Why has the Indian rupee depreciated and what does it mean for the economy?
Independent institutions under independent individuals
Joe Nocera’s piece in the New York Times crediting Y V Reddy, former governor of the Reserve Bank of India, for pursuing policies that (relatively) insulated the Indian banking system from the global financial crisis, has some of India’s top bankers sounding like people looking back at their adolescence and thanking their strict parents or school principals for, well, being strict parents or school principals.
Now that those risks have been made painfully clear, every banker in India realizes that Mr Reddy did the right thing by limiting securitizations. “At times like this, you tend to appreciate what he did more than we did at the time,” said (Yes Bank founder Rana) Kapoor. “He saved us,” added (HDFC chief Deepak) Parekh. [NYT]
Now, a few experts, like V Anantha Nageswaran, have been arguing that Dr Reddy’s exemplary stewardship of the RBI was among the few bright spots in India’s economic management in the last five years. And as events proved, they were right.
Beyond individuals though, the underlying point is that independent institutions can deliver competent governance in their mandated areas even under bad governments. Of course, even independent institutions can be undermined over time, by packing them with less than independent-minded individuals. And that, unfortunately, might well be on the cards. The tenacious Dr Reddy is no more at the crease. The Election Commission could fall into the hands of Naveen Chawla, who the Shah Commission declared “unfit to hold any public office which demands an attitude of fair play and consideration for others.”
Wall Street woes
By V Anantha Nageswaran
In the last few months, financial markets had got used to the idea of the authorities conjuring up some solutions to problems in the US financial industry over the weekend and announcing it on Monday morning (Asian time) in time for the Asian stocks to open higher. This routine worked initially but when problems did not go away, the impact became rather muted.
Unfortunately for Lehman Brothers such a weekend solution did not arrive. Late on Sunday evening in the US it announced that it was going to declare bankruptcy. Wanting to avoid that fate, Merrill Lynch sold itself to Bank of America. Some called it tectonic shifts on Wall Street. Alan Greenspan, former chairman of the Federal Reserve said that America was facing once-in-a-century financial crisis. He should know better because he played no small role in creating it. Continue reading By Invitation: Buy lots of mattresses
…hinges on the support of its creditors
Lending money to governments to fight wars has a very long history, giving creditors a degree of influence over debtor monarchs or governments. But at least four factors make the situation in the early twenty-first century different. First, the global economy—and not least global financial markets—are connected in an intricate sense. Second, the creditors are not only sovereign but in several instances also from countries where the state-owned companies are entrenched economic players in their own right. Third, the individual and combined size of the sovereign wealth holdings is unprecedented. And finally, the geopolitical relationships between the principal debtors and creditors is competitive and adversarial, if not antagonistic.
In this light, the Council on Foreign Relations has published a special report by Brad Setser on the sovereign wealth and sovereign power. It argues “that the United States’ current reliance on other governments for financing represents an underappreciated strategic vulnerability.”
The willingness of foreign central banks—which remain a far more important source of financing for the United States than sovereign wealth funds (SWFs)—to build up dollar reserves has long provided a stable, but limited, source of external financing. But the United States increasingly relies on financing from central banks that already hold far more reserves than are needed to assure their own financial stability. It is true that foreign central banks have an interest in keeping the dollar strong. But the United States might have more to lose from a disruption of this relationship: financial flows create mutual interdependence, but the interdependence is asymmetric. The longer the United States relies on central banks and sovereign funds to support large external deficits, the greater the risk that the United States’ need for external credit will constrain its policy options. [CFR]
While much of the recent analysis on sovereign wealth has been from an economic standpoint, Dr Setser’s report provides directions for a realist appreciation of the issue. To the extent that they give rise to a balance of terror, it is possible to see excess foreign reserves holdings of central banks and large sovereign wealth funds as strategic weapons. How these ‘weapons’ work, how they might be employed and how they might be deterred or defeated are all questions that should concern geopolitical strategists.