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.

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.

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

Limitations of Dow

When I was reading an article about “Why Google and its $1,000 shares will never crack the Dow”, in Bloomberg business certain thoughts came to my mind, so thought of writing about them.

Often people look at the stock index as it is perceived to be broad representation of overall stock market. Dow Jones Industrial Average is one of the three main indices of U.S. (other two being NASDAQ and S&P 500) and it is the oldest of three. Even though “industrial” word is there in the name of the index, Dow now include non-industrial companies also as over a period of time economic composition of sectors changed. Present constituents and their weights of the Dow are as follows (Source Bloomberg and data is as of 21^st October).

Though Dow changed its constituents of the index over a period of time, but it didn’t change the calculation method of the index. It follows price-weighted index calculation method wherein stock price will decide the index proportion i.e. highest weighting will be given to a highest stock price and vice-versa.

There are certain limitations of this method. For example as mentioned in the above article, it becomes difficult to include a stock in the index if its price is too high as is in the case of Google or Apple. Even though both of these companies are technology sector giants it is difficult for Dow management to include these companies as these companies’ stock prices are substantially high as compared to Dow components’ stock prices. For instance Google trading at $1000+ and Apple at $500+ will fetch almost half of Dow index weighting if included at these present price levels. So because of high price these companies can’t be included in the index calculation.

Second limitation is price of a stock does not represent the size of the company. To be precise, price of the stocks doesn’t reveal the companies’ position in their sector or overall market. For example Visa is a highest-weighted stock in the Dow because of its share value, which is highest among its components. But revenue wise Visa is smallest company (around $11 billion) whereas JP Morgan whose revenue is almost $100 billion (9 times of Visa’s revenue) is at 21^st position in price-weighted stock in the index. Chevron, whose revenue is less than half of the Exxon Mobil, influence Dow more than Exxon as it is the 6^th highest weighted and latter being at 10^th position.

Third limitation or complicated situation is of corporate action. Corporate action may be stock split or reverse split or bonus share issuance. Companies can split their stock prices for various reasons into smaller priced ones by any ratio. Reverse split is nothing but opposite action of stock split, wherein companies merge their stock. Bonus share means companies issues shares in certain ratios for existing share holders. For all above actions stock price will be forced to adjust. So according price-weighting index method company’s position will be changed even though not much change happened to company except its share price.

Fourth would be question of index representing all the shares in it. In price-weighted index it may or may not give due importance to all companies' share, which it has. Means if divergence between heavy and low weighted stock prices increases then index may move in either direction just because of heavily-weighted stocks rather all stock prices in it! For example in above case if Visa, IBM, Goldman Sachs and other top companies share price increases and GE, Intel and Cisco price decreases or remains constant over a period of time then latter ones lose on their weight and earlier ones gain on their weight. If this persists for a long period of time then Dow will majorly move by the top weighted companies. This means index value may not represent exact status quo of its constituents itself! These results in a situation like index regaining its lost value but most companies' stock value still at abysmal level!

Interesting readings on Economics Nobel Prize

The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2013 to

1. Eugene F. Fama
2. Lars Peter Hansen
3. Robert J. Shiller

Trendspotting in asset markets:
There is no way to predict the price of stocks and bonds over the next few days or weeks. But it is quite possible to foresee the broad course of these prices over longer periods, such as the next three to five years. These findings, which might seem both surprising and contradictory, were made and analyzed by this year’s Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller.

Nobel Prize winners say markets are irrational, yet efficient
Are stock markets irrational, driven by greed and fear, subject to euphoria and panic? Or are they highly efficient indicators of intrinsic value? Both, says the Nobel Prize Comittee for Economics, with no sense of contradiction.

The economics Nobel matters for India
The recent announcement of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has gone to three extremely deserving recipients. The combination of deep economic insight and clever methodological contributions that Eugene Fama, Lars Hansen and Robert Shiller have brought to this field has revolutionized our understanding of the determinants of asset prices.

Split Nobel prize shows bubbles are worth watching
Economics is the only field in which two people can share a Nobel prize for saying opposing things.

Economists Clash on Theory, but Will Still Share the Nobel

Nobel Prize U.S. winner warns of 'bubbly' global home prices

Fama, Shiller, Hansen Win Nobel Prize for Asset-Price Work

What is happening in U.S.?

When one of my friends asked me what’s happening in U.S., so I thought of writing about it in a layman terminology, so that non-finance guys like many of my friends can understand.

Most of you might have already read or heard about American government being shut down from last one week or so. You might be wondering, what is this shut down. Why it happened and what is the impact of it?

To start with America follows the financial year from 1^st October to 30^th September just like our financial year, 1^stApril to 30^th March. For every new financial year a new budget is prepared and once it is passed, fund can be transferred to various departmental activities. Means funds allocated for each department can be utilized according to their plan of expenditure.

But if Congress (Parliament in Indian context) does not pass the new budget presented then Congress needs to come up with contingent bill, which allocates funds as per previous year allocation, to work around for time being. If that is also not passed by the majority in the both the houses of the Congress (Senate and House of Representatives) then government needs to shut down some departments which are not exempted from Anti-Deficiency Act (ADA). ADA is legislation, which prevents some government departments spending beyond their allocated funds.

You might be wondering why Congress didn’t pass the budget or contingent bill. Bill is implemented only when both the houses of Congress pass the bill by 2/3 majority or more. Senate, the upper house of the Congress is led by Democrats (52/100) and House of Representatives; the lower house of the Congress is led by Republicans (232/435). So bill should be satisfactory to both the parties.

President Barrack Obama is trying reform the healthcare (bill is also known as Obamacare) by reducing the cost of insurance and increasing the coverage of uninsured Americans (Around 15% of the population is not insured in America). But Republicans are opposing it for obvious political reasons and burden on expenditure, so not ready to negotiate in House of Representatives. President and Democrats are not ready to negotiate the budget without Obamacare. So because of the deadlock and new financial year U.S. government needs to shut down some of the departments until deadlock is resolved and pass the budget.

Now question is what is the impact of the government shut down? Immediate effect is around 8 lack government employees are on forced temporary leaves without pay and around 13 lack government employees need to work without pay. Major tourism spots like historical places, libraries and museums will be closed. And economic impact is different as per different estimations. According to Goldman Sachs estimates 5-6 days shut would shave off around 0.2% of GDP, 10-12 days shut would cost around 0.5% of GDP and 20-24 days will be of 1% of GDP.

So ultimate question would be what is the way going forward?  How long deadlock can continue? As long as both parties come to table with some amendments from both of their demands deadlock can continue. Historically the longest deadlock has been for 21 days in 1995-96. So what if present deadlock continues for more than 2-3 weeks like one in 1995-96? That’s the worst thing to happen to U.S. as it will be facing debt ceiling negotiation on October 17. Debt ceiling means, the limit on the amount of debt America can issue. If this deadlock continues till October 17 then there is possibility that debt ceiling may not able to increase. If that happens then treasury department may not able to repay the amount on debt maturities beyond a point, where it runs out of its reserves. After this treasury department needs to prioritise its debt service obligations and there might be partial defaults or in worst case full default, which is unthinkable and unprecedented! Because of the debt ceiling issue and the way it was handled in 2011, Standard & Poors downgraded U.S. from AAA rating.

Conclusion: Hope American politicians realise and recall the phrase “it’s the economy, stupid” and resolve the issues as early as possible.

Raghuram Rajan questions his peers’ policies!

Recently the Center for Financial Studies (CFS) awarded the Deutsche Bank Prize in Financial Economics 2013 to Raghuram Rajan. He presented his recent research paper on monetary response after the crisis.

He started his keynote lecture by saying “we seem to be in a situation where we are doomed to inflate bubbles elsewhere to boost the domestic demand” to question the low interest rate, “whether ultra low interest rates are part of the solution or part of the problem”. He called central bankers as “heroes” for rescuing the world from the brink of the collapse but warned his (now) counterparts, they may not be addressed same for the second half of the crisis i.e. recovery, as growth is not as expected!

He accepted the fact that he doesn’t have answers to the questions, he is raising, but he would like ask the questions!

He goes on to question the usage of monetary policy (over targeted fiscal policy) to drive the growth with the help of ultra low interest rates. He argues retirees as well as other people (who used to spend before the crisis) may not start spending in ultra low interest regime. In fact they may start saving more because spenders are under the water of debt over burden due to the crisis and retirees may not be able to get anticipated returns in these ultra low rates. Also he mentioned about “debt fuelled demand” is highly localised by quoting different spending patterns of Las Vegas and New York.

Moving on he questioned the credibility of the central bankers’ forward guidance like keeping interest rates low either time bound or conditional (like unemployment) dependent. Since recently markets started questioning the guarantee of central banks credibility and their talk.

He talked about amount of tapering may not alter much in long term Fed’s bond holding portfolio, which in turn should not have much impact on bond stock and flow.  But in reality it is not happening as per theory.

Talking about Bank of Japan, he hoped the balancing act of raising inflation expectation not too high and not too rapidly while maintaining bond yields low so bond portfolios don’t get beaten up, BOJ will succeed.

Unintended consequences of unconventional monetary policy

He said unconventional monetary policies may be intended to take more risk from entities like insurance companies and other financial corporation’s but he is not sure about that risk taking translates into real risk taking in real economy! But unintended consequences like spill-over and capital flow to emerging markets leading to asset price boom in those countries might raise the question. Politicians in emerging markets may forego the countercyclical policies during the capital inflow phase.

Even in industrial countries, monetary policy doing too much may take away the pressure from government and politicians and their focus. Because when central bankers say monetary policy is the only game in town they become the only game in town as everybody else then willing to wait. Damned if you do and damned if you don’t!

Pointing at taper talk confusions, he said we should plan our exit when we enter into something! Because of this stress he thinks emerging markets may decide not to run current account deficit, build safe structure by building reserves, focus on export led growth.

He said we need to break the cycle of one crisis to other like Asian crisis to Industrial world crisis and back to emerging market crisis again.

He ended his presentation by saying “I think I posed more questions than answers, but that’s the state of my thinking”.