Some points from RBI Annual Policy

RBI has announced its Annual Policy Statement for the year 2007-08. The summary is here and details here .

Summing up the policy, there have been no changes in interest rates. However, the concerns over inflation have been mentioned in the statement.

The Statement is divided into 2 parts:

1. Annual Statement on Monetary Policy- which is further subdivided into 3 parts:
   i) Summary of the Macroeconomic and Monetary developments I mentioned in previous blog entry . ( So people who cannot read the huge report, can read the summary here ..Summary 30 pages Vs Report 99 pages)
   
   ii) Stance of Monetary Policy for 2007-08: It is the most important part of the Statement as from this one gauges the stance (whether hawkish or dovish) , RBI is taking.
   
   iii) Monetary Measures: Finally the measures taken, the part which matters the most for markets.
2. Statement on Developmental and Regulatory Policies for the year 2007-08: This statement lays down policies for strengthening the Indian Financial System.

On 1(i) and 1 (ii) I would write later, let me quickly go through the developments in 2 (my comments wherever reqd are in italics and in blue).

State Development Loans (State Govt. Bonds)

• Introduction of an indicative calendar for State Development Loans ins being worked out
• Non-competitive bidding in SDL auctions to be issued
• SDLs to also be reissued ( rather than issuing new SDLs evertytime)

G-Secs (Central Govt Bonds)

• Floating Rate Bonds have so far failed in India. (See an example of how floating rate bonds are valued here). There is a proposal to use average cut-off yield on 182 day T-Bills instead of 364 day T-Bills. (The bond failed as the coupon was reset once in an year and in a rising interest rate scenario it was not worth buying the bond, the statement does not mention that reset would also be changed to twice a year. Let us wait for further press release)

Corp Bonds

• After many years of dilly dallying, RBI says it will consider inclusion of corporate bonds in the repo market. (I don't understand why does it take so much time to consider? The guidelines for this would be interesting as corporate bonds are now under SEBI's domain and G-Sec under RBI, corp bonds are traded/reported on BSE and NSE and G-Sec on NDS-OM system. How would the whole thing be managed would be interesting to see)

Derivatives

• Plans to start a trading platform for Interest rate swaps (a nice move to bring transparency in this market, as it is largely traded OTC (Over the Counter) over telephone , I was wondering how should an exchange be designed for these products? Something like OTCEI I would believe....)

Towards fuller Capital a/c convertibility

• Overseas investment limit for corporates increased from 200% of their net worth to 300%
• Listed Indian companies are allowed to do portfolio investment in companies abroad. This limit has been increased from 25% of net worth to 35%.
• Mutual Funds on an aggregate basis are allowed to invest overseas and the ceiling is $3 bn. This has increased to $4 bn
• Individuals can now invest Us $ 100,000 in overseas markets from the $50,000 limit earlier
• Category-1 Dealers can offer Hedging solutions to domestic producers/users of following metals: aluminium, copper, zinc and nickel in international exchanges. Users of ATF are also allowed (It is welcome but why just 4 metals)
• Earlier corporates that used forward contracts to hedge currency risks could use them provided they are completed by delivery or rolled over on due date. From now, they can cancel the contract and rebook it. SMEs and individuals can also use forward contracts now.(Another good development; corporates can take a relook at the risk and hedge afresh)

I am a bit tired now. Would post more developments tomorrow.

Globalization and Inflation

The other day I was discussing with a friend wondering whether Globalization has any effect on inflation.

I just did some reading on that topic and the summary so far is that globalization should lead to lower inflation but so far empirical evidence shows negligible impact.

There are a number of ways in which globalization could effect prices in an economy and Janet Yellen provides a very good summary of the same. She also points to two studies both showing very little impact of globalization on inflation:

• IMF analysis estimates for a panel of eight industrial countries, including the U.S. The study finds that the slower rise in relative import prices in recent years has had only a fairly small impact on overall inflation. For the U.S., the study estimates that a 1 percent decline in relative import prices lowers CPI inflation by only 15 basis points after one year and 6 basis points after three years. Based on such estimates, the IMF calculates that non-oil import price reductions lowered U.S. inflation by an average of ½ percentage point a year over 1997 to 2005.
• Federal Reserve Board study estimates that lower (core) import prices have reduced core U.S. inflation by an annual average of ½ to 1 percentage.

Krozner and Bernanke have also given very insightful speeches on the above.

Ken Rogoff has taken a step further. He says Chinese exports lower relative prices and as long as Central Bank targets the overall price level, the prices of the other goods must actually be rising. Hence, China could actually be exporting inflation and not deflation as is the common perception.Theoretically it appears quite good, but has to be still tested empirically. ( Atleast I am not aware of papers on this)

There have been further papers by Laurence Ball and John Taylor (the person who gave the famous Taylor formula that gives interest rates given the inflation conditions). These papers also suggest that Globalization has not changed inflation. Read this abstract from Ball paper:

" Many observers suggest that the "globalization" of the U.S. economy has changed the behavior of inflation. This essay examines this idea, focusing on several questions: (1) Has globalization reduced the long-run level of inflation? (2) Has it affected the structure of inflation dynamics, as captured by the Phillips curve? (3) Has it contributed substantial negative shocks to the inflation process? The answers to these questions are no, no, and no."

There is a caveat though. Most of the work so far I have cited is from US. Still looking at papers that give a more global outlook. Anyways, happy reading on inflation and globalisation.

Useful set of reports from RBI

Today is the RBI Annual Policy Review for the year 2007-08. For the uninitiated in this review RBI officials take a view on the economy and decide the interest rates you and me are going to pay in coming months. What RBI changes is its benchmark rates (the rate at which RBI lends to Banks) and the Banks alter their rates structure accordingly. If RBI raises rates other follow and vice-versa.

Before the policy, RBI comes out with a document called Macroeconomic & Monetary Developments. It is a superb analysis of the events so far. Basically these are quarterly reports on the Indian economy and covers the developments in the economy in previous quarter. This is better than most of the research reports on Indian Economy which one comes across. It is a must read for all the people interested in Indian economy.

The report is nicely divided into chapters like Real Economy, Financial Markets, External economy with simple text and rich graphs illustrating all about Indian economy. Apart from the lucid analysis, it offers very useful data which can be used by researchers for their analysis.

Read the summary here and the detailed chapters are here

I would post my comments on the same later.

Some facts about Clark Medal and Nobel Prize

Just carrying on with the Clark Medal, I thought I would share some trivia and facts. As Clark Medal is supposed to be for economists under 40, one of the things to see is how many get Nobel finally. Here is a factfile:

• There are 58 nobel winners so far
• There are 29 clark medal winners
• Out of 29 clark medal winners only 11 have got a nobel so far...(38% conversion rate... pretty impressive)
• Clark started in 1947 and Nobel in 1969....so a gap of 22 years... the fact is that till 1969 Clarkies had already produced 7 future nobel winners!!!
• Infact in that gap of 22 years, there were 10 clarkies (none was awarded in 1953) and seven went on to win a nobel !!! 70% success ratio
• Post 1967, the number of clarkies winnining a nobel has been just 4 out of a total of 19 winners a ratio of just 21%
• Out of 58 winners so far, 42 were associated with US Univs at the time Nobel was awarded....72.4%!!So to say Nobel is panglobal is not really working.. well what can nobel committee do... all top guys and thinkers seem to be in US...
• It shows nothing but their productive Univs 9 from Uchicago, 4 from UCB, 4 Harvard, 4 columbia, 3 Cambridge (last in 1995)
• Average & mode age -67, median age-66
• It takes roughly 22 years of waiting between clark and nobel
  Arrow took the least time between clark and nobel (15) and Tobin and Solow 26...
  Arrow is the youngest (but obvious) to have won a nobel (just 51) .. he still holds the recors... and nobel committee is widely cricticised for giving him a nobel alongwith Hicks... he deserved it all alone...!!!!
• Merton 2nd youngest at 53, His mentor Samuelson at 55, Scholes at 55...One can imagine the impact Black Scholes Merton model had on fin markets....
• 3 guys in 80's gto the Nobel- Schelling (game theory) , Wickfrey (famous for his work on auctions), and Coase (never calls himself an economist.. but what impact...)
• all fin eco guys were either 66 or below (Both Modgillani and Miller were 67...the oldest of the lot.. funny the guys who contributed the most recognised at last)
• And plotting the ages gives a somewhat normal disitribution.....!!!!

Here is the full list of Clark Medal Winners who got the nobel as well. The year ahead of name is Year when Clark is given. If the nobel is given, the year is followed after the name..

1947 Paul A. Samuelson 1970
1949 Kenneth E. Boulding
1951 Milton Friedman 1976
1955 James Tobin 1981
1957 Kenneth J. Arrow 1972
1959 Lawrence R. Klein 1980
1961 Robert M. Solow 1987
1963 Hendrik S. Houthakker
1965 Zvi Griliches
1967 Gary S. Becker 1992
1969 Marc Leon Nerlove
1971 Dale W. Jorgenson
1973 Franklin M. Fisher
1975 Daniel McFadden 2000
1977 Martin S. Feldstein
1979 Joseph E. Stiglitz 2001
1981 A. Michael Spence 2001
1983 James J. Heckman 2000
1985 Jerry A. Hausman
1987 Sanford J. Grossman
1989 David M. Kreps
1991 Paul R. Krugman
1993 Lawrence H. Summers
1995 David Card
1997 Kevin M. Murphy
1999 Andrei Shleifer
2001 Matthew Rabin
2003 Steven Levitt
2005 Daron Acemoglu
2007 Susan Athey