Jagdish Bhagwati on Free Trade

Jagdish Bhagwati can be called as The Globalization Guru Here are his views on Indian Economy in a Globalized World.  He talks about reforms in India and also distinguishes between Free Trade of Goods and Services with Free Trade in Capital Flows.He talks about financial innovation which is leading to creative destruction like forcing people to take more risks. What are the strucutral problems in the world economy?.

How is Outsourcing jobs to India and china is helping the world economy?Is US really taking a protectionist position related to International Trade.?Not much but to some extent ,cause it has to protect the incomes of people over there. He says "If income falls ..Trade falls and sometimes it will lead to financial collapse". I guess that's is what is worrying uncle helicopter Ben

 

Note: I am reading few of his works..so expect couple of posts on Trade related stuff and also if anyone finds this please share it with me

Five Frontier Issues in Indian Banking...by Dr. Duvvuri Subbarao

Excellent address by RBI Governor to  bankers at  the BANCON 2010, here he talks about the way indian banks withstood during crisis and regulatory change which is going to happening in form of BASEL 3 accord.

He put forward some ideas and asked banks to discuss on it .

First Issue : Are Indian Banks Prepared for Basel III? 

The building blocks of Basel III are by now quite well known: higher and better quality capital; an internationally harmonized leverage ratio to constrain excessive risk taking; capital buffers which would be built up in good times so that they can be drawn down in times of stress; minimum global liquidity standards; and stronger standards for supervision, public disclosure and risk management. 

 The Basel III package includes capital buffers to contain the pro-cyclicality of the financial sector. Building capital buffers will entail additional costs for banks with consequent implications for investment and hence for overall growth.

Building Buffers will make the capital ideal and will not add anything into productive, it is meant to use at bad times(its like putting more money in savings deposit(RBI) for interest rate...there by curtailing the lending power of banks to some extent.

To effectively deploy countercyclical measures, we also need to improve our capabilities to predict business cycles at the aggregate and sectoral levels, and identify them in real time. This will require better quality of economic and financial data as well as improved analytical capabilities.

 In India the data collected from Ministry of Statistics is sometimes inadequate to predict the right conditions across the economy as well as markets, we need a more reliant  streamlined data from each  sector across the eonomy . I guess this can be done only when government makes a regulation for mandatory data submission from each  department where it works...example:Collect all the land registrations across Pan India to get a feel of real estate sector pricing, collecting pricing from companies which manufacture the products etc..

Estimates show that the leverage in the Indian banking system is quite moderate. Notwithstanding the fact that the SLR portfolio of our banks will be included in computing the leverage ratio, Indian banks will not have a problem in meeting the leverage ratio requirement since the Tier 1 capital of many Indian banks is comfortable (more than 9%) and their derivatives portfolios are also not very large

 Indian banks will not have problem in meeting the ratio as long as real estate value goes up,but once it starts coming down, we might feel the pinch.Though the derivatives positions of banks are not large our banks show significant revenue from trading.

Second Issue:  Should Indian Banks Aim to Become Global?

The second issue I want to address is one that comes up frequently - that Indian banks should aim to become global. Most people who put forward this view have not thought through the costs and benefits analytically; they only see this as an aspiration consistent with India’s growing international profile.

 Are our banks ready to become global and ready to meet the demands of global citizens..( Can Mittal bank on Indian bank to fund a major acquisitions across the globe?). Though SBI missed the boat of acquiring Citi Bank when it was trading at 1$ at the hieght of finanacial crisis due to government inefficient bureaucracy.

Can Indian banks aspire to global size?

As per the current global league tables based on the size of assets, our largest bank, the State Bank of India (SBI), together with its subsidiaries, comes in at No.74 followed by ICICI Bank at No.145 and Bank of Baroda at 188.  It is, therefore, unlikely that any of our banks will jump into the top ten of the global league even after reasonable consolidation.

 Should Indian banks aspire to global size?

Opinion on this is divided. Those who argue that we must go global contend that the issue is not so much the size of our banks in global rankings but of Indian banks having a strong enough global presence. The main argument is that the increasing global size and influence of Indian corporates warrant a corresponding increase in the global footprint of Indian banks.

The opposing view is that Indian banks should look inwards rather than outwards, focus their efforts on financial deepening at home rather than aspiring to global size

Third Issue: Should We Mandate Foreign Banks to Come in Only as Subsidiaries?

 Here he talks about the subsidiaries role in indian context

Fourth Issue:  Why Do We Need to Rewrite Laws Governing the Banking Sector?  

Infact banking laws helped us to maintain a orderly banking system during crisis. 

Requirement of minimum paid up capital and reserves, restrictions on payment of dividend, transfer of a percentage of profits to reserves, maintenance of SLR, restrictions on connected lending, maintaining a percentage of domestic liabilities as assets in India have all helped the Reserve Bank in preventing crises and maintaining financial stability.

 Fifth Issue : Where Do Indian Banks Stand on Efficiency Parameters?

There has been a particularly discernible improvement in banks’ operating efficiency in recent years owing to technology upgradation and staff restructuring 

 One such is Core Banking System which helped banks to offer more services and reduced the time lag in delivering the services

He advised the banks to raise the interest rates offered to depositors and reduce the lending rates charged on borrowers - in other words, reduce their intermediation costs, or in technical terminology, reduce the net interest margin (NIM).

This will lead to decreasing margins for banks and i beilive this lead to Bank Sector tanking down 3%  in today's market.

Inclusive Growth – Role of Financial Sector

Below are some excerpts from a lecture at a University by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India on Inclusive Growth – Role of Financial Sector

• Here he talks about Inclusive Growth what it means ? why is it important ?. Inclusive growth means allowing people to contribute to and benefit from economic growth.
• Off late it has caught policy makers attention because the benefits of economic growth happened in the past few years are not shared equally among people.
• Growth is inclusive when it creates economic opportunities along with ensuring equal access to them.
• The Indian economy, though achieved a high growth momentum during 2003-04 to 2007-08, could not bring down unemployment and poverty to tolerable levels.
  
• Further, a vast majority of the population remained outside the ambit of basic health and education facilities during this high growth phase
• Over 25% of Indians continue to live in abject poverty. As a result, Inclusive growth has become a national policy objective of the Union Government.
  
• Govt has identified agriculture, infrastructure, health care and education as critical areas for achieving higher inclusive growth.
  
• The policies aim at increasing the income and employment opportunities on the one hand and on the other; it tries to finance programmes which are capable of making the growth more inclusive.

Financial Inclusion--Financial inclusion is the process of ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low income groups at an affordable cost in a fair and transparent manner by mainstream institutional players

Role of Financial Sector

• Banks and other financial services players largely are expected to mitigate the supply side processes that prevent poor and disadvantaged social groups from gaining access to the financial system.
  
• Access to financial products is constrained by several factors which include: lack of awareness about the financial products, unaffordable products, high transaction costs, and products which are not convenient, inflexible, not customized and of low quality
• The empirical evidence shows that countries with large proportion of population excluded from the formal financial system also show higher poverty ratios and higher inequality.
• However, we must bear in mind that apart from the supply side factors, demand side factors, such as lower income and /or asset holdings also have a significant bearing on inclusive growth.

Bottlenecks

• The gigantic nature of the task, keeping in view the number of financially excluded people.
• Lack of proper Business Models. Banks still perceive this as a burden and an imposition and not as a viable Business Model
• The costs of administering low value transactions and of financial intermediation are perceived to be on the higher side.
• Lack of cost effective scalable Delivery Models.

Strategy

• Banks must view Financial Inclusion as a huge business opportunity and perfect their Delivery Models. BC based delivery model has been made more flexible and inclusive
• Involve all the stakeholders in the process. Governments, both Central and State, NGOs, technology vendors, Industry Associations, Insurance and Mutual Fund companies, society at large

Myths about Financial Inclusion

• It is not their willingness but the lack of ability to deliver which is coming in the way

And he concludes that current policy objective of inclusive growth with stability is not possible without achieving universal Financial Inclusion.

Whats Ahead for Markets from Options Data

Concerns of Debt Crisis in Ireland along with expectations of a Rate hike in China in coming days(might be this week) prompted investors across the market to liquidate there positions and looking  for safer assets.

Irish banks have there own problem of debt caused by the housing bubble and similar is the case with portugal. Even EU and IMF are trying for bailout but markets are concerned that the problems might be spread to other peripharel countries.

Nifty Shed 132 points and settled at very crucial support point of 5980 . On the Equity Side we have

FII

16-Nov-2010

3157.02

3353.71

-196.69

DII

16-Nov-2010

1542.54

1092.95

449.59

FII were Net Sellers and DII were Net Buyers.
On the other Side if we see the options Data where all the action happens moreover most of the action over there is done by FII's.

• Nifty call options added 57.75 lakh shares in open interest whereas put options shed 4.00 lakh shares in open interest.

Options Data on 16-10-2010

There is lot CALL Writing happened at 6000 Levels with increase of  Open Interest of 27Lakhs meaning it will take RESISTANCE at these levels in coming days and also OI got increased for 6100 and 6200 means in coming days it will be tough to reach those positions.

In the PUT Side we have increase of OI at 5900 with Put Writing seen at 5900 and 5800 coupled with increase in OI expecting market not to go down and Taking a SUPPORT at these levels, though 6000 PUT writing happened many positions were closed as can be seen with decrease in OI of 8 Lakhs,similarly 6100 PUT and 6200 PUT had seen Decrease in OI .That means many PUT Writers closed there positions expecting that market might head south and there by limiting there loses.

Similarly we have seen Lot of CALL Writing at 6100,6200 meaning thatWriters are not expecting to go above in coming days...

Looks like it might Trade in 5900+ to 6100 in coming days

On making good decisions..Norway Bank

Norway Central Bank Deputy Governor Jan F. Qvigstad gives a superb speech on the "On making good decisions". The speech revolves around how central banks make decisions and what makes a decision good or bad .
It cover the following areas:

• Independence provides a sound framework for interest rate decision

Most countries have now delegated the task of ensuring price stability to the central bank. The government has set an inflation target for monetary policy and delegated the operational conduct of monetary policy to Central Bank

The Norwegian economist Finn Kydland received the Nobel Prize for economics in 2004 for having shown that on the whole, monetary policy decisions are better if policymakers delegate interest rate setting to an independent central bank under a clear mandate

• We make decisions under uncertainty

Independence alone does not guarantee good decisions. Even if an independent central bank is better positioned to avoid having short-term expediency and changing preferences dictate interest rate policy, its decisions must be made under considerable uncertainty.

“Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape”....Alan Greenspan

• Groups often make better decisions than individuals

Contestants on the television game show Who Wants to Be a Millionaire? have various so-called “lifelines”, including telephoning a smart friend or asking the studio audience for help. It has transpired that the studio audience is the contestants’ absolute best bet. The majority of the studio audience votes for the correct answer nine out of ten times, beating out smart friends, who provide the correct answer only 65 per cent of the time

• But groups are no guarantee for good decisions

The deliberative process does not necessarily lead to a better decision. When the group members share the same world view and thinking, groupthink can lead the members astray. There is typically little dissent in discussions where participants think alike. The group can therefore be convinced that their common standpoint must be right.

• How do we arrive at a decision?

There two approaches: premise-based or conclusion-based. The two approaches may have different outcomes. Many will favour the premise-based approach because it gives weight to the underlying basis for the decisions we make.

• Was the decision good?

The objective of monetary policy is a natural place to begin our assessment. Have we or have we not achieved price stability? Even if we make our best efforts, there is no guarantee that we will succeed in reaching this objective. The key policy rate is not the only factor affecting the economy and that can disturb the outcome.