Ajay Shah's blog

Interesting readings

2009-11-21T02:17:00.001+05:30

Tackling systemic risk is no job for the status quo by William Donaldson and Arthur Levitt, in the Financial Times.
Short-Selling Bans around the World: Evidence from the 2007-09 Crisis by Alessandro Beber and Marco Pagano. The abstract reads: Most stock exchange regulators around the world reacted to the financial crisis of 2007-2009 by imposing bans or regulatory constraints on short-selling by market participants. We use the large amount of evidence generated by these regime changes to investigate their effects on liquidity, price discovery and stock returns. Since bans were enacted and lifted at different dates in different countries, and in some countries applied to financial stocks only, we identify their effects with panel data techniques, and find that bans (i) were detrimental for liquidity, especially for stocks with small market capitalization and high volatility; (ii) slowed down price discovery, especially in bear market phases, and (iii) failed to support stock prices..
A story on regulatory impact assessments.
Mahesh Vyas on improving disclosure.
Let bidding begin in the market by Rajesh Chakrabarti, in Financial Express.
Ashok Desai in Business World on the scandal that is ULIPs.
Sanjeev Sanyal in Business Standard on making Bombay work.
At 250 kph, the Bombay-Delhi distance of 1200 km is covered in 5 hours. At 376 kph (which the Chinese are implementing today), it's roughly 3 hours. If that sounds exciting, read Bullet trains for America? by Mark Reutter.
A pair of articles from The Economist on India and capital controls: A world apart, and Raining on India's parade.
Anita Bhoir in Mint on the proposed Standard Chartered IDR.
Looking back at Indira Gandhi: Ila Patnaik in Financial Express, and Shekhar Gupta in Indian Express.
A great collection of pictures about the Berlin Wall. Do not miss the symbolism of #34, where Lech Walesa starts the toppling of the dominos.
New York Times blogs on weight loss and exercise; you might like to also see my page on this which has a framework within which the NYT blog post can be placed.
India's dirty role in Sri Lankan war by Brahma Chellaney in [covert].
Terror in Mumbai, a documentary on HBO on 19 November.

The problems of big banks

2009-11-19T00:43:00.002+05:30

I wrote an article in Financial Express titled The problem of big banks. On this subject, also see:

In the world of banks, bigger can be better, Charles Calomiris in the Wall Street Journal.
A three-way split is the most logical, by John Gapper in the Financial Times.
Narrow banking is not the answer to systemic fragility by Charles Goodhart.
See the section titled Regulatory and legislative reaction and the foreign exchange market in Lessons for the foreign exchange market from the global financial crisis by Michael Melvin and Mark P. Taylor on voxEU.

Prescience

2009-11-19T00:01:00.001+05:30

Count Sergei Witte was an important figure in czarist Russia in the early 20th century. In October 1905, he wrote a memorandum to the Tsar summarising his view of the political unrest in the aftermath of the Japanese war. In it, he said:

The idea of civil freedom will triumph, if not by way of reform then by way of revolution. But in the latter event it will come to life on a thousand years of destroyed history. The Russian rebellion, mindless and pitiless, will sweep everything, turn everything to dust. What kind of Russia will emerge from this unprecedented trial exceeds human imagination: the horrors of the Russian rebellion may surpass everything known to history. A possible foreign intervention will tear the country apart. Attempts to put into practice the ideals of theoretical socialism -- they will fail but they will be made, no doubt about that -- will destroy the family, the display of religious faith, property, all the foundations of law.

How many other paragraphs can you think of, where someone peers into the unknowable, and largely sees the next 100 years right?

I saw this in Nicholas 2 Signs the October Manifesto by Richard Pipes, in I wish I'd been there, edited by Byron Hollinshead and Theodore K. Rabb, Pan Books, 2008.

Mobile phones and economic development

2009-11-08T14:34:00.004+05:30

The CMIE Consumer Pyramids data shows that in all their income categories, more than 50% of households have a mobile phone. It is only in their bottom category `Lower Middle Income - II' that only 37.5% of households have mobile phones. From `Higher Middle Income - III' upwards, the incidence is above 80%. If you had asked anyone in 1999 or 1989 whether this could be done by 2009, the answer would have been in the negative.

With broadband Internet, in contrast, India has not got such breakthroughs.

The September 2009 issue of Finance & Development has a story on the impact of mobile phones for development. In India, there is a lot of merit in using new technologies and players to break with the comfortable stagnation that's enveloped finance.

The Economist has a beautiful section on mobile phones and development: on Chinese progress on network hardware, broadband, on the impact on development, a retrospective, looking forward, and an enthralling piece on the cost reductions by firms in developing countries. Now all we need is for Indian finance to go the way of Indian telecom (and airlines).

Anand Giridharadas, writing in New York Times, describes new developments in distance education. India is the place in the world which would be the biggest beneficiary from distance education, given the combination of lots of young people and a dismal education system. This does require broadband to go the way mobile phones have. I often joke that the task of an economics undergraduate education in India should be to get a person to the point where he or she can read my blog :-) (and cynics respond saying that most of the teachers of economics in India can't parse my blog).

Anne Eisenberg has an article in New York Times about researchers at UCLA trying to use cell phones to do medical diagnosis. Given the ubiquity of cell phones in India, these could be useful lines of attack for us.

East Europe after 1989

2009-11-07T09:09:00.005+05:30

I have an article in Financial Express where I look back economic development in Eastern Europe in the last 20 years, and compare and contrast with India.

In recent weeks, a lot of very interesting writing, looking back at 1989, has come out. My suggestions for further reading follow. Readers of age 40 and below should try particularly hard to read these and other materials so as to comprehend these earth-shaking events. These events matter because they have had a huge influence on the world that we see today. And, they matter because they help us think more effectively about the drama that will come about in China in coming years.

1989! by Timothy Garton Ash in The New York Review of Books. Am eagerly waiting for part 2 of this. Also by him in The Guardian: This tale of two revolutions and two anniversaries may yet have a twist (May 2008) and 1989 changed the world. But where now for Europe? (now).
A great story of the big day by Alison Smale. Also see Serge Schmemann.
The unknown war by Matt Welch on reason.com. We feel this intuitively, but the statistics are stunning:

In 1988, according to the global liberty watchdog Freedom House, just 36 percent of the world's 167 independent countries were `free,' 23 percent were 1partly free,' and 41 percent were `not free.' By 2008, not only were there 26 additional countries (including such new `free' entities as Croatia, Estonia, Latvia, Lithuania, Serbia, Slovakia, and Slovenia), but the ratios had reversed: 46 percent were `free,' 32 percent were `partly free,' and just 22 percent were `not free.' There were only 69 electoral democracies in 1989; by 2008 their ranks had swelled to 119.
A beautiful section from The Economist:
Walls in the mind;
So much gained, so much to lose;
The man who trusted his eyes;
A globe redrawn;
Less welcome;
Keep calm and carry on;
Wall stories;
Down in the dumps
The peaceful revolution of 1989 by Adam Roberts in The Independent.
Brain drain in reverse behind fallen Berlin Wall by Carter Dougherty, in the New York Times.
A slideshow by Erik Berglof which summarises the Transition in crisis? report released by the European Bank of Reconstruction and Development.
My take on the new dangers that we face today.

Governments taking over banks

2009-11-05T23:07:00.001+05:30

Jerry Caprio and Ila Patnaik, at two ends of the world, on the same subject.

The UK Special Resolution Regime has excellent documentation on the web.

There is a lot of talk in India about financial stability, where basic ideas are distorted to defend the status quo. Financial stability is, sadly, not interesting to the establishment when achieving it requires undertaking economic reform. One example of this is the problems of closing down failed banks or other financial firms: few things are more important to financial stability than the machinery of the bankruptcy process for financial firms. The best thinking on how to build deposit insurance is found in Chapter 6 of Raghuram Rajan's report. In the mid 1990s I was member of an RBI committee on reforming deposit insurance. There hasn't been any movement on this in decades.

Recent RBI moves in finance

2009-11-04T10:55:00.001+05:30

On 30 October, I had written a response, in Financial Express to recent RBI moves on financial reform. Here are a few other responses:

Anil Padmanabhan in Mint on the big picture.
An editorial in Business World, and Tamal Bandyopadhyay in Mint, on the PLR controversy.
An editorial in Financial Express, and a blog post by Bagdu, on freedom to open branches.

Interesting readings

2009-11-01T11:07:00.003+05:30

Sanjeev Sanyal in Business Standard : Building cities for 21st century India, Delhi (which leads you to delhinullahs.org), and Calcutta. Also see: The Sustainable Planet Institute.
Why investment banks were fated to be roadkill, in Financial Express by Viral Acharya.
On Mumbai's Streets, Cabbies Fight To Keep Passengers Uncomfortable by Eric Bellman in the Wall Street Journal. A simple emphasis on law and order would go a long way.
Green roots of recovery, by Ila Patnaik in Indian Express.
In Foreign Policy magazine, Steve Coll has a great article on how the US should think about its AfPak strategy. India has a lot at stake in ensuring that this works out right.
Brian Krebs is a columnist on computer security for The Washington Post. He has recommendations for customers -- and implicitly for banks -- on how to be safe when doing Internet banking.
Editorials in Financial Express on the confusion that arises in India owing to the pervasive use of year-on-year growth rates: 13 October and 14 October.
Andre Beteille, in the Telegraph, on The language of rights.
Rob Walker in the New York Times, on the frontiers of quantification of Indian music.
An editorial in the Telegraph on the disappointing perpetuation of censorship in various aspects of the Indian government.
In response to The museum of innocence by Orhan Pamuk: a review in the New York Times by Maureen Howard, review by Pico Iyer in The New York Review of Books, and Negar Azimi in the New York Times on the museum that goes with the book.
In the story of Microsoft vs. Unix, Windows 7 seems to have reached the point where, in David Pogue's words: ``Microsoft employees can show up in public without avoiding eye contact''. On another front, Microsoft seems to be losing the cell phone to the two Unixes playing in that space. See Daniel Lyons look back at Microsoft's last decade, and a great Bill Gates story by Joel Spolsky.
Baby you were born to run by Tara Parker-Pope, in the New York Times.

A conference on Indian pension reform

2009-10-31T18:32:00.003+05:30

IIEF Pension Policy and Business Conference, 2009.

Recent RBI moves in financial reform

2009-10-30T13:16:00.000+05:30

I have an article in Financial Express today where I try to interpret recent RBI announcements in financial reforms.

Looking back at Indira Gandhi

2009-10-30T11:29:00.002+05:30

Writing in Indian Express, Pratap Bhanu Mehta looks back at Indira Gandhi. He offers five lessons for today's Congress:

Leaders are more effective when they work through institutions rather than attempting to subvert them.
Sound economic policies are not a matter of simply projecting good intentions; they require a concerted understanding of the causal conditions that make for successful intervention.
Being personally secular is neither here nor there. The important thing is to fish in the treacherous waters of communal identification, from wherever it comes.
As the Punjab crisis demonstrated, when the state does not act impartially and in time, it sows the seeds of greater violence in the future.
Democracy is not just about the practice of popular authorisation. It is about a whole gamut of constitutional values that have to be zealously guarded.

India had a bad period from 1962 to 1977, of which the worst part was the Emergency. This period preceded Pakistan's worst years (Zia ul Haq's period, 1978-1988). Kamal A. Munir has an article in Financial Express about Pakistan where we see the sustained impact of those years.

India seems to have come out better from the dark period, partly because that period ended a long time ago and there has been more time for healing. In addition, in Pakistan's case, the Afghan wars and islamisation which began in Zia ul Haq's period have not yet ended. In some sense, Pakistan is not yet into the post-authoritarian post-conflict period of reconstruction of institutions, which began in India in 1977.

Regulation vs. micro-management

2009-10-26T13:17:00.001+05:30

Writing in Business Standard, Somasekhar Sundaresan reminds us that SEBI has greater powers than US SEC. I'm curious: Does the US SEC have the power (if it should so decide) to control what time trading should start and stop at all exchanges?

How evil is insider trading?

2009-10-25T16:48:00.000+05:30

I have long been a skeptic about State action against insider trading, which is believed to be widely prevalent in India. Writing in the Wall Street Journal yesterday, Donald J. Boudreaux has a nice scheme which can replace the existing policy framework.

New thinking on financial stability

2009-10-20T04:36:00.002+05:30

I have an article in Financial Express today, where I discuss RBI's take on financial stability, which sums up to the rejection of all recent thinking in India on monetary and financial reform, in the light of recent thinking on this subject at the US Fed and the ECB.

Movement on corporate bonds

2009-10-17T07:56:00.003+05:30

Shilpy Sinha and Swapnil Mayekar have a story in Business Standard offering some optimism about the corporate bond market. They point out that in the six months from April to September 2009, corporate bond turnover was Rs.1.6 trillion, when compared with Rs.0.5 trillion in the same period of the previous year.

SEBI has decided to force many market participants to do netting by novation at a clearing corporation when trading on the corporate bond market. From 1 December 2009 onwards, there will be two possibilities for a trading mechanism:

OTC trade, reported on one of the three trade-reporting systems, run by BSE, NSE and FIMMDA, or
Order book trade, run by BSE or NSE.

But regardless of how trading takes place, counterparty risk will be eliminated, and netting efficiency obtained, through the clearing corporations. This will be a big win compared with the awful settlement mechanism that's used today. It should reduce transaction costs on this market.

The deeper problems of corporate bonds remain:

The lack of a liquid GOI yield curve along with interest rate derivatives, so as to be able to layoff interest rate risk when holding a corporate bond portfolio,
The low values for loss-given-default, given the lack of a bankruptcy code and
The ban on credit derivatives.

The workaround for #2 is: to stick to trading in short dated bonds from issuers where the failure probability is very low. A workaround for #3 is: to utilise information about credit risk embedded in the stock price.

The right way to think about the corporate bond market is in the context of the Bond-Currency-Derivatives Nexus, which emphasises the interlinkages between the government bond market, interest rate derivatives, corporate bonds, credit derivatives, the currency spot and currency derivatives. All these markets have to achieve liquidity with active arbitrage. The key ingredient for getting there is unifying the regulation and supervision at SEBI. This should address the bulk of the problems of corporate bonds -- other than the problem of loss-given-default.

Interesting readings

2009-10-13T16:08:00.000+05:30

David Oakley reports on Brazil having made it to investment grade. This is their payoff to the immense progress that took place in the last decade in terms of fiscal, financial and monetary institution building. In many respects, India's starting conditions today are similar to where Brazil was before these reforms.
Robert Shiller, in Financial Times defends financial innovation, and Robert Cryan, in New York Times worries that Canadian banks missed opportunities in this crisis.
Chiraga Chakrabarty, in DNA, on the need for INR/EUR futures. Once INR/USD and INR/EUR futures are trading, futures on USD/EUR will close the currency triplet and ensure efficient pricing of all three.
Raghuram Rajan in Financial Times on the neat idea of requiring banks to hold debt capital that will convert into equity when two triggers are met.
Read about Larry Summers and the US economic policy process in New Yorker magazine.
Anil Padmanabhan has an important column in Mint on the mess that is shaping up on the Goods and Services Tax.
James Lamont describes the world's third largest producer of Gherkins: a firm named Global Green, out of Bangalore.
On TV, Vivek Law takes on the mess found in fund management products sold by Indian insurance companies.
Nell Minow in Financial Times with new thinking about corporate governance.
Ila Patnaik on RBI's next moves. Also see The good news, analysed better and This is no time for a rate hike.
Vimal B in Financial Express on the internationalisation of the Chinese yuan.
Jayanth Varma is scathing about the SEC's efforts at being motherly towards fat fingers.
India's New Capital Restrictions: What Are They, Why Were They Created, and Have They Been Effective? by Bryan J. Balin of The Johns Hopkins University School of Advanced International Studies (SAIS).
Alan Blinder thinks that we should all be long India.
Shubhashis Gangopadhyay pleads for the removal of capital controls against venture capital and private equity.
Counterfactual history, by Ramachandra Guha: Episode 1: What if Subhas Chandra Bose had returned home sometime after WW-II ended?.
How Sam Yin Chueh changed the world.
We have serious problems with freedom of press in India.

Did we get a good IIP number today? No.

2009-10-12T17:19:00.004+05:30

It seems that we got a good IIP number today? Here's what the year-on-year growth of IIP Manufacturing says:

Mar 2009	-0.30
Apr 2009	0.39
May 2009	1.84
Jun 2009	7.82
Jul 2009	7.41
Aug 2009	10.21

So it looks like a recovery is gaining traction, with yoy growth going up in each month from March 2009 till August 2009, other than a slight decline in July 2009?

No.

The year-on-year growth is, unfortunately, a highly misleading measure. Here's what we get when we look at the seasonally adjusted levels and the annualised growth of these:

	Seas.Adj.IIP	Ann.Growth
Mar 2009	296.64	1.62
Apr 2009	297.69	4.24
May 2009	299.08	5.59
Jun 2009	319.78	80.32
Jul 2009	320.81	3.84
Aug 2009	322.14	4.98

This shows a very different picture. It shows one big month -- June 2009 -- where seasonally adjusted IIP jumped from 299.09 to 319.78. This was an annualised growth rate of 80.32%. This was the month in which the recovery kicked in, where we jumped back from the low state to a better state.

After that, growth has dropped back to anaemic levels, with annualised growth of 3.84% in July and 4.98% in August. So today's data release was actually not so hot - it was just 4.98% growth (annualised) of seasonally adjusted IIP manufacturing.

Each value of the year-on-year growth rate is the moving average of the latest 12 values of the month-on-month growth. So this one big value of 80.32% is going to elevate each reading of yoy growth up, all the way until we calculate the yoy growth from May 2009 till May 2010. After that, we'll get to the yoy growth from June 2009 till June 2010 and this jump will go away.

You only get the true picture by looking at point-on-point changes of seasonally adjusted data.

Interpreting recent movements of the rupee-dollar rate

2009-10-12T02:16:00.000+05:30

In recent weeks, there has been a lot of focus on the appreciation of the rupee against the dollar. In an opinion piece in Financial Express today, I point out that the US dollar has fluctuated considerably in the period after September 2008, and interpret the recent events on the Indian currency market. At first, in the `flight to safety' into US government bonds that came about after the Lehman shock, the US dollar gained ground. As the global financial system has gained confidence, the reversal of this `flight to safety' has meant a concomitant decline in the US dollar.

These ups and downs of the US dollar have important implications for our intuition in India about the rupee-dollar rate. If we think the US dollar is roughly fixed, then the pursuit of an inflexible rupee-dollar rate can be interpreted as some kind of `stability'. But if the US dollar itself is a fluctuating yardstick, it is hard to justify efforts at RBI to obtain inflexibility of the rupee-dollar rate. When the dollar declines in value, an attempt at holding on to a rigid rupee-dollar rate is tantamount to forcing a rupee depreciation, and vice versa.

Greater flexibility in the rupee dollar rate will free up monetary policy to pursue the more important goal of stabilising the domestic business cycle. But along the way, for firms to learn to live with greater flexibility of the rupee dollar rate, well functioning currency derivatives markets are required. RBI needs to first step away from the present strategy of banning most of these markets, so as to be able to move forward to greater flexibility of the rupee.

On the macroeconomic arguments about the long-term decline of the US dollar, see Wolfgang Munchau in the Financial Times today.

2009 Economics Nobel Prize

2009-10-06T10:15:00.003+05:30

We'll soon get the announcement. Here are a few possibilities, computed by Thomson/Reuters, using citation analysis.

If I had to vote, it would be a Taylor/Woodford prize. For a sense of this work, see: link, link. While inflation targeting was invented in New Zealand based on the intuition of cleanliness in public administration, Taylor and Woodford had a lot to do with being able to think straight about it.

It's interesting to wonder how publicly visible citation data can be used to predict the Nobel prize outcome. One would want some kind of model which consumes citation data and comes up with an estimate of the Pr(Nobel prize). E.g. if one strong idea suffices (example: James Heckman) then it suggests certain people who will get through (example: Paul Romer). If they want you to build a broad literature (example: Robert Lucas) then that yields a different profile of those who will get through. Hmm, I can't come up with an example of another Robert Lucas. Such a modelling effort will yield insights on the usefulness of summary statistics of citation data such as the h-index and the g-index. As an example, it's easy to test which of the h index or the g index have superior predictive power in a model of predicting the Nobel prize.

For an analogy, it's easy to take firm data and fit an ordered probit model which predicts the credit rating. Once this is done, you're holding a black box which is able to look at firms, and come up with a real valued measure of credit risk. In similar fashion, once a model is estimated, which maps citation data and generates a real number from 0 to 1 (e.g. the probit latent variable), then it can be applied to a full database of all economists, and yield a measure of how Nobel-like each person is. This can be easily layered into Google scholar.

Most people in India think of Raghuram Rajan as being the first Indian-born economist who became the chief economist of the IMF. What is not widely appreciated is that in the class of economists of Indian origin who are younger than Amartya Sen, Raghu is the best set of papers, as measured by citations.

Bharti/MTN transaction, and India's problem of capital controls

2009-10-05T01:39:00.002+05:30

I have a piece in Financial Express today about the deeper linkages between the failed Bharti/MTN transaction and India's problem of capital controls.

The dual listing issue was, of course, not the only or even the main reason why the Bharti/MTN transaction failed. But it was an important impediment, and many interesting transaction structures could have been used if this constraint had been absent. And, the issues that I highlight in the article are applicable in a much broader range of situations. Unsigned reportage in Economic Times suggests that a few other people are also thinking similarly.

Also see reportage by Heather Timmons in the New York Times. Subhomoy Bhattacharjee in Financial Express has interesting views. Also see The legal aspects of dual listings, on the blog `Indian corporate law'.

For another story of Indian companies who are growing up, facing global competition, and hitting constraints of Indian public policy, see this story by Pallavi Aiyar about Jet Airways setting up their hub in Belgium.

The remarkable Indian automobile industry

2009-10-04T20:58:00.007+05:30

The automobile industry is an oasis in the Indian economy in terms of having high quality data. Commercial vehicles are of particular interest given that CV sales is a component of investment demand in the economy. Hence, we can learn something about investment demand in particular, and business cycle conditions in general, by looking at what is going on with CVs. If you try to draw a graph of the time-series of CV sales, you will find that this is very noisy. And if you convert it to year-on-year growth, this is not useful since each value of the year-on-year growth is a moving average of the latest 12 one-month changes. You'll pickup what was happening in the last year, and not what is happening right now.

Swaminathan S. Anklesaria Aiyar has an article in Economic Times on India's remarkable emergence as an exporter of automobiles. Mahesh Vyas has an article in Business Standard on the recent rebound in automobile production and sales. And, here's the link to the CMIE website on cars.

Let's look at global conditions. It's interesting to look at (seasonally adjusted) US data for sales of automobiles. Possibly helped by the cash-for-clunkers program, this data shows a strong bounce, back to the levels seen in early 2009. Click on the graph to see it more clearly:

Giovanni Veronese emailed me a fascinating graph, with seasonally adjusted data for Indian commercial vehicles. Click on the graph to see it more clearly. This is not quite comparable with the above, since it pertains to commercial vehicles and not cars. And, Indian exports are unlikely to have benefited from the US cash-for-clunkers program. All the three lines on the graph are seasonally adjusted levels, indexed to 100 for the production of January 2005. The red line is for Indian exports. It shows a very high rate of growth - a roughly 50% rise over the period from 2005 to early 2008. This is the incredible rise of India as an automobile exporter, the story told by Swaminathan S. Anklesaria Aiyar. Unlike sales of cars in the US, this has not recovered to pre-crisis levels.

The green line is domestic sales. This shows a recovery similar to that seen in the US - back to the values much like those seen immediately before the crisis, but without a cash-for-clunkers program being run by the government.

The blue line is automobile production. It shows savage cuts in production executed by the industry when the financial crisis appeared. This was unlike the standard script for downturns as we know them, where firms generally build up inventory when sales slow down. This time around, working capital financing in order to hold inventory was hard to find. I also think that the headlines and television dramatisation of the early stages of the downturn, accompanied by sharp movements in the prices of securities, were useful as an early warning system. This triggered off action by CEOs well before the full bad news came out through sales. As a consequence, there was very little inventory in hand, and production bounced back nicely when sales came back.

If the three indexes had continued to grow as they had done pre-crisis, then all three would have been roughly at values like 200 today (i.e. one doubling ahead of the values of January 2005). Instead, we're back to the pre-crisis level or worse. Exports are just a bit more than half the pre-crisis high. In the case of production, we're at a value of 130, which is significantly behind the pre-crisis level of 150.

It is really important to do seasonal adjustment, and then eyeball time-series of seasonally adjusted levels, in order to understand what is going on with these series. We've been updating a set of series every Monday morning, and releasing these as a public good.

Currency futures liquidity ahead of the forward market?

2009-09-23T02:26:00.007+05:30

At NSE, currency futures did $1.8 billion yesterday. With this, India is starting to look like a rare country where the turnover of the currency futures market is big when compared with the currency forward market. (Gurnain pointed out, in the comments to this post, that this is the case in Brazil. I'm not aware of any other country where this is the case).

Turnover is, of course, not liquidity. An exchange can fake liquidity by doing round-trip transactions which boost trading turnover. Liquidity is about the transactions cost faced when transacting. Liquidity comparisons between the OTC market and the futures need to take into account the fact that the OTC market trades bigger contracts. So, let's see what impact cost is visible in the information present on the web, pertaining to closing time (5 PM) on the 22nd. The quantities available at the best five prices are visible on the web. There is surely more available beyond the top five in the book, but you probably don't want to trade at those adverse prices.

Let's focus on 1000 contracts, or $1 million. Based on conversations, I get the sense that the forward market would have impact cost of 0.01% to 0.02% for this transaction size. The graph shows that the NSE contract had smaller numbers than this for both buying and selling.

(Click on the graph to see it more clearly). The futures market seems to be able to serve upto $6 million to a buyer and $2 million to a seller, while suffering reasonable values of impact cost, within the top five prices.

This is admittedly one data point. Late in the day, I noticed a big number for turnover and wondered what was happening to liquidity, so I looked at the `market by price' display visible on the web. But for a currency futures market to beat a currency forward market on liquidity is unusual by world standards, even if it is for one data point.This is particularly remarkable given the tiny window of operation that RBI has permitted for the futures market: all products other than INR/USD futures are banned, and participation by FIIs and NRIs is banne.

Interesting readings

2009-09-22T12:45:00.001+05:30

Writings about Lehman, in the broad Indian discourse, are a reminder of the low quality of the Indian economics discourse. Meghnad Desai looks back at a year after Lehman, in Financial Express. For a person who was in my father's class at M.A., he is remarkably free of socialist cobwebs of the mind. And, for other interesting treatments, see : see: Jayanth Varma in Financial Express, Dhiraj Nayyar in Indian Express, Andy Kessler in Forbes, Avinash Persaud on bankers pay in Financial Express.
P. Vaidyanathan Iyer in Indian Express on some thinking about the role and function of government agencies in finance that is afoot at MOF. Hmm, I could get used to a Financial Stability and Development Authority.
Subhomoy Bhattacharjee on India's capital controls and the proposed Bharti/MTN transaction.
Bibek Debroy on the role and function of the Chief Economic Advisor to MOF.
Sangeeta Singh and Rahul Chandran have an article in Mint on one of the most important infrastructure projects in India: the Bombay-Delhi freight corridor. It is going to work wonders in establishing the straight line connecting Bombay to Delhi as an axis of prosperity. See the CMIE Capex database on this.
The `trilemma of the international financial system' in India by Koji Kobayashi of the Mizuho Research Institute.
The Afghanistan impasse by Ahmed Rashid in The New York Review of Books.
In the New York Times, Steve Dougherty has a great idea: to walk through today's Warsaw trying to reach the locations of Alan Furst's great book The spies of Warsaw.
Does anybody here remember Vera Lynn?

You will

2009-09-20T09:48:00.005+05:30

In 1993, before the World Wide Web and before the commercial Internet, AT&T ran a set of television advertisements. They are visible on youtube. At first blush, a lot of it sounded wide eyed and futuristic. But to people who were in the field then, everything in the ad was reasonable and incremental; merely a matter of scaling up what had been figured out. It was a great time to be alive, those early days of the Net. To AT&T iphone customers of today in the US, almost everything in the ad is now reality.

A more gloomy version of the ad was floating around:

Have you ever received an automated sales pitch,
while you were still in your pajamas?

Have you ever had thousands of calls all over
the world charged to your stolen account number?

Have you ever had your paycheck deleted
by faceless intruders from across the globe?

Have you ever had an employer know more about your
whereabouts and activities than your spouse?

Have you ever been snuffed to dust by a
satellite laser while lying on the beach?

YOU WILL

And the company that will bring this to you
is AT&T.

This was a post on rec.humor.funny on 20 April 1994. Everything in this dystopic vision came out true by 2009 too, other than the last one.

5th research meeting of the NIPFP-DEA Research Program - website is up

2009-09-15T23:08:00.002+05:30

The bulk of the papers and slideshows in the 5th Research Meeting of the NIPFP-DEA Research Program are now up on the website. (A few stragglers are still trickling in).