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It was an interesting session on " "Is world economy on path of recovery " with wonderful speakers giving all insights on the recovery and the vibrant audience.
I thank you all for making the 1st session of Discussion forum a success. :)Thanks Mihir,Purnima and Raghunandan and offcourse the smart batch of 2011.

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Link- http://www.easy-share.com/1908470658/Has World Recovered from Recession-1.ppt

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Enjoyy Discussing!!

RBI buys Gold from IMF

The central bank of India,RBI has bought 200 metric tonnes of gold from IMF in $ 6.7 bn $.India is now the 10th largest holder of Gold Reserves.
The big question is the reason behind such a move.Is it a move to diversify its reserves (Yes!! the rising deficit of US and declining Dollar) or to have more say in IMF or ....?Lets uncover the reasons of this move by RBI and its effect on market of gold,BOP outlook of India,financial market...

Bharti-MTN Deal

The $ 24 billion Bharti- MTN merger deal has become an issue of international finance ,as South African Govt wants the dual listing of the merged company . The positive signals by the UPA Government like the support of Pranab Mukherjee and initiative of PM Manmohan Singh in G 20 summit can be inferred as the start of major leap in the direction of capital account convertibility. If deal goes through, MTN will hold 36 % in Bharti Airtel and Bharti will acquire 49 % in MTN.
The dual listing of the merged identity in both Bombay Stock Exchange and Johannesburg Stock Exchange requires full capital account convertibility of Rupee. This implies that the equity share of Bharti Ltd can be bought and traded in South African Rand. Till now the cross listing of companies was allowed which implied partial convertibility. The equity shares were issued to the custodians outside India, which were issued in the form of GDRs/ADRs to foreign investors. The ADR/GDRs can be converted to equity shares on the request of investors but once converted; they cannot be changed to ADR/GDRs.
What does the dual listing have implications for India Inc? Is it feasible for India to take such a major step at this stage (when the conditions laid by Tarapore Committee are far beyond realization)?

G 20 Pittsburgh Summit

The G20 club of rich and developing economies will hold a two-day leaders summit in Pittsburgh on 24-25th September’09.
G 20,the group of developed and emerging markets ,comprising of US, India , Argentina, Australia, Brazil, Canada, China, France, Germany, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, Britain and the EU. The group of countries accounts for 90 percent of the global output and 80 percent of world trade.
The proposed key issues to be discussed are the Doha round, management and regulation of World bodies like IMF, rebalancing of power within nations.
US meet to discuss the plan to build a more balanced developed economy, a framework to boost the savings in US and reduce the export surplus of Countries like China.
The developing countries will seek more say in world bodies like IMF, World Bank International Fin Corp. India has committed to invest up to $10 billion in the IMF to enhance its say in IMF.
Important and diverse issues are on cards. The result of the summit can hold solution to key problems looming over the world trade and growth.
And as the world leaders meet, the world watches..

India: An emerging source for FDI?

Outbound Foreign direct investment from India has increased at annual growth rate of 64 per cent in the last five years. India's FDI to the US was USD 4.5 billion in 2008 and USD 2.8 billion in 2009.Inbound FDI showed a 56 percent increase to USD 3.51 billion from USD 2.25 billion in the year-ago month.
Increasing outbound FDI establishes India as a key global player. It can be for increasing focus on geographical expansion, transfer of technology, access to raw materials and moving up the value chain. But it definitely points towards as start of reversal of power relations between countries.

L,V,U OR W-SHAPED RECOVERY?

Will the most common word spoken, dreamt, dreaded, discussed, analysed, lived-“recession” will be out of people’s dictionary or stay for a long period before we could see some change in the economy and hear the most awaited word ”recovery”?

Recession is defined as “two consecutive quarters of negative growth”. The world economy entered into deep recession in the last quarter of 2008. The global trade and the industrial production saw its sharpest decline in the post world war era. Officially, recession was declared in US in December 2008 while UK announced in January 2009. What followed was a mere guess – declining production, rising unemployment, falling household consumption and declining investments.
So with the world economy showing some positive signs(green shoots), the question taking rounds is whether it will be L,U,V or W recession.

Now let me explain the meaning of alphabets in present context? V shaped recovery means economy will bounce back from recovery with a bang and recovery will be strong. In U shaped recession, trough is not well defined like V shape. W shaped recovery means sharp decline, followed by a sharp rise back to the previous peak, followed again by a sharp decline and ending with another sharp rise of output. L shape means that output does not return to its pre recession level and grow at permanently lower path.

What are the indicators? Stocks Index, Commodity prices, Industrial production, employment, growth etc.
According to Ranjeet, the magnanimous stimulus and fiscal measures that has created deep hole in government’s pocket all over the world has started showing positive signals. The industrial production in US grew by 0.5% in July 2009, the first increase in nine months. The UK economy contracted by only 0.8% in the second quarter this year much lower 2.4% contraction of the first quarter of 2.4% contraction. The French and German economies both grew by 0.3% between April-June while Hong Kong emerged out of recession posting 3.1% growth during the same period. China's economy grew at an annual rate of 7.9% in the second quarter this year up from 6.1% in the first quarter. So can we say it’s a U-shaped recession? A U-shaped recession illustrates a rather long and deep bottom with recovery being seen in about 2 years.

But Neha Bhatt rules out V shaped recession as it’s already over one and a half year since the onset of the one of the biggest recession. A V-shaped recession illustrates a steep decline, a relatively short stay at a bottom and a rapid recovery in a period of 8-10 months as was the case with the 2001 recession.
Further, Ranjeet observes that many economists reports that the signs of revival are temporal and a true revival is still far away. The households are still cautious and in savings mode delaying their consumption. The weak recovery in demand is still stopping the producers from huge capital investments. Large fiscal deficits and its debt financing leading to rise in bond rates and capital flight is causing crowding out of private investments. Given all these, it seems the recent signs of recovery are just an oasis with the true recovery still far away. The fear of a double-dip recession can thus be not ruled out in the current situation. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession also known as W-shaped recession.

Only time will decide whether it’s a L, U, V or W-shaped recession.
What according to you will be the shape of recovery? and why?
Different indicators indicate towards different directions. According to you, which indicator gives better insight about the recovery?

New Exim Policy (2009-2014) - Some issues for review

This will be interesting news today. Commerce and Industry Minister Anand Sharma has many concerns that he would need to address. Let me put forth some of them

1. Increasing protectionism in the developed world especially wrt primary articles of exports. Does India need to worry?

2. The increasing services exports game...the BoP components of business services that we discussed. Does the new FTP have an agenda for the services sector?

3. Given the fact that India has not been a great export oriented economy, do we look forward to major changes that will make us so?

4. China's economy is set to take a new place in the coming years..does our FTP have to exhibit a China focus?

5. There is news that the FTP may explore Latin American and African markets especially with respect to traditional exports? Do we have competitive advantage?

Will look forward to your responses based on the new Exim Policy being unveiled today (Aug 27, 2009)

Archana

Decoupling: A Reality or a Myth???

A couple of years back ( late 2007), before the market meltdown, when it was just an ordinary recession, there was a theory that the big emerging markets (BRIC: Brazil, Russia, India, China) were "decoupled" from the US economy(& other developed economies). Decoupling holds that European and Asian economies, especially emerging ones, have broadened and deepened to the point that they no longer depend on the United States for growth, leaving them insulated from a severe slowdown there, even a fully fledged recession. But in reality, Economies have become more intertwined through trade and finance, which should make business cycles more synchronized. The slide in emerging stock markets (in 2008) on Wall Street's fall seems to support this view. These people on the blue channel suddenly have, forgotten about Decoupling and are seldom find giving the statement that::

“When America catches cold( & not swine flu), rest of the World starts sneezing”.

Have these white collared people forgotten their statements made a couple of years back???

Decoupling does not mean that an American recession will have no impact on developing countries. That would mean too impractical. Such countries have become more integrated into the world economy (their exports have increased from just over 25% of their GDP in 1990 to almost 50% today). Consumption is gaining more weight in the US economy. For example, it contributes about 72 percent to the GDP of China. The complex web of financial transactions, makes the global economy tightly coupled. The “decoupling” argument became the latest big idea to shrink dramatically when tested in the real world (provided if we leave out Chile which still reported a GDP of 8%+ in FY2008). Decoupling was all the rage early last year when international financial markets all but ignored the increasing turmoil in the U.S. economy and stock market. However, some advocates of this theory still believe that the basis of comparison they selected got them into trouble. U.S. economies that were showing wear and tear then were those to which the rest of the world would never be heavily exposed. The U.S. slowdown was driven almost entirely by housing, it made sense that the rest of the world kept right on going. Housing is a domestic story which was strangely linked to the entire world.

The rise in risk aversion is global and will have an impact on credit terms and availability everywhere. And we're finally seeing evidence that the U.S. job market is losing steam and consumer spending is slowing. It was only through economic liberalization (LPG 1991-92) that the economies of Asia were able to grow as fast as they have, allowing for the development of conspicuously consuming middle classes. This resulted in opening up of economies ( i.e. trade, finance etc) and therefore rise of inter-dependence.

The new Asian consumers may not be able to compensate for all of the exports that would be lost during an American recession( the textile sector which depended heavily on exports is already facing problems and their voices for an exclusive severance package keeps on rising with time).

The irony is that these economies are more coupled with the rest of the world than they ever were in the past.

Currency carry trade.

Currency Carry trade.Started with the Japanese Yen, continuing with US Dollar and can start with Chinese Yuan. The interesting observation is that it has the huge capability to effect the direction and magnitude of global capital flow. (BIS Survey on “Evidences of Carry trade”, September,2007) .
What is currency trade? Currency carry trade i.e. borrowing short term loans in low interest currency (funding) and investing in high yielding currency (target). The three conditions to ensure profitability are stable funding currency, interest rate differential and appreciating target currency. It provides liquidity in the target currency country, thus reducing the cost of capital for that country. It comes to emerging market mainly in the form of FII, providing much needed liquidity in the countries. According to Kotak Mahindra Bank, the increase in FII 15.8% in 1st quarter of 2009 can be attributed to Dollar carry trade. It provides better investment opportunities for the investors worldwide.
Sounds harmless, right?
Carry trade is a wave, until it turns into a tsunami by unwinding. Any expectation of target currency depreciation, funding currency appreciation and decrease in interest rate differential can lead to massive sell off of the target currency, crashing the stock markets. As can be seen from major stock market fall of 2007 and 2008, when the appreciation of Yen took place, even Japan’s economy was deep in recession. The recent fall in Nikkei is also being attributed to the unwinding of Yen carry trade.
The evidences of carry trade are everywhere. The continuously falling Dollar Index, the foreign holding of Japanese reaching 7 year high and China issuing dollar denominated bonds etc etc. The so called “green shoots” like” rising asset prices, rise in stocks indices.” seen as revival of world economy can be just one of the overshoots of omnipresent (well almost!!) dollar and yen carry trade.
The thing that strikes me that what if the unwinding is in offing? What if as the world economy recovers, the dollar appreciates and the interest rate rises to check inflation and widening deficits in US? What if the unwinding of dollar carry trade makes the growth of emerging markets go for a full toss? Will it push the world economy back into another recession? What is the probability of this happening?
Carry trade does carry many million $“questions “in its womb.
Related Links:
1. http://www.bloomberg.com/apps/news?pid=20601101&sid=aEx0ou2Z7ssA
2. http://www.dnaindia.com/money/report_-carry-trade-lifts-fii-stakes-for-first-time-in-7-quarters_1280334

An introduction

“Arguing against globalization is like arguing against the laws of gravity.”This statement by Kofi Annan truly specifies international finance is not a matter of choice any more. The international events has deeper and broader impact on nation, corporate and individual ,as manifested from Great Depression to- not- so-long- ago financial crisis.
So here is the is the avenue for the discussion of all major economic event, predict crest and troughs of business cycles, apply Keynes and Hicks, know all “micro” and “macro” NoMics, test if IRP and PPP are at par with the reality and of course, know baskets full of Currency!!!
This blog will provide the platform for sharing of views on the contemporary international issues. The goal is to start a fresh discussion every week .Your point of view, backed with appropriate data is invited.So do contribute by clicking on “Comments” and writing your view.
This blog is a team effort of two people. We are:
1. Prof Archana Pillai,Faculty,IBS Hyderabad
2. Tanuja Kumari,Student,IBS Hyderabad