trillions of dollars of money through three QE programs. After New Century Financial Corporation, a leading subprime mortgage lender, filed for bankruptcy in April 2007, rating agencies became cautious and started downgrading subprime mortgage bonds. Looking at the financial markets’ nervousness and to maintain the liquidity in the system, Fed started with 50 basis points cut in fed fund rate to 4.75% in September 2007 and by April 2008 fed fund rate touched 2%. Within 8 months, Fed reduced its interest rates by 325 basis points.

On September 7, 2008, the Treasury department took control of mortgage giants Fannie Mae and Freddie Mac and pledged a $200 billion cash injection to help the companies cope with mortgage default losses.

World financial markets spooked on September 15, 2008, when Lehman Brothers filed for Chapter 11 bankruptcy protection. As result of Lehman collapse, global money market immediately dried up, equity markets routed like there is no tomorrow, bonds and dollar skyrocketed. After seeing this, U.S. government, Treasury department and Fed took various measures to calm the financial markets.

Immediately after Lehman collapse, Fed and the U.S. government helped the one of the world’s largest insurer, AIG with $85 billion. In other words, AIG was bailed out by Fed and the U.S. government.

Within matter of three months, Fed reduced fed fund rate by more than 175 basis points to keep it between 0 to 25 points in December 2008. In between, when fed fund rate was about reach near zero levels, Fed started realizing the liquidity trap problem in traditional monetary approach. Ben Bernanke at helm of the Fed, who extensively studied Japanese lost decade and 1930s the great depression, started thinking of unconventional ways to pump the money into the economy.

QE1, QE2 and QE3
QE1 began in November 2008, with Fed deciding to buy $500 billion worth of mortgage backed securities (MBS) from financial market participants, $100 billion worth of debt obligation mortgage buying from giants Fannie Mae, Freddie Mac, Ginnie Mae and Federal Home Loan Banks. Fed did extend another $100 billion to Fannie Mae, Freddie Mac and Fed also announced the purchase of another $300 billion worth of long term treasuries. When QE1 ended in first quarter of 2010, Fed almost spent about $100 billion every month on buying mortgage backed securities for 17 months. That means, Fed was sitting up on about $1.7 trillion worth of mortgage backed securities. Overall QE1 can be classified as bailout fund.

In November 2010, Fed restarted its unconventional monetary policy, QE2, with $600 billion worth of long term treasuries buying plan. Fed expected to keep long term treasury rates and interest rates to be lower to speed start the economic activity. As previously announced, Fed concluded its $600 billion bond purchasing program in June 2011. QE2 can be termed as the fund used to kick-start the economic recovery.

In September 2011, Fed came up with yet another program called operation twist, wherein Fed started selling short term treasury bills and notes, and buying long term treasury bonds, to lower the long term treasury yields. Total fund allocated for this program was $400 billion. This showed that Bernanke was shifting the central bank's focus from repairing the damage from the subprime mortgage crisis to supporting lending in general.

In September 2012, Fed announced QE3. It agreed to buy $40 billion in MBS, and continue Operation Twist, adding a total $85 billion of liquidity a month. In December 2012, Fed announced it would buy a total of $85 billion of long-term treasuries and MBS put together. It clarified its direction by promising to keep it until one of two conditions was met: either unemployment rate to fall below 6.5% or inflation rose about 2.0%.

Did QEs Work?
In hindsight it’s always easy to analyze things! But talking about whether Fed’s QEs worked or not, it is somewhat complicated to question to answer and those answers are divided. But many economists agree that Fed accomplished couple of its goals. It’s unimaginable to know what would have happened without Fed's QEs. In the beginning, Fed wanted to stop the financial crisis from getting worse. By buying mortgage securities, Fed prevented more banks from failing and eased the frozen lending and money markets. Also being far more proactive and expansionary in nature of Fed as compared to ECB of European region reflects in the present status of both the regions. Fed helped to stabilize the U.S. economy, providing the funds and the confidence to pull out of the recession.

But whether QEs achieved what they were intended to achieve? Whether they succeeded in creating more jobs, spurring up the economy, boosting the inflation to Fed expectation level? I think answer would be “No”.  
Why QEs didn’t create enough jobs or reduce unemployment rate to Fed’s normal acceptance level of 5%. Why unemployment rate, which rose to 10% in 2009 till today didn’t reduced to before the crisis level of 5%, even after six non-stop years money pumping from Fed. Because monetary policies can't do much to reduce unemployment as liquidity is not the problem. In other words, there is little that expansionary monetary policies can do to increase the job creation.

High unemployment rate is due to two factors: cyclical unemployment and structural unemployment. Cyclical unemployment is caused by the economic downturns and structural unemployment happens when the long-term unemployed people lose their skills, needed to compete in the job market. Even now many economists argue that, present decline in unemployment rate is substantially because of long-term unemployed people quitting the job searching process, which is reducing unemployment rate.

QE didn't achieve Fed's goal of making more credit available and boosting the inflation. It gave the money to banks, which basically sat on the funds instead of lending it out. Though Fed succeeded in lowering the cost for banks to make mortgages, the banks didn’t actually start making more mortgages. Since banks didn't lend out the money, inflation wasn't created in consumer goods. As a result, Fed's measurement of inflation, the CPI, stayed below Fed's target.

However, QE did create an asset bubble kind of situation, first in gold and other commodities, and then in stocks.  An gold price more than doubled, rising from $869.75/ounce in 2008 to $1,895/ounce in 2011. Oil prices more than tripled from around $40/barrel in 2008 to around $120/barrel in 2011. After that, investors shifted to stocks. S&P 500 more than doubled from 700 levels in 2009 to 2000 levels in 2014.

QE could have been better designed. There could have been a better balancing act between monetary and fiscal policies. In retrospect far too much faith was put in the banks to channel the money to where it was needed. Edward Hadas of Reuters Breakingviews once nicely said, QE could have been worse, and it should have been better.

Friday, December 13, 2013

Will Fed’s QE taper talk topple Rupee again?

When U.S. Federal Reserve chairman Ben Bernanke spoke of reducing bond buying quantity (Presently Fed is buying $85 billion per month and the program is popularly known as QE, quantitative easing) first time in the month of May, markets were surprised and spooked.

U.S. Benchmark 10 year treasury yields jumped more than 100 basis points within a short duration, equity markets throughout the globe slumped, hot money from emerging markets started flowing out, developing countries’ currencies tanked and Indian Rupee was the worst performer of the league. Rupee touched historical all time low of about 69 per dollar in August from as high as 53 per dollar in May.

After continuous speculation in the markets, markets were prepared for QE tapering in September, but Fed took a cautious call not to taper and surprised markets again.

Following 2 successive months of Non Farm Payrolls jobs data around/above 200,000 and unemployment rate falling to 7%, there is again speculation of tapering in the markets. Timing and quantity of the tapering is a debatable question but will that talk of tapering cause volatility in forex markets again? Will Rupee again tank to such drastic level with such aggressive bearish bets.

I think, pace and level of volatility what we saw after Chairman Bernanke comments in May were too fast and too much and that may not repeat if tapering happens also. Obviously there will be some reversal in recent gains attained by Rupee as whenever U.S. sneezes rest of the world catches cold! So there may be slide in the level of Rupee but with not such aggressive pace and the level, seen earlier because of the following five reasons.

Priced in the market
Tapering news was new when Chairman Bernanke spoke about it in the month of May. After that various regional-Fed presidents either talked against it or in support of it. Markets participants started analysing for and against the tapering. Markets were prepared for tapering in September month’s Federal Reserve meeting itself. So this time whenever it happens or mere talk of tapering may not cause such drastic moves in Rupee markets as it is already priced in the markets that eventually tapering had to be done, it’s just a matter of time and quantity.

Bond yields
When Bernanke talked about it first time in May, Benchmark 10 year treasury yields were as low as 1.6% and now they are trading at 2.8%. Talking about Indian government 10 year bond yields, they were around 7.5% in May and now trading at around 9%. Both the countries yields are elevated levels indicating tighter liquidity scenario in coming months and looks like they are prepared for tapering.

Current account
Indian current account deficit (CAD), the difference between outflow and inflow of foreign exchange, was one of the worst among the emerging countries. But CAD reduced substantially over the last quarter. India's current account deficit narrowed sharply to $5.2 billion, or 1.2% of GDP, in the July-September quarter of 2013-14 on the back of turnaround in exports and decline in gold imports. Thanks to RBI and governments moves to curb the gold imports and improvement in exports helped by Rupee depreciation as well as recovery in global economy. The current account deficit was USD 21 billion, or 5 per cent of the GDP, in the second quarter of last fiscal. On Sequential basis also CAD improved from $26.9 billion in previous quarter.

Bottoming out of growth rate
India’s gross domestic production growth rate on decline from 2010 peak and it seems that it is bottoming out around 4.5% - 5% levels. GDP expanded 4.8% in the three months ended 30 September, compared with 4.4% in the preceding quarter. From last 4 quarters Indian GDP is hovering around 4.675% (4.8%, 4.4%, 4.8% 4.7% in reverse order) indicating the bottoming out of the Indian GDP growth rate.

Rajan effect
After Raghuram Rajan became RBI governor, markets showed confidence in his ability and credibility to curb the inflation, bond market reforms, clear communication with market participants and forward guidance. His strategy to attract Dollar deposits through FCNR route helped Rupee to regain some of the losses in the forex market. His shifting focus towards CPI inflation from WPI inflation is good for Indian economy in longer run, even though it may hurt in immediate future. After yesterday’s CPI inflation of around 11%, Rajan may increase repo rate by another 25 basis points in next week’s meeting, which indeed in turn helps Rupee as hot money will be chasing for high yields.

Tuesday, December 3, 2013

Micro-decoupling factors in a macro-coupling world

During early part of the recent financial crisis, decoupling concept started popping out in financial markets, that certain part of the world is not dependent on the rest of the world. But as crisis deepened, people started realising that in the present globalised world, it’s very difficult say that we are no longer dependent on others!

But there are certain factors, which are very micro, country specifics and are decoupled in macro-coupling economic world. To begin with end, I am still saying global world is a coupled one and no country or state can say that they are fully immune from the rest of the world. Nobody can say that, they are growing only because of domestic reasons.

But below mentioned micro economic factors, which are country specific, are giving signals that they are decoupled in nature in short to medium term.

As all of us know inflation, change in the price levels of essential goods and services in a country, plays important role in the country’s economic policy making. I am not such a big fan of Milton Friedman’s proposal of inflation: Inflation is always and everywhere a monetary phenomenon.

I think inflation can also be because of fiscal expansion, like government spending more but without actually increasing output of the country, leading to bigger amount of money chasing same goods and services, which in turn creating demand-supply mismatch in an economy. Also there can be various other causes like, monetary policy cycle, demographics of the country, savings and expenditure pattern and currency fluctuation.

Keeping aside these causes, Inflation in countries like India, Indonesia and Venezuela is beyond central bankers’ comfort zones whereas in certain parts like Japan, Euro-zone and U.S. it is much below their central bankers’ targeted levels. These developed countries' central bankers are trying pump up the inflation or trying to avoid the deflation whereas developing countries central bankers are trying to minimise the inflation and inflation expectations. Reasons for both the cases vary from country to country, but in above mentioned each part, central bankers are struggling to anchor the inflation in different directions! 

Interest rates
Central bankers of each country (or zone) will be having different mandate/s like growth and/or inflation or only price (inflation) stability or currency stability. Depending on these mandates central bankers decide their course of action in deciding the interest rates and also cycle (upward or downward trend).

Now without getting into each central banker’s mandate, it is easy to say from currently available picture that each country’s interest rate is decoupled from rest of the world. For example India, Brazil, Indonesia are following contractionary monetary policy whereas U.S., Euro-zone, Japan are following ultra-expansionary monetary policy because of the issues these countries (zones) facing are different for different parts of the world.

Current account
In layman terminology, current account is nothing but difference between imports and exports. Depending on the difference between exports and imports, countries will be bifurcated as current account surplus and deficit countries. I believe global trade is a zero-sum as ones loss is others gain, so always there will be current account surplus and deficit countries as long as trade is global and liberal.

Countries like Germany, China and Saudi Arabia are current account surplus ones whereas U.S.,  India and peripheral countries of Euro-zone likes of Greece, Portugal and Spain are current account deficit ones.
Reasons may vary from efficient productivity, economies of scale, natural resources and others but countries are clearly decoupled in this context way above margin!

Equity markets
I would like to cast equity markets in a coupled-macroeconomic section as free capital (hot money) flow in a globalised world is not a country specific phenomenon. Easy money strategy followed by developed world like QE (1, 2, 3 and operation twist) of U.S., low interest rates and LTROs from Euro-zone, Abenomics in Japan is not only pumping their domestic equity markets to new (or regaining historical) levels, but also other countries’ equity markets are also trading at record levels.

Dow Jones and S&P 500 (@highest levels), NASDAQ (@13 year high) of U.S. and Dax of Germany are trading at historical levels. Japan’s Nikkei 225 is at almost 6 years high, India’s Nifty and Sensex are trading either highest level or around historical high levels.

Saturday, November 9, 2013

Raghuram Rajan’s balancing act of (im)possible trinity

When Raghuram Rajan took over the charge of the governorship of Reserve Bank of India (RBI), India was facing multiple issues. Because of Federal Reserve bond buying tapering speculation (at that time) hot money started flowing out of the emerging countries and India was no different. In addition to that India's unsustainable current account deficit (CAD) fuelled the bearish sentiment of the Rupee. It was the worst performer among the emerging countries currencies.

Meanwhile, then governor D. Subbarao hiked Marginal Standing Facility (MSF) by 200 basis points to prevent the currency outflow and so called excessive speculation. MSF is the rate at which banks borrow from the RBI in times of tight liquidity and it used to be 100 basis points above repo rate. Markets started speculating about RBI’s next possible move of capital controls, which Finance Minister and RBI governor denied repetitively.

Furthermore, India’s growth rate was (is) at its lowest pace in a decade. Inflation dilemma was continuing due to divergence between high level of CPI and moderate levels of WPI. Everybody was contemplating new governor’s stance on monetary policy at this crucial state of the economy.

Governor Rajan was supposed to prevent free fall of rupee, manage market expectation of not pursuing capital controls and have a monetary policy which is independent of all this. Which is impossible trinity and as name suggest it’s practically impossible to achieve all three at the same time.

In his first monetary policy meeting he took two important decisions.

1. Increasing repo rate by 25 basis points and decreasing MSF rates by 75 points. By doing this he took first step towards managing market expectations of not pursuing capital controls and at the same time he stressed upon the anchoring inflation and inflation expectations. By taking these steps he walked towards achieving two legs of the impossible trinity, i.e. free capital movement and independent monetary policy.

2. Providing the Dollar-Rupee swap facility for dollar funded deposits which helped India to attract nearly $12 billion in less than two months from then. This took care of Indian rupee depreciation and rupee recovered from its lowest levels. Third leg of the impossible trinity talks about fixed exchange rate, in which India doesn’t operate as Indian currency is partially pegged one.

Meanwhile, other factors like tapering postponement and Central government's efforts to curtail CAD also helped the market sentiments.

But credit must be given to governor Rajan as he is doing tricky job of balancing the impossible trinity of free capital flows, exchange rate (managed, not fixed in this case) and independent monetary policy, which is anchoring inflation.

Wednesday, November 6, 2013

Basic tips for resume and interview

As a part of my job, now I have the privilege of scrutinizing resumes and taking interviews. Over the course of this time I have realised some basic things about resumes and interviews, which may be very common, but not finding them in most of the candidates and their resumes. Here I am mentioning certain basic tips, which we all might know but may not be giving much importance.

Information in the resume should be to the point

·         Nobody in corporate world has time to study candidate’s resume in detail for more than a minute (less than that in most cases) or two.
·         Candidate should always remember his/her resume will be competing with tens of hundreds of resumes.
·         Selecting resumes out of this bundle of resumes need lot of time, so each resume may not get much time.
·         Within first few seconds only resume’s fate will be decided whether to read further or not.
·         Resume’s length shouldn’t go beyond a page or one and half page.
·         Try to use bullet points rather than paragraphs, as information may not be as visible as in bullet points.
·         Don’t put in unnecessary data or information, which is irrelevant to job profile applying for.
·         Concentrate more on skill set, prior experiences, professional achievements, academic career and basic personal information. This doesn’t mean that other things should not be there, but give these things more importance.
·         Follow a flow; it is better to start from skills sets, most recent experience and then in downward order.
·         Better way to forward resume is through referrals rather than sending it through websites or email id provided there. 

Interview is for rejecting

·         You might be thinking that by mistake I would have written rejecting instead of selecting. No, you are wrong.
·         Even though interview is conducted for selecting right candidates, but rejection percentage will be much bigger than that of selection because of high number of applicants.
·         First few minutes of the interview only decides the fate of the candidate, whether to proceed to next level or end it.
·         So always try to give an impression to the interviewer that you are not wasting his/her time.
·         Don’t get panicked if interview is prolonging and grilling. Sometimes it might be a sign that interviewer is interested and wants to test the limits.
·         Candidate should be confident, convincing, logical and clear in communicating his/her thought process.
·         Carefully use words to construct sentences, as most of the times candidate they themselves provide an idea for next question, to be asked while answering previous questions.
·         Please don’t ever bluff in the interview, it’s very difficult outsmart the interviewer.
·         Don’t be overconfident, arrogant, and argue with interviewer.
·     Should be careful about panel interview, as each person in the panel will be an expert in     
     different field and will be looking at the candidate from his/her perspective. So gauge the 
     pattern of questions asked by each individual and tackle them appropriately.

Thursday, October 31, 2013

Rajanomics and its decoding

Prannoy Roy of NDTV discussing overall Indian economic situations like Inflation, Growth (faltering), Sovereign rating and Rupee volatility with RBI governor Raghuram Rajan.  
For Video: Click here