Break,FRBMandChestertonfence

So, as we write this communique after a gap of 18-days we realize that lot of turbulent water has passed under the markets bridge in the meantime. In India, the annual Budget and the MPC policy meeting were the scheduled events where on the global stage market participants were kept enamoured with yields in the US bond market (whether treasuries or junk bonds), gyrations in Bitcoin and the upending of capitalist paradigm as witnessed in the Game Stop saga.

Let’s have a look at some of the market parameters in the last 18 days. Dollar Index was 90.24 on the 22^nd of Jan and it is currently trading at 90.40. US 10-year yields have moved from 1.04 to 1.16 in the same period. For the 30-year US treasury the movement has been from 1.85 to 1.96. Euro from 1.2167 to 1.2126 currently. GBP from 1.37 to 1.3810 currently. Gold has hardly budged in the last 18 days whereas Silver has shown a 10% move. Brent crude has moved steadily from 55.40 $/bbl on the 22^nd of Jan to 61$/bbl currently. We can devise a plausible sounding narrative to explain all of these movements, but we will control that urge as of now.

Now let’s come to the domestic markets where the Rupee has remained mostly in range, but a significant movement has been seen in the bond markets. The 10-year G sec yield has moved from 5.94 to trade at 6.05 today. The 2-year G Sec yield has moved from 4.20 to 4.70 in the same period. A lot of digital ink has already been consumed on the point that how the budget announcements regarding the expanded borrowing and an unhinged fiscal deficit have impacted the yields, so we will not go into that discussion.

However, the time is ripe to discuss one important announcement of budget speech before it becomes a distant memory. This was on the fiscal deficit targets. It was announced that the FD for the current year will finally end at 9.5% against the target of 3.5%. Apart from the pandemic related spending the number is high also on account of change in accounting treatment assigned to the FCI related borrowing. Going forward government aims to bring fiscal deficit to 6.8% in FY 21-22 and finally to below 4.5% by FY 25-26. This in effect means that the FRBM law has been outlawed comprehensively for now. Anyways it was sheepishly modified multiple times in the past too.

Now there is a concept of Chesterton’s fence in philosophy which one should employ whenever any existing law or a rule changes. What this heuristic essentially means that laws are like fences, they don’t come up on their own. There is a reason behind why they exist in the first place. Hence when we decide to do away an existing rule we need to think about the reasons of their origins before we write the marching orders. There is ample chance that the rule has become stale and frigid, but the fence metaphor will allow the policy makers to avoid any unintended consequences.

FRBM was put in place 17 years back to get government financing in order, keep borrowing in check and provide the markets an anchor to base their decisions. A pandemic hit economy requires a strong fiscal push but the original reasons for putting the fence in place aren’t totally useless even now.