Newmonth,RBIbulletinandLewis'spanic

As the new week of the new month starts, there will be a flurry of data to track and assimilate from across the globe. Various PMI data points will pervade the news waves depicting how the economic activity is picking up across the globe. From the US, the week will end with the NFP data, unemployment rate and the wage growth number. For India however the new virus case numbers will be the foremost data to track apart from the vaccine rollout numbers. Needless to say that the twain will overshadow any growth number, inflation print, PMI, car sales, southwest monsoon etc in the short term.  

When there is flurry of activity happening on a daily basis there is always benefit in revisiting some old text. Not exactly old but the RBI Bulletin for April released last week was on our weekend reading list. Apart from many insightful articles, bulletin also had the statement by RBI Governor which was first published on 7^th April (along with MPC policy decision). It was worth a read just to appreciate how suddenly things have change for the worse on the ground. Articles like these are much more conscious and aware of time in which they are being written. They are sometimes a better ally in understanding the nature of the problem than a long book on the topic. A book which is generally written 5-6 years or even more post the event gains a lot of its maturity due to the hindsight effect. A lot of its wisdom is a post facto assimilation of information which was not available to the policy makers or other participants when the event was playing out in real time. This presents a bleached version of the reality and the book’s author sounds more wiser than what he or she really is. One great example is a book named Panic by celebrated author Michael Lewis. It is not exactly a book but actually a compendium of articles written during the time when various financial crisis was unfolding like Asian debt crisis, LTCM or dot com bust etc to name a few. The various articles present a real flavour of what it was like being in the vortex of the crisis. If nothing else the read makes you humble for sure.  

Coming back to the content of the article it talks a lot in detail about the liquidity situation in the economy that how RBI wants to keep it in a surplus mode. Let’s try to dwell further on this. On a basic level economy is nothing but the interactions between people where the money is exchanged between them. When people get locked down (or out) they consume less and spend lesser. For the ones with the income streams intact the balances in the bank (read savings) go up. This consequently increases the liquidity in the banking system and reduction of cash in circulation. On the other side this results in collapsing demand of certain products and services. The class of people affiliated with this sector hence experience a loss of income and defer consumption.

Certain other second order effects will be excess savings being channelled into equity markets. This can be seen as asset price inflation; in case of equity this rise will happen without any increase in earnings. A somewhat bubble kind of scenario. On the other hand, the lower consumption would make the prices depressed and a negative spiral would ensue. Our readers would remember that there is a Keynesian medicine available which advises that government should spend more and generate employment opportunities to revive the economy. But this medicine works in a longer-term horizon (finding a project, starting it, spending on it etc are time consuming things), a sudden loss of income due to the virus lockdown needs a much more urgent remedy. A country like the US can help with outsized unemployment benefits but not every else can do the same. There is some fiscal consideration to contend with. From the market’s perspective, the longer the pain continues the pressure on the government to act will increase. This will eventually trickle down primarily on the bond markets as the assumptions underlying the borrowing calendar for the year have to be revisited.