Thinkpad: Opinions, Opinions

You know what they say about opinions....Everyone has one.

There are opinions, then there are counter opinions and counter opinions to the counter opinions. It goes on. This was a week with many opinions. Or maybe they were counter opinions.... 🤔 Well, never mind.

Nobel laureate Abhijit Banerjee had an opinion to offer this week. He told Bloomberg that the government should think about spending an additional 2% of GDP to help the country through the second wave of Covid infections. “Is it possible to spend an extra 2% of GDP on this right now? Probably - many countries have borrowed 10 times that amount, so why not?” he asked. He went on to say that “It’s ‘not clear at all’ that bond markets would react negatively to such moves made to avert ‘an ongoing series of crises’.”

Banker Uday Kotak certainly agrees partially. This is the time to “print”, Kotak told NDTV. Both the government and the central bank should open up their balance sheets, he said. Kotak probably knows the Indian markets too well to think that such spending won’t come with a cost attached but he didn’t go there.

The question is does the government agree with this opinion? Or does it agree with the counter-opinion to its opinion that the current spending plans remain appropriate? We don’t know yet. Bloomberg reported that some thought is being given to sector-specific stimulus but that’s all we have heard. Cash transfers, which many believe have become more important as Covid-19 spreads into rural areas, don’t seem to be on the horizon so far.

Will the government change its opinion? We’ll see.

While it’s a drop in the bucket for the government‘s Rs 35 lakh crore spending budget, the RBI has chipped in with a larger than expected surplus transfer of Rs 99,122 crore. Gains on foreign exchange transactions contributed nicely during the year to the central bank’s income.

That led to another rush of opinions.

Is the central bank playing the forex markets to generate profit? Why did they sell so much in the quarter ended March but also buy so much? Are sell-buy forex swaps the gold mine the government was looking for?

Chances are that the answer to all the above questions is, no. Ananth Narayan of SPJIMR, who was the first to flag off the potential gains from the forex accounting change, explains that the strategy of dollar sales to generate surplus, even if it were to be considered, will “not yield any significant additional dividend, unless the RBI allowed weakening of rupee, and purchased foreign currency in forward rather than spot markets”.

“The RBI should and will eventually convey the message that cynical considerations of the quantum of dividend would never play any part in influencing its financial market intervention,” Ananth, who is also India analyst for the Observatory Group, wrote in his note.

Former RBI deputy governor R Gandhi, in this conversation, rubbishes the idea that this strategy would even be considered. When RBI wanted to continue with a more conservative accounting rule, everyone asked why, he says. “Now they have switched over and people are asking why?” he lamented.

You can’t please everyone. If you are a central bank, chances are you can’t please anyone.

The week ended with a meeting of the GST Council. It is almost a miracle that with opinions from 29 states and the central government, anything actually gets done. Two debates have taken hold here—the amount of compensation the government will pay to states this year (we’ve been there before) and how long the government will continue compensating states for.

Both debates will go on for some time to come so we’ll get to it another time.

Stay safe.