Our very own Central ‘Bonkers’
The idea of a rate cut should be simply thrown out of the window

If one were to have asked a central banker some decades ago about what does he really do nine-to-five, then it wouldn’t have been a surprise to find him gaping into the blue trying to figure something out of his seemingly foggy and blurred lexicon of responsibilities. Compare that to a ‘2007 generation central banker’ who would bombast that he gets paid for ‘inflation targeting’. Today’s central bankers have a very barefaced mandate to fight inflation with a hammer and tongs philosophy. But classically, the recent times have had central bankers – especially Ben Bernanke with his Fed coterie – go bonkers by crossing this line, what with rate cuts being unbelievably suggested! What is being rooted for is quite reminiscent of the post-crash years at the beginning of the millennium and a pick from former Federal Reserve chief Alan Greenspan’s manual – a rate cut – at this juncture of time might just seem like a saving grace but could well go down in history as one that got the house down. Lights on! Year 2001 – the invigoration of the largest economy on Earth, the United States, goes on in full swing with a series of rate cuts. Unfortunately, the trouble that we are in now can be backtracked to the very same year. In this year, with the Fed and other central banks cutting rates like there was no tomorrow, the whole world went on a binge. The cheap money floating around not only went on to fuel bubbles across asset classes, but also triggered inflationary pressures. Th en there was a series of rate hikes to fire-fight inflation, which stemmed the long streak of cheap money sending the financial and asset markets in a tizzy. Rising interest rates saw the US housing sector cripple and defaults crashing through the roof. Over indulgent bankers that extended credit to sub-prime borrowers saw their assets turn bad as interest rates continued to rise. Well, if the recent crisis were given a chance, then it would choose Greenspan as its most accurate alibi.

Today, we live in a world so intertwined that a financial contagion has an astounding probability of making it to the farthest and most alienated places of Earth. Did anybody say financial inclusion? Well, for whatever, the recent subprime shake out has been a crisis of sorts; and how far have the Asian giants been exposed is a question worth pondering over, considering the increased role of Asia in the global financial system. Well, there’s no doubt that the aftershocks of US sub-prime have traversed far enough and hit the Asian shores, which is quite palpable from the widening bond spreads shown in the charts. But one has to consider the following. The external debt of Asian economies has reduced significantly – placing them strongly against hasty capital outflows and currency depreciation. External debt as a percentage of GDP for emerging East Asia and other Emerging Asia has fallen by almost 10% & 5% (approx), respectively. Again, if one takes into consideration the government balances, one would find that fiscal prudence has been noteworthy. While emerging East Asia as a whole has reduced its fiscal deficit from almost 2.5% in 2001 to just above 1% in 2006, the other Emerging Asia as a whole has seen a significant dip in deficits by almost 5%. Moreover, towering Forex reserves of major Asian economies provide them with the much needed cushion against currency depreciation, which the Asian economies lacked during the Asian Financial Crisis years. Finally, the buoyancy of growth and robust consumer demand might off set any hardship to a large extent. As Ping Chew, Credit Analyst, Standard & Poor’s, explains, “Asian economies have improved their banking systems, reined in fiscal deficits, brought down external debts, built up foreign exchange reserves, and improved their current account balances.” The fact is that the Asia that we see today is fundamentally better armoured than the one in the late 90s. And one hopes it remains that way, unless of course, our brilliant regulators wake up! thin line wherein the liquidity injection has been in the form of overnight lending to the banks. Th is has not only re-liquefi d the market, but has ensured that the Fed and other central bankers (along with the cut in the discount rates) do not have to entail a broad based liquidity expansion. Craig Alexander, Vice President & Deputy Chief Economist, TD Bank Financial Group, comments, “This time, there are no rate cuts as we saw in 2001, so the liquidity expansion hasn’t been as broad based. The way liquidity is being injected is through repos, which means the central bank will buy them back in few days. So, the money will not remain in the system and will not fuel markets or it won’t be inflationary pressures.”

But a possible cut in interest rates carries problems like markets again getting supplied with cheap money fuelling more bubbles and most excruciatingly fueling inflation. Asking for a rate cut at this point in time will bring some relief, but it will again lay the foundations for another crisis of this sort in the future, but with even more debilitating effects than what the world is experiencing now. John Hawksworth, Head of Macroeconomics, PricewaterhouseCoopers, UK, voices, “There does not appear to be an immediate need for a cut in the key Federal Funds rate, although this might be considered at the Fed’s next scheduled meeting on September 18, 2007. Any such decision to cut rates should, however, be based not just on financial market developments but on broader economic fundamentals of relevance to the outlook for growth and inflation in the US economy.” The prudence that has been displayed by the Fed and other central bankers might just go down the drain if they rope in a rate cut, which is anything but wise. At this juncture, a rate cut could well end up as our ‘fate’ cut! Period!

The next time US markets crash, chill!
Definitely, today’s Asia has outgrown the Asia of late nineties for the better

Today, we live in a world so intertwined that a financial contagion has an astounding probability of making it to the farthest and most alienated places of Earth. Did anybody say financial inclusion? Well, for whatever, the recent subprime shake out has been a crisis of sorts; and how far have the Asian giants been exposed is a question worth pondering over, considering the increased role of Asia in the global financial system. Well, there’s no doubt that the aftershocks of US sub-prime have traversed far enough and hit the Asian shores, which is quite palpable from the widening bond spreads shown in the charts. But one has to consider the following. The external debt of Asian economies has reduced significantly – placing them strongly against hasty capital outflows and currency depreciation. External debt as a percentage of GDP for emerging East Asia and other Emerging Asia has fallen by almost 10% & 5% (approx), respectively. Again, if one takes into consideration the government balances, one would find that fiscal prudence has been noteworthy. While emerging East Asia as a whole has reduced its fiscal deficit from almost 2.5% in 2001 to just above 1% in 2006, the other Emerging Asia as a whole has seen a significant dip in deficits by almost 5%.

Moreover, towering Forex reserves of major Asian economies provide them with the much needed cushion against currency depreciation, which the Asian economies lacked during the Asian Financial Crisis years. Finally, the buoyancy of growth and robust consumer demand might off set any hardship to a large extent. As Ping Chew, Credit Analyst, Standard & Poor’s, explains, “Asian economies have improved their banking systems, reined in fiscal deficits, brought down external debts, built up foreign exchange reserves, and improved their current account balances.” The fact is that the Asia that we see today is fundamentally better armoured than the one in the late 90s. And one hopes it remains that way, unless of course, our brilliant regulators wake up!

Who’s saving?
Financial inclusion is the key...

(column by Gyanendra Kashyap)

‘Inclusive Growth’ is perhaps the much touted concept in the economic forums, and this can be amicably achieved through ‘financial inclusion.’ The good old days of funding the burgeoning need of credit by means of sale of surplus government bonds & securities (which banks held in excess of the minimum statutory requirements) may be over. Undoubtedly, this presents immense opportunities for the banks, but as statistic suggests, as of March 2007, the commercial banks holding in SLR had declined to 28%, as compared to 42.7% in April 2004; given this fact, banks must move beyond mere selling of securities & bonds. Amidst this scenario, financial inclusion provides a much more viable option. For the uninitiated, financial inclusion implies widening of the deposit base for the banks. The mechanism would necessarily bring in more and more financially excluded people under the gamut of banking services.

“No frill account is a welcome measure targeted at financial inclusion of such a huge base. Such measures are needed, as these will not only help the low income households but will also provide the banks with necessary resources to expand credit,” says Suresh Nanda, Regional CEO, ING Vysya Bank. The credit-GDP ratio, which as of March 2007 stood at 51% (the credit GDP ratio in March 2000 was 30%) apparently seems to be impressive; yet, on grounds of comparison, it remains much lower than major East Asian Economies. Consider the credit GDP ratio of Malaysia (144%), Singapore (71%), Thailand (111%) & China (136%) and it becomes very clear why much ground needs to be covered. Look at it from whichever perspective, the answer is financial inclusion...

Missed by a mile!
Only the chosen ones to be benefited

First Qualified Institutional Placement (QIP) route and now Fast Track Issuance of Securities (FTIs) and perhaps much more later. Acting on the recommendations of Primary Market Advisory Committee, the market regulator Securities and Exchange Board of India (SEBI) has introduced FTIs, which will help the listed companies (satisfying certain criteria) to raise capital in a faster, yet cost effective manner. Companies listed on BSE or NSE for at least three years with more than Rs.100 billion of average free fl oat market capitalization can avail of the relaxed norm, go for public issues under FTI and feed its budding appetite for expansion. The companies complying with the requirements will also be eligible for “rationalized disclosures as well as simplified procedural requirements.” Without an iota of doubt, the mechanism adopted is a welcome sign as it will significantly cut down the follow-on issue time, open the capital market, put the equity fl oat on a fast track and make the market very efficient for fund raising. Analysts are of the view that the move will primarily benefit the blue chip, top tiered companies. Their views cannot be totally denied, as analysis show that a mere 30-35 companies listed on BSE & NSE have a free fl oat market capitalization of Rs.100 billion or more (unfortunately DLF, which qualifies on the m-cap criterion, fails on the listing tenure). Prasuna Venkatesh of P.N. Vijay Financial Services, says, “The Rs.10,000 crore cap is very stringent as it will enable only a few companies to avail of the route for fund raising. Companies having m-cap of more then Rs.10,000 crore are cash rich companies, there is nothing for the mid cap and small cap companies who ideally require the funds.” Clearly, the failure of OTC & BSE Indonext raises questions on success of FTIs. The failure of BSE Indonext primarily due to the stringent norms (entry norms, asset base, exclusively listed on regional stock exchanges et al) should act as a reminder for the market watchdog. Unless the regulator offers advantages for smaller companies, there are fears that FTIs will meet the same fate....

(End of Gyanendra Kashyap column)