The Indian Demonetization Gambit

On the evening of November 8th 2016, the Indian PM Narendra Modi mounted an offensive, one that caught many off guard. Starting the very next day, currency notes of the 500 & 1000 Rupee denominations would no longer be valid legal tender. The high denomination notes can be exchanged by the end of the year, deposited in bank accounts or spent on government utility bills but each such transaction will require an ID proof. In the course of a 40 minute speech, PM Modi touched upon the need to tackle unaccounted and counterfeit money circulation and gave out a strong signal to tax evaders that the state can call their bluff and be a step ahead of them. I was just getting started for the day while on travel out of India and there I knew the first question of the following day’s meeting “How do you expect demonetization to work?”. Damn! I had 8 waking hours to think of an answer while income tax evaders in India counted their cash. I managed to get through that question with some spiel and logic that none of my education had prepared me for. In fact, getting away with the ego bruised was a good result in my own estimate. So, with the ego intact, I spent the better part of the evening watching America vote Trump into the presidency over food and drinks. Fortunately, I’ve had some time since then to compose my thoughts and this post is an effort at working through as many angles. Let me warn you that this is a long note and a mug of strong brewed coffee would surely help.

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A change of guard at the Reserve Bank of India

It’s time for change in the way that the Reserve Bank of India will set monetary policy and we’ll get a sense of how that’ll pan out starting this Tuesday, 5th of October. Breaking from hallowed tradition, the central bank shall now discuss and set monetary policy measures within the confines of a new Monetary Policy Committee (MPC). The MPC is to comprise 6 members, 3 from the bank and 3 nominees of the government. There is indeed a lot of excitement that this change has brought in its wake. I’ll not be surprised if we have all variety of economists and writers talking about the Hawks and Doves in this MPC. Continue reading

Going sub zero with interest rates: Weird is now normal for monetary policy

Would you pay someone to borrow money from you? Rest easy, I’m not hinting at the prospect of a mafia don on the other side of the transaction. Rather, would you pay your central bank 100 bucks today in return for 99 bucks a year from now?

Those of you who think I’m laying out a scam, ease up and don’t get your panties in a bunch. Sample these news stories instead.

“German consumer goods group Henkel sold € 500m of two-year debt with a yield to maturity of minus 0.05 per cent while French pharmaceutical business Sanofi sold € 1bn of three and a half year debt, also at a yield of minus 0.05 per cent”

“Roughly €706 billion of Eurozone investment-grade corporate bonds traded at negative yields as of September 5th or over 30% of the entire market, according to trading platform Tradeweb, up from roughly 5% of the market in early January”

“Around $13 trillion worth of bonds traded with a negative yield in late August, according to J.P. Morgan Asset Management. At the beginning of 2014, the figure was close to zero” Continue reading

Reflections on China’s Stock Market Bubble

“We must deepen economic system reform by centering on the decisive role of the market in allocating resources….” —  President Xi Jinping, “The Decision” of the Third Plenum, Nov. 2013

“What people don’t realize is that China papered over its last two credit bubbles, those in 1999 and 2004. The banks were never bailed out – they just exchanged their bad loans for questionable bonds from quasi-state organizations.”  — James Chanos of Kynikos Associates

Last Monday – the 27th of July, was a disaster for the Shanghai stock market. The greatest one day decline in 8 years wiped out 8.5% of market capitalization. The plunge rang the curtains down on a six day rally – one that was clearly engineered by the government to arrest a freefall starting late June, wiping out some US$4 trillion or almost a third of the value of the A-shares market in three weeks.  Amidst all the panic, what is conclusive is that neither the incredible bull run nor the dramatic fall in prices reflects the underlying performance of listed companies. Continue reading