Avoid aggressive management of rupee: Business Line 27th July 2022

 

Forex intervention by RBI has actually contained rupee depreciation. But the benefits of heavy intervention are not very clear

The rupee has crossed the 80 mark against the US dollar. It has been sliding in the last five months, ever since the war broke out in Ukraine and the US Fed, in parallel, began aggressive action in response to emerging inflation trends. Each month the rupee crossed a new mark — 75 in January, 76 in March, 77 in May, 78 in June and 79 in July. And the rupee touched 80 in July itself, rather than August. How is one to read this trend?

The important thing is the rupee is not alone in this spiral; almost all currencies are witnessing similar trends. In fact, if one were to look at a point to point change — July 15, 2022 over December 31, 2021 — in value of currencies across the world, the rupee has not really done that badly. It has gone down by around 7.2 per cent, which is just about the median level compared with other currencies (see Chart).

The currencies of China, Malaysia, South Africa and Australia have done better but still fallen by around 6 per cent, while those of Indonesia, Singapore, Hong Kong, Brazil and Mexico have dropped less than 6 per cent.

However, the rupee had appreciated in effect against the euro, pound and yen and did better than the currencies of Taiwan and Thailand. Therefore, the current spate of depreciation is more of a global phenomenon. The rupee is somewhere in the middle, which is comforting.

But this should not divert attention from the fact that the rupee has also been hit by weakening fundamentals, such as a widening trade deficit which will expand further as growth picks up. India is definitely one of the faster growing economies. However, this also means that demand for imports, both oil and non-oil, will increase which will reinforce the trade deficit.

Exports, on the other hand, tend to be guided more by global growth conditions and if there is a slowdown here, there would be an adverse impact. It has been observed historically that exports tend to be influenced more by global growth than exchange rate changes. This is why the trade deficit is expected to widen leading to also a larger current account deficit which is expected to cross the 3 per cent mark this year.

RBI’s initiatives

The obvious question to ask is whether or not the RBI can do anything about it. In a system of free trade and general openness to convertibility, central banks will be constrained and cannot do much to restrict outflows. What can be done through policy has already been done by the RBI, in terms of allowing more NRI deposits, ECBs (external commercial borrowings) and FPIs (foreign portfolio investments). It is however debatable whether these measures will help bring about a turnaround in forex inflow; it can, at best, increase marginally.

For example, ECBs today are no longer attractive, with interest rates overseas increasing. Add to this the foreign currency risk, which is high in these volatile times, and domestic borrowing may be preferred for most companies. Taking forward cover, which is advisable, has a cost and the economics may not make it favourable to do so.

Similarly, allowing higher interest rates on NRI deposits is a good regulatory move. But with deposit rates increasing in the West, savers will see this as an option which may not be significantly more attractive. FPIs were not too interested in corporate paper to begin with, as seen by the relatively small proportion of the limits being utilised. Presently, it is just 18 per cent of the limit permitted. Hence, allowing them to go for short-term investments of less than one year maturity could work only at the margin. But the RBI has surely been proactive in this regard from the point of view of policy.

The phenomenon of currency depreciation is a global problem brought about by the sudden strengthening of the dollar. This may not prevail for long periods; at present, low unemployment and high interest rates signal the strength of the US economy. But as the Fed rate hikes feed into the system and slow down growth, the dollar should weaken and there would be some respite for other countries.

Therefore, trying to arrest the slide in the rupee may not be very meaningful. Using reserves to stem the fall may just mean using up resources with no medium term gain. At the same time, it is essential to ensure that there is no free fall which would be the case in the absence of selective intervention by the RBI.

Handle reserves carefully

The RBI has seen reserves come down by $35 billion over March and are at around $573 billion due to both regular intervention as well as revaluation effects on holdings of non-dollar assets.

Direct intervention through sale of dollars hence has limits. Imports in the first quarter were around $190 billion, which at a monthly average of $60-63 billion would amount to nine months of forex cover for imports, down from 13-14 months last year.

Therefore, while the reservoir looks adequate, management of the same is imperative so that they do not fall below threshold levels determined by the central bank. Therefore, direct intervention would have to be only the last resort.

The RBI has already used the policy tools to widen the circumference for capital flows, and the benefits would evolve over a period of time. Under these conditions there may not be too much that can be done. Intervention in the forwards market can be used to align the movements to other currencies so that the rupee remains in the middle range of depreciation. As long as interest rates rise in the West and the easy money which came about due to the quantitative easing is reversed, currencies will keep declining. It may be best to avoid any aggressive interventions from hereon.

Book Review | The power equation – From Dependence to Self-Reliance: Mapping India’s Rise as a Global Superpower by Bimal Jalan: Financial express 24th July 2022

 

An optimistic view of the country’s economy, but not so much on the polity

Written by Madan Sabnavis

July 24, 2022 3:30:00 am

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In his latest book, From Dependence to Self-reliance, he achieves this on several aspects of the changing face of the Indian economy in both the economic and political fields.

Bimal Jalan, a well known economist, central banker and politician (former member of Rajya Sabha), will always have a well-rounded view of the way in which the Indian system works. In his latest book, From Dependence to Self-reliance, he achieves this on several aspects of the changing face of the Indian economy in both the economic and political fields.

In the author’s view, there have been two defining moments that have helped to bring about transformation in the economy. The first dates back to 1991 when we went in for economic reforms and moved out of the socialist model of growth and development. This brought in the vibrancy required for making the economy self-reliant, as can be seen by various economic indicators today where India stands tall.

The other is 2014 when the NDA government came to power with a strong majority. Having a strong majority party in power helps to accelerate the pace of reforms, which is what we have witnessed in the past few years. This also helps to enhance federalism where there is more harmony between the Centre and states. More importantly, this also helps to push through political reforms without dependence on the opposition, and hence provides opportunity to bring in change.
While speaking on the economy, Jalan also traces the rise of the services sector in the economy and the difference here is that the ascent has been of skill-based services that provide a comparative advantage to any economy. There has hence been a very blurred distinction between goods and services. This revolution has been brought about by unprecedented and unforeseen advances in computer and communication technology in the past four decades.

A lot of what is written on the economy will be familiar to the reader as these are issues that are debated regularly in the media and discussions in conferences. Jalan is particularly critical of the public sector because of the inefficiencies that have come into the system. This may not have been that important, but for the fact that the onus falls finally on the government and it finally affects the budgets and its spending. His argument is that as these enterprises keep making losses, they have to be financed by the government either through outright subsidies or indirect support. This weakens the budget as the government has less to spend on the poor, which, in turn, hampers their development. Therefore, the comparatively well-off people may not be affected, but it affects the future of the poor. He believes that the steps taken by the present government in privatisation are progressive, and he substantiates this with several global instances.

An area that he talks of in some detail is the political system. He looks at various anomalies that exist in the present system and discusses the pros and cons of the alternative presidential structure. In balance, he feels that the existing system is better, though admittedly, the governments that have ruled have never come close to having 50% of the votes. He does lament the persistence of the feature of having a large number of people with criminal records as members of Parliament. Here one can be helpless, for it is these people who actually garner votes for their parties and claim power subsequently. It is not a happy situation to be in where such people with serious criminal cases, which are yet to be proved, occupy positions of power. An argument often given is that since these members have been elected by the people so there cannot be anything amiss. The author, however, is cautious in not naming any person or party, which has been his trademark non-controversial style.

An interesting turn is taken when he brings in the concept of scarcity, which is an economic subject, into the structure of our political system. He looks at the system with a pyramid-like structure where the government is vast at the bottom but narrow as we move upward. At the panchayat level there are lots of representatives of the people and hence the system is more democratic. However, these so-called leaders have little power and it is more in the area of implementation of schemes where the funds come from the Centre or states. Therefore, there is relatively more cleanliness here.

But as one goes up the echelon to the states and Centre, there are fewer seats, which brings in the scarcity concept and a premium that is attached to every seat that is fought during the elections. No wonder there is substantial muscle clout which comes in the running of parties and governments. The power that is exercised is tremendous as the Centre and states have the right to set of organisations, committees, taxes, expenses, etc, within the realm of what is provided by the Constitution. This is why there is a craze to be in power, as it gives people the right over these critical decisions that are taken by the government. The author has hinted that often all the ministers are selected by the leader and hence when all ministers normally tend to be appointed by a single person who is charismatic, the system may not really be truly democratic.

This is a fairly well balanced view taken on the progress made by our country and the author steers clear of any controversy either directly or by innuendo, especially when commenting on the polity. On the economic front there is a lot of promise according to the author. We do lag, however, when it comes to social uplift, which is highlighted early in the book. We need to work harder on provision of education and health, especially to the poor. Changing the quality of polity, however, one can surmise is a tough nut to crack given the intricacies that have been inbuilt in the system to preserve status quo. Hence while there is optimism on the future of the economy, the same has not been expressed on the polity.

From Dependence to Self-Reliance: Mapping India’s Rise as a Global Superpower

Bimal Jalan
Rupa Publications
Pp 184, Rs 695

Will inflation go up when prices rise? Free Press Journal 23rd July 2022

 

Clearly the government is looking at tweaking the structure to garner more revenue as the economy is not behaving the way it was expected. The logical question is whether this will work

One of the bolder decisions taken by the government was to increase the GST rates on several goods and services. This was taken at a time when inflation was high at around 7% with surprises coming in every day, the latest being the rupee touching the 80 mark against the dollar.

The justification for the imposition of these rates was manifold. First several goods were kept out of the ambit to begin with, that needed to be corrected. This is logical considering a review was taken after five years. Second, producers were indulging in beating the system through the unorganised sector route through labelling concessions. This led to leakages which needed correction. Third, the government has realised that the automatic buoyancy taken for granted in 2017 did not work out. Hence a review of rates was essential. The ultimate justification was that the average rate now being charged was lower than the pre-GST regime and hence this was only a part of the tax structure as even at the time of imposition of this tax, it was made clear that the rate had to converge. Therefore it was a well thought-out strategy and we can expect more such changes until the convergence takes place.

Hence clearly the government is looking at tweaking the structure to garner more revenue as the economy is not behaving the way it was expected. The logical question is whether this will work. The answer is that it is ambivalent. On one side, increasing the price of packaged atta or taking a hospital bed of above Rs 5000 a day does mean paying more. Hence it will be hard to dodge this tax. The unorganised sector selling smaller quantities, as well as organised sector selling dairy products, will witness higher prices.

Two things can happen. First consumers will shift to unpackaged products if the burden is high. Second producers may stop labelling products, by packing products in packaging material without printing. Even today one can buy a sandal soap of established brands without the cost of the brand, as tax rates are lower. This cannot be ruled out. The same holds for hospital beds which can be priced at Rs 4999 to avoid the tax, just as has been done by hotels to come into a lower tax bracket. The other escape route is the selling of products through the ‘loose’ mode where there is no identification trail.

The other side of the story is interesting. The CPI index may of move much as all commodity prices are based on quotations received which are largely the organised sector, the ratio will be 70-80% and unorganised at 20-30%. Therefore the amount may not be very high statistically as the majority was being taxes already at this rate.

The timing however is curious. On one hand the duty on fuel products has been reduced. On the other LPG prices have gone up. It is hard to guess whether the aim is to protect the common man or not as LPG is consumed by the middle class while petrol supposedly by the rich. Using the same rationale, the present tax of 5% could be affecting the middle class more than the rich. With inflation likely to be above 7% in the next few months the decision could have been kept on hold.

By not deferring this decision inflationary expectations will turn adverse. Also considering the central bank is working hard to control inflation by hiking rates the sentiment change will add to the worries. This will mean that the RBI has to weight this in while taking a call on interest rates which are bound to rise on this score.

This also comes at a time when the rupee is falling. This affects the prices of all imported goods as the exchange rate has moved around 7% in the last 6 months. While it is true that global commodity prices have eased the depreciation neutralises this impact, the final effect will vary across goods. But to the extent prices increases it will increase input costs and make producers consider another round of increase in prices. If chemicals become expensive so will the price of toothpaste and shaving cream. Companies have already started passing on higher input costs and may choose to go in for another round once it starts to pinch their profit margins.

Hence we have to be prepared for higher prices though the inflation rate per se may change marginally. More importantly it will affect all consumers with the middle class probably bearing the brunt. Also given the direction that the GST Council has taken there will be the tendency for more of such hikes to be invoked over the next few years until the equilibrium is attained. Quite clearly the argument given earlier that the tax burden and hence prices would come down will not play out as the economy has not quite behaved the way it was expected. Looking ahead, economic growth is expected to move upwards quite gradually. Even the 7% growth this year will be marginally higher than the pre-pandemic times and hence faster acceleration may be required.

India's ten fold path to manage foreign exchange volatility Mint, 21st July 2022

 The regulatory world of innovation has few boundaries. And the way in which India has tackled foreign exchange crises over the years has been quite profound. A forex crisis can be loosely defined as one where the rupee starts depreciating rapidly or when forex reserves slide precipitously. Normally, the two go together, which raises an alarm as unchecked depreciation is always self-fulfilling. When the rupee is expected to fall, exporters hold back their earnings while importers rush to buy larger quantities of forex for future imports, thus exacerbating the position and causing the rupee to fall faster as demand goes beyond supply.

Ever since India’s reforms of 1991-92, the external sector has been liberalized, with even full capital account convertibility being considered at one point. A flexible exchange rate regime runs the risk of volatility, which keeps central banks alert all the time. On its monetary and forex policies, the Reserve Bank of India (RBI) has maintained that it has an array of options that can be used, and hence its approach isn’t straight-jacketed. In the rupee’s context, let’s look at options that have been used in the last three decades or so.

The first course of action has been selling dollars in the spot forex market. This is fairly straightforward, but has limits as all crises are associated with declining reserves. While this money is meant for a rainy day, they may just be less than adequate. The idea of RBI selling dollars works well in the currency market, which is kept guessing how much the central bank is willing to sell at any point of time.

The second tool used is aimed at garnering non-resident Indian (NRI) deposits. It was done in 1998 and 2000 through Resurgent India bonds and India Millennium Deposits, when banks reached out asking NRIs to put in money with attractive interest rates. The forex risk was borne by Indian banks. This is always a useful way for the country to mobilize a good sum of forex, though the challenge is when the debt has to be redeemed. At the time of deposits, the rates tend to be attractive, but once the crisis ends, the same rate cannot be offered on deposit renewals. Therefore, the idea has limitations.

The third option exercised often involves getting oil importing companies to buy dollars directly through a facility extended by a public sector bank. Its advantage is that these deals are not in the open and so the market does not witness a large demand for dollars on this account. It is more of a sentiment cooling exercise.

Another tool involves a directive issued for all exporters to mandatorily bring in their dollars on receipt within a set time period, with allowances made only for balances kept aside that are needed for future imports. This acts against an artificial dollar supply reduction due to exporter hold-backs for profit.

The fifth weapon, once used earlier, is to curb the amount of dollars one can take under the Liberalized Exchange Rate Management System for current account purposes like travel, education, healthcare, etc. The amounts are not large, but it sends out a strong signal.

Sixth, another route used by RBI is to deal in the forward-trade market. Its advantage is that a strong signal is sent while controlling volatility, as RBI conducts transactions where only the net amount gets transacted finally. It has the same power as spot transactions, but without any significant withdrawal of forex from the system.

The seventh tool in India’s armoury is the concept of swaps, which became popular post 2013, when banks collected foreign currency non-resident deposits with a simultaneous swap with RBI, which in effect took on the foreign exchange risk. Hence, it was different from earlier bond and deposit schemes. The same idea has been used again, though without deposits being raised that involve a sale-purchase transaction which provides dollars to banks with a commitment to buy back after, say, 3 years.

All these instruments have been largely direct in nature, with the underlying factors behind demand-supply being managed by the central bank. Of late, RBI has gone in for more policy-oriented approaches and the last three measures announced are in this realm.

First was allowing banks to work in the non-deliverable forwards (NDF) market. This is a largely overseas speculative market which has high potential to influence domestic sentiment on our currency. Here, forward transactions take place without real inflows or outflows, with only price differences settled in dollars. This was a major pain point in the past, as banks did not have access to this segment. By permitting Indian banks to operate here, the rates in this market and in domestic markets have gotten equalized.

Second, more recently, RBI opened up the capital account on NRI deposits (interest rates than can be offered), external commercial borrowings (amounts that can be raised) and foreign portfolio investments (allowed in lower tenure securities), which has the potential to draw in forex over time. Interest in these expanded contours may be limited, but the idea is compelling.

Third, and last, RBI’s permission for foreign trade deals to be settled in rupees is quite novel; as India is a net importer, gains can be made if we pay in rupees for imports. The conditions placed on the use of surpluses could be a dampener for potential transactions, but the idea is innovative and could also be a step towards taking the rupee international in such a delicate situation.

Clearly, RBI has constantly been exploring ways to address our forex troubles and even newer measures shouldn’t surprise us.

ON ETNow: 19th July 2022

 https://www.timesnownews.com/videos/et-now/shows/what-next-for-rupee-debate-with-madan-sabnavi-and-siddhartha-sanyal-india-development-video-92989117

On NDTV : 18th July 2022

 https://www.ndtv.com/video/news/left-right-centre/everyday-essentials-services-get-more-expensive-643574

Rupee crossing 80 to the dollar is nothing to be startled about: Business Standard 19th July 2022

 https://www.business-standard.com/article/opinion/rupee-crossing-80-to-the-dollar-is-nothing-to-be-startled-about-122071900501_1.html

The GST experience has been largely positive: July 15th 2022, Hindu Business Line

 

t has led to greater formalisation of the economy. But the taxing of fuel must be sorted out owing to its inflationary impact

The GST was probably the biggest reform introduced by the government since 2014. A singular tax structure across all goods and services is efficient, though ideally a single rate should prevail. But given the complexity of federalism and the belief in the principle of ability to pay, different rates had to be introduced. It has, however, been maintained that the system is evolving and rates could be tweaked.

There was some hype created by economists on GST. The structure was to be revenue neutral. And as a corollary, when the economy grew tax revenue would accelerate. Second, it was claimed that GST would bring about significant growth in GDP — by 1-2 percentage points. The rationale was not too compelling, though the models did indicate such numbers. Third, it was argued that with tax rationalisation and removal of inefficiencies, it would lead to lower prices and hence less inflation. The profiteering clause was brought in to ensure that benefits were passed to the consumers.

With five years gone by, it will be useful to evaluate the success of this tax structure. First, the way things have gone, it does look like that rates have been altered within the five-slab structure. The GST Council is looking at fine turning rates to enhance collections.

Second, the inflationary impact has been either neutral or positive after these five years though the average tax rate has come down post GST. Where the rates have been increased, there has been a direct impact on prices which will also include the recent changes made by the Council.

Further, while the rates have been reduced for some items, the benefits have not gone done to the consumer. It is hard to establish that there has been profiteering as there are multiple inputs going into the production of any good with the net impact being nebulous.

Third, the impact on GDP is unclear as the economy was in slowdown mode even before the pandemic struck. Alongside, as prices have only tended to increase rather than decrease, there has not been a case for purchasing power increasing.

Fourth, revenue collections have been a major positive if averaged across this time period. The tax system has certainly brought about greater formalisation of the economy, which is commendable. As claiming a set-off from any purchases made involves having every layer of the supply chain sign in, the GST has brought about a rather radical transformation in the way in which business is done. There are exemptions available under the composition scheme, but in general, there has been better coverage of economic activity.

The least expected development in these last few years was the lockdown which distorted collections to such an extent that the States had to be compensated by the Centre which also ran short of funds. This was part of the GST deal of the Centre with States where the States were to be compensated in case their revenue did not increase by 14 per cent for five years.

While the lockdown was a black swan event, the possibility of severe slowdown in the economy cannot be ruled out in future; hence there is need for the agreements to be revisited to provide for such a contingency.

The States have a point, because joining the GST agreement means loss of power to tax commodities and services. It may hence be worth considering a way forward: whenever the GDP growth falls below, say, 5 per cent there should be an automatic trigger for compensation.

Taxing fuel

As for fuel, presently there is a constant debate on which government should cut taxes. The Centre imposes a flat rate, while the States generally have variable rates. The overall revenue earned is substantial for both the arms of the government and amounted to Rs. 7.14-lakh crore in FY22, compared with Rs. 6.37-lakh crore in FY21. It was Rs. 5.08-lakh crore in FY20 when consumption was higher at 214 million tonnes compared with 204 million tonnes in FY22.

The issue of including fuel in GST needs to be resolved because the inflationary impact is sharp and has secondary and tertiary effects in the economy. At times in order to protect the consumers, the OMCs are made to bear the cost of higher crude prices. While protecting the present level of revenue can be the starting point, a higher GST rate of, say, 70 per cent can be levied, which will make things more transparent. Arguably, the government may stand to lose revenue if crude prices fall sharply. But having a structure in place would be useful as this appears to be the major anomaly in the system.

The GST experience has been a learning exercise which has brought to the forefront the complexities in introducing such a structure. The Council has dexterously steered the economy through this labyrinth. There are some pressing ideological issues that have come up and can be addressed through more deliberations.

Book Review — CEO Excellence: The Six Mindsets that Distinguish the Best Leaders from the Rest : Financial Express 10th July 2022

 It is agreed that CEOs are the pivot of any organisation and often their names are associated with the success of the company. This is understandable as they take the responsibility of delivering shareholder value and also tend to be the highest paid personnel. Interestingly, it has been found that among Fortune 500s CEOs, around 30% last less than three years. And, more significantly, two of five CEOs fail within the first 18 months.

Dewar, Keller and Malhotra from McKinsey & Co, in their book titled CEO Excellence, tell us more on this subject after interviewing around 67 of these leaders from a pool of 2,400 companies that were scanned for this purpose. These include the heads of Sony, Microsoft, JP Morgan, Netflix and their like.

So. what did they find? To simplify their findings, they believe that there are six responsibilities of CEOs that sort of make or break them. The book focuses on these six areas of responsibility for CEOs.

The first is what they call ‘setting the direction’ for the company. Here it can be seen that the future course of a company would be driven by this goal, where the CEO should articulate the vision and roadmap. This would cover the growth areas, which can also include things like diversification or acquisition. This vision has to be accompanied with a clear strategy and the long-term goal has to be broken into short-term plans, given that the future would always be uncertain with shocks that have to be adjusted for. Having a vision and strategy also enables the allocation of resources that are limited.

The second is aligning the organisation to these objectives and strategies. This is where often there can be stumbling blocks. The new-age companies may be easier to align compared with older ones that have entrenched mindsets and structures. At times this alignment can be the biggest challenge. Here the authors talk of the culture of the organisation, which may have to change.

Associated with this alignment is ‘organisation design’, which can involve doing away with certain positions and verticals and creating new ones. This can be a challenge because everywhere people matter and the reskilling of staff becomes important. Traditionally, this has taken a lot of time for companies to change and successful CEOs have to shorten the same. Getting new talent can be required to become more nimble-footed but the costs have to be weighed not just in terms of the salary bill, but also taking along the staff.

The third is to identify leaders. Here, it has been seen that new CEOs have a preference for people with certain backgrounds, which can create a bias. But they need to get the mix right, because any plan can be driven by CEOs but has to be executed by various leaders within the organisation. This will then mean getting these leaders to form their teams either from within or scout for talent from outside. Such a task looks commonsensical, but can lead to a lot of dissatisfaction in companies where tenures and experience are brushed aside in the name of getting things right.

Fourth is a different kind of challenge which involves engaging with the Board. Here it has been seen that managing the Board is the biggest task. The Board members normally come from different backgrounds and are usually retired personnel with commitment that can differ as they meet only a fixed number of times. The question is how does one get the best of them so that the company benefits. The members will have questions to ask and the CEO has to answer them all the time. This can lead to conflict-like situations that have to be handled with maturity. Board meetings are the most important discussion tables because all strategies get approved only after deliberation. Therefore, CEOs have to work in an effective manner to take them along as they can give their independent view.

Fifth is connecting with stakeholders, which can range from shareholders and clients/customers to employees. Today, with increasing focus on ESG, CEOs have to engage with all the stakeholders concerned to ensure the company is on the right track. In fact, dealing with the government as well as regulators means that they have to spend a good amount of time to convey to these officials the progress being made by the company in these areas. Investors, too, have to be engaged with regularly as they are links with the market.

Hence, as can be seen, CEOs need to move away from the day-to-day functioning of the company once the strategy has been formulated and leave it to the leaders to implement them while they engage with the Board and other stakeholders on important issues. Here often CEOs stumble and ignore these two aspects, as a result of which they are bogged down by mundane activities that often feed their egos as they believe they are in control of the organisation.

Last, the authors talk of managing personal effectiveness which flows from the earlier point made where their time and energy has to be spent on what matters at their level. They become the company ambassadors and should behave like one. Delegation is important and often insecurity of the CEO can be a hurdle.

This is an interesting book on ‘what to do’. The problem with such books is that they appear to be stylised. The question is, can a CEO sit down and ruminate over these six issues and address them together so that she is a success? Enumerating the qualities is enlightening but the fact is that there are no templates that can be followed assiduously. The reason for failure is that no CEO is willing to accept that they are on the wrong track. No CEO is open to criticism and everyone likes to have people around that applaud their actions. This is why they fail.

CEO Excellence: The Six Mindsets that Distinguish the Best Leaders from the Rest
Carolyn Dewar, Scott Keller & Vikram Malhotra
Scribner
Pp 373, $30

Understanding oil — the joker in the pack: Free Press Journal 9th July 2022

 

Oil remains the joker in the pack as it has potential to cause considerable distortion. The price of oil is driven by three sets of factors – demand and supply topped by the extraneous factor of politics.

The global economic environment is typified today by considerable volatility which transcends the markets and enters the real economy that involves basic GDP growth. The driving factor, in a way, is oil. Fickle oil prices have caused considerable distortion and the crux is hence getting a hold on how they will move. This has become very difficult, for a variety of reasons.

The price of oil has moved to less than $100 a barrel, which has given some relief to all countries. But the question is, for how long will this last? It may be recalled that until the point when the EU had decided to impose harsher sanctions on oil and gas from Russia, the price had come down to the $110 level which gave hope that prices could go below the $100 mark. But with the sanctions being imposed, the price went back to the $120/barrel level which had central banks taking a more aggressive view on interest rates.

The oil price forecast is hence the most critical factor for all policy formulation - especially monetary policy. As long as there is volatility in this market, there would be an upward thrust to overall inflation which in turn will influence interest rate actions. Global commodity prices have tended to move downwards post-May, which gives an impression that the worst may be over. But oil remains the joker in the pack as it has potential to cause considerable distortion.

The price of oil is driven by three sets of factors – demand and supply topped by the extraneous factor of politics. On the supply side there are conundrums. Theoretically there are around 1.65 trillion barrels of oil reserves which can last for around 50 years. The challenge is to make adequate investments to drill and make available this oil to the users. The decision to invest is based on demand forecasting, which is being influenced progressively by the focus on alternative fuels that has gained in fashion. With green energy being spoken of and countries aggressively exploring renewables, the oil producing countries have not been investing enough; this in turn has tended to cause supply shortfalls every time demand increases. Also, the development of shale fields in America has also caused drop in demand from conventional oil which in turn has kept investment down. Hence the willingness of the oil producing countries to invest will depend on their subjective judgments on future demand.

On the demand side, for the last decade or so there have been considerable swings in the growth trajectories of especially the western economies. Growth has not been smooth and unidirectional for countries in Europe as well as USA. Intuitively, as long as interest rates are benign in the west, it can mean that growth is still shaky and when central banks firm up rates, it is indicative of growth being on the fast track. The former situation means less demand for oil while the latter scenario would mean heightened demand, though not necessarily for non-shale oil.

The other factor which has played out is China. China was probably the fastest growing economy for almost two decades, as the model used was an investment-oriented one which also necessitated greater demand for oil. Industrialisation at a high decibel level increased the demand for energy. However in the last 5-7 years, the pace has slowed down as the investment-led model has its limitations in the absence of consumption growing at a similar pace. This has also led to a slowdown in the demand for oil.

The pandemic has upset the applecart further, with prices first plummeting and then rising as the world economy recovered. The Ukraine crisis has further exacerbated the situation with Russia, which is the second largest producer of oil, being eased out of the system virtually. The interesting thing here is that even a 1-2 mn barrel per day supply of oil can disrupt prices significantly due to the inability of other countries to produce more oil in the short run. Subsequently there have been different scenarios being presented on the state of the world economy. With the Federal Reserve as well as the European Central Bank to increase interest rates in the face of higher inflation, the expectations are that there could be a recession in the west. This is the irony with monetary policy, because any action to soothe inflation necessarily means that economic growth has to be slowed down on the demand side. This in turn has made markets bearish on oil, as a result of which the price has come down.

The question is whether or not this price of $100/per barrel can be sustained. The answer is that no one can tell, as while the price of any commodity is driven by the laws of supply and demand, the external factor which overrides the principles of economics is an unknown. Also, unlike other commodities, supplies cannot be jacked up easily as it is linked to investment.

Does this price matter to us? The answer here is yes, because presently with the price coming down, the oil marketing companies stand to benefit as they are making losses on sale of fuel ever since the retail prices were locked by the government. Hence the consumer gain will not be there while the companies will lower their losses. Lower price will reduce the import bill and hence there will be some comfort on the trade front, though exports of refinery products will also reduce in value terms. But if these prices are sustained, the RBI stance on rates may be less stringent as inflationary concerns have been linked inexorably with oil prices.

RBI's innovative approach to control the fall in rupee is commendable: Business Standard 6th July 2022

 https://www.business-standard.com/article/economy-policy/rbi-s-innovative-approach-to-control-the-fall-in-rupee-is-commendable-122070601027_1.html

Bring back futures trading in oils, pulses: Business line 26th June 2022

 The recent inflation spiral in India, going by both the CPI and WPI, has impacted all industries. This is so especially due to the surge in global commodity prices which range from crude oil to metals to food products including wheat and corn. Almost every industry has been impacted as a user or seller. Now the question is: have companies been hedging their price risk?

Companies have been increasing the final prices of their products due to the rise in raw material costs. This started from the third quarter of FY22 and has continued since, which has in turn added to CPI inflation for household goods and consumer products.

Vegetable oils have already been under strain as India imports around 60 per cent of its edible oil requirements. With international prices being distorted due to the Ukraine war where both Russia and Ukraine are major global suppliers, the impact has been quite severe with prices almost doubling in a year. The government has had to do some firefighting by cutting duties to cool prices.

Similarly the wheat episode is remarkable because a country with one of the highest outputs has witnessed an increase in prices. The reason is that with supplies from the war region being cut off, there is an incentive to export to cash in on higher prices, leading to lower domestic procurement.

The oils and wheat episodes have impacted industry besides households. The entire food processing industry as well as services such as hospitality, tourism, airports etc. are affected by higher prices which get passed on to the consumer. Ideally manufacturers of oils, confectionery, bakery products, hedge their raw material risk on commodity exchanges.

But this is not possible today as there is a ban on futures trading in the entire oil complex (seeds and oil) as well as chana and wheat. This means that there is no option to hedge the price risk and the higher cost has to be absorbed by the firms. They would do so up to a point beyond which the consumers will have to pay higher prices.

The rise in prices can be seen already in the MRP of various products and menu cards of restaurants and there could be more hikes in the offing.

The irony of a ban on futures trading in oils and wheat is stark. The ostensible reason for this ban is to curb the rising prices. This is a hypothesis that has never been proved and is more impressionistic.

But by banning such hedging options, companies perforce pass on the higher raw material (input) cost to the consumer which adds to inflation. This anomaly needs to be corrected by removing bans on futures trading in agricultural commodities.

No proof

Interestingly, there is no evidence so far of futures trading fuelling inflation. An expert committee set up under Abhijit Sen over a decade ago pointed to this aspect. Subsequent studies have also not established any causal link between futures trading and inflation. Yet, successive governments have instinctively banned futures trading whenever prices increase, on the mistaken notion that futures trading leads to inflation.

As all futures contracts are delivery based, which means that open positions have to be closed out or result in delivery, it is hard to distort the market. Besides exchanges have in place sound risk practices such as position and price limits to restrict volatility in the market.

Bans have been in vogue in this market since 2007 when tur and urad were banned for futures trading. These were rather robust contracts where the dal and spices mills were actively hedging their risk. Subsequently, there have been bans on rice, wheat, soya oil, soyabean, guar seed, guar gum, sugar, chana etc. The latest set of bans include rice, wheat, moong, crude palm oil, Chana etc.

Besides companies dealing with these products, even user industries like the farsan (bhujia) segments, have been impacted and they have been compelled to increase their prices by passing on the higher input costs, as they would not be in a position to hedge their price risk on both — besan and edible oils, which are the main ingredients.

By imposing a ban the market has been pushed back and the entire value chain ends up being impacted which ends with the farmer. The restoration of futures trading in 2003 was done with the idea of commercialising the agricultural sector to ensure the benefits percolate to the farmer.

Exchanges like NCDEX have had good deliveries taking place indicating thereby that value chain participants were trading.

Further, farmer producer organisations (FPOs) have been active in the market with SEBI taking some aggressive initiatives. At the same time corporates find hedging useful even when they don’t take physical delivery as it is a powerful tool to protect their margins.

Companies even today hedge their price risk on international exchanges when opportunities are denied within the country. Metal companies hedge on LME, though the contracts offered by MCX have found favour over the year. The same holds for crude oil related products. The ban on futures trading on oils and wheat as well as chana needs to be withdrawn immediately. This will help in multiple ways.

First, it will help companies hedge their price risk. Second, it can help to reduce further increases in prices. Third, it will help strengthen Indian commodity exchanges which need business to survive. An exchange like NCDEX which had dominance in agricultural products, today is barely able to clock even ₹1,000 crore of average daily volume.

Today it has been seen that there are only two exchanges that have survived, and while MCX has done well in the metals and energy domains, NCDEX has been sliding down in the present environment. There is need to grow the market and not destroy it.

The present scenario is scary for the market. It affects not just the exchanges which provide a platform for trading but the entire value chain that has been built and nurtured in the last two decades.