Interest rate futures launch

On 31st (Monday) morning, interest rate futures trading will start at NSE for the second time. Watch me on the CNBC TV18 website on interest rate futures. I had a blog post on this recently; Mobis Philipose has an article in Mint; Financial Express has an editorial. In Economic Times today, Mayur Shetty interviews B. Prasanna of ICICI Securities PD, and Gaurav Pai has some worrisome reportage about possible regulatory problems that might come in the way.



NSE has setup a nice web page on interest rate futures which is the same as what they have for currency futures.

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From ivory tower to ground zero

I have a column in Financial Express today about Ben Bernanke, titled From ivory tower to ground zero.

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5th research meeting of the NIPFP DEA Research Program

On the website of the NIPFP DEA Research Program, there is a checklist of the papers and speakers of the 5th research meeting,
which is scheduled for 16 and 17 September. This URL will show a full
fledged conference program, with timeslots and discussants, in a few
days.

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Postcard from the edge

NSE has announced that on 31 August, they will trade interest rate futures. I believe BSE will also be in this fray soon thereafter.



After the Percy Mistry and Raghuram Rajan reports, there was a bad RBI committee report in August 2008. This led into a `RBI/SEBI Standing Technical Committee report' which spent ten months doing product design. This is central planning at its worst; every detail about the product is specified by the government, through a committee which has nobody from the private sector. And we went from bad to worse: while the `bad RBI committee report' talked about a short-dated interest rate futures contract, that product vanished in the RBI/SEBI Standing Technical Committee report.



With all these problems, it is a step forward. The product will trade right alongside currency futures at NSE. The glass is half full in that the government has not forced the creation of one more silo, one more separate segment.



So this long bond futures will trade in isolation, without the short-dated contract. Yet, I think it will work. The reason is that in India, the bond market is in such bad shape, that there is really only one rate. There isn't much of a yield curve to speak of, there is no yield curve arbitrage, etc. So a one-factor model -- parallel shifts of the yield curve -- captures the bulk of the action. There is relatively little else going on.



For an analogy, we know that in fledgling emerging markets, on the stock market, the market model has a high R2. In other words, there isn't much information production on a per-stock level; it's all macroeconomics and politics. As we get to a less stunted world, idiosyncratic risk surfaces, and each stock does its own thing. In similar fashion, given the stunted Indian bond market, all that happens really is parallel shifts. It would be possible to trade these using the interest rate futures at NSE/BSE. This will be a big step forward.



Economic reform in India is about winning political battles against the license-permit raj. The last time interest rate futures trading was attempted in India, RBI sabotaged this by banning bank participation. When currency futures trading started, RBI banned participation by FIIs and NRIs, while FIIs continue to have full access to the non-transparent and vulnerable OTC market. These bans continue to be in force today (!). RBI continues to ban elementary things like currency options or currency futures for non-dollar currencies on exchanges, even though these are acceptable to RBI on the (non-transparent and vulnerable) OTC market. With these kinds of mistakes starkly visible, it is generally safe to make modest assumptions about economic knowledge and sensible policy-making capability at RBI. Starting from these low expectations, it is remarkable to see that FIIs and banks will be able to trade the interest rate futures (after a fashion).



It's a halting, stumbling, bad way to make progress. But it feels nice to occasionally get progress, and progress this is.



For the domestic financial industry, this is a game changer. The dynamic part of Indian finance -- the securities firms -- have traditionally been kept out of the SGL club. They are now being given a chance to do currencies and interest rates. If you ask me which are the NSE/BSE firms which will thrive in the next ten years, my answer will be: the firms who are in the top 25 ranking by activity in currency futures and interest rate futures in 2009-10. These are the firms who will have done the most in terms of growing up beyond their equity market roots, to turn themselves into full fledged financial firms.

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Interesting readings

• An editorial in Financial Express on recent efforts to snarl up `minor' ports, which are the hotbed of progress in India's ports.


• Writing in Foreign Affairs, Christian Le Miere proposes a way for China to deal with its problems in Tibet and Xinjiang. In similar fashion, Sri Lanka has problems with the Tamil regions.
  I have a suggestion for a well-tested approach that could help forge a union out of diverse provinces: the federal structure of the Indian Constitution. Some of these ideas could be ported to these new settings. As an example, I believe the Indian idea of the Finance Commission has been used to some extent in the design of the South African Constitution.


• Some people in the Indian policy establishment are smugly basking in the glory of having blocked securitisation in India, given that securitisation got into trouble in the West. Jayanth Varma has an article in Financial Express which is most interesting. One key point is that when bank assets get into trouble, the difficulties are first visible in transparent assets such as securitisation paper. He ends saying: We must also remember the US home owner gets a bargain that is available to few home owners elsewhere in the world : a 30-year fixed rate home loan that can be repaid (and refinanced) at any time without a prepayment penalty. This is possible mainly through securitisation and deep derivative markets that allow lenders to manage the interest rate risks.
  In India by contrast, the home owner gets a much worse deal: most home loans are of shorter maturity (20 years or less) and are usually either floating rate or only partially fixed rate. The few `pure fixed rate' loans involve stiff prepayment penalties when they are refinanced. It would be sad if we keep things that way because of an irrational fear of securitisation.
  On a related note, see K. Vaidyanathan in Financial Express on CDS.


• Tim Harford in Financial Times on the remarkable fact of poor people in India choosing to pay for private education or healthcare services when government alternatives exist and are free.


• Watch Raghuram Rajan and Bibek Debroy on Ila Patnaik's TV show.


• Sunil Jain in Business Standard on the role of ad campaigns in winning public policy arguments.


• Meghnad Desai in Financial Express on the evolution of ideas on stabilisation, and the outlook for the `new orthodoxy' of macroeconomic policy.


• One of the more egregious forms of protectionism that afflicts india.

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The end of the beginning

The Bank of Israel has become the first central bank worldwide to raise interest rates in this downturn.

 

A few weeks ago, I wrote an elongated blog post titled Does unconventional monetary policy and unusual fiscal policy presage an upsurge in inflation?. This was partly motivated by the concerns of the time (this was in mid-June) about the exit strategy of central bankers. I had argued that inflation targeting gave the right framework for all three phases: the sharp drop in the policy rate, the shift to quantitative easing when the short rate fell to zero, and the eventual rise of interest rates. It is not surprising that the first mover on the exit process is an inflation targeting central bank.



A Taylor rule with an inflation coefficient of 1.5 and an output coefficient of 0.5 gives us a rough approximation to the thinking of inflation targeting central banks. The puzzle then lies in forecasting the extent to which inflation will exceed the target and forecasting the extent to which output will be below the target. These two forecasts are hard to make. But as I said in the above article:

As the financial system comes back to life, as the money multiplier comes back to normal values, the intellectual framework of inflation targeting will shape the responses of the central banks. There will obviously be some mistakes in forecasting inflation, given that the parameter estimates in our models are driven by normal times. But one can expect an average error of zero in the sequencing through which unconventional monetary policy is withdrawn. And when mistakes are made, when de jure inflation targeting is in place, the bond market will know that these are mistakes of execution and not a change in strategy.

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Comments to discuss

Maps vs. map data: appropriately drawing the lines between public and private

Comment by Anonymous:

OSM is a good effort, but it's license is flawed. It should be a pure public domain license, and it is not - they selected CC-by-SA. To their credit, they have been discussing this fascinating issue on their website. (See http://www.opengeodata.org/?p=262)

The other issue is that their data is still not good enough - it will take some time to get there, but throwing money is not the solution. users / volunteers will do a better job here!

Re: Survey of India / GOI The GOI continues to view Maps data as a strategic asset, important from the defense perspective - and hence restricted. That makes it much harder for the survey to be open about high resolution data, and compete in this space.

Improving wireless bandwidth

Comment by satya:

I have been a customer Sify--->Bsnl--->Tata Wimax ---> Airtel

Tata Wimax was good for the line of sight solutions they are offering , there customer care was pathetic, switched to Airtel on first instance Airtel got into our colony.

Still i am waiting for something like http://www.railwire.in/, even with 1:4 ratio tariff plans looks unbelievable.Still havent got a feedback about there Network and Support.

Grassroots strategy for mobile phone based payments, sighted in Africa

Comment by Bipin Preet Singh:

Hi, We are working towards something similar with our mobikwik balance. Please check it out at www.mobikwik.com

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