Presidentialdebate,Borrowingcalendarandhistoryofratesetting

When on Monday we wrote this newsletter we titled it saying the week of MPC, NFP and Presidential debate. Little did we knew that the MPC was going to be postponed. An unexpected turn of events! A meeting getting preponed on account of delivering an emergency cut or hike is still palatable but the postponement was a bit out of the blue.

The other headline item, the presidential debate in the US, happened on the expected lines where the contrasting style of the two candidates was sharply visible. The first of three televised debates has been long considered the perfect platform by the candidates to sway the fence sitters which is crucial in the case of a knife edge final result. Frequent interruptions marred the first debate as contentious issue of tax returns remained in focus.

Now coming back to the news of the MPC delay. From the price action perspective, the market had already made peace with the fact that there is not going to be any rate cut. The rate conundrum is difficult to manage as too low would punish depositors whereas too high will impact business growth. Let’s walk through some history to judge the rate levels present today. Though we have seen this example in an old note it would be worth a revisit to glean some new learnings.

Raghuram Rajan quotes from Kautilya’s Arthshastra in his book The Third Pillar, citing an example of how the rates were set in the Mauryan empire of 300 BC. The royal decree says that maximum rate charged for loans to ordinary people would be 1.25% per month. 5%  pm would be the ceiling for ordinary commercial loans. 10% pm for riskier transactions which involved travel through forests. Finally 20% pm for trade through sea. The rates look obnoxious when compared to the current repo rate of 4% per annum.

There are a few interesting observations from the above rate chart. Firstly, the rate on ordinary loans is very reasonable acknowledging the fact that such loans would add to consumption resulting in overall growth and prosperity. The high rates charged on sea trades are like precursors to the modern concept of a risky credit/junk bonds. We are sure that in due course, as the sea faring techniques improved, the risk premium would have come down. Though one would be right to wonder about the profit margins such traders would be making on their voyages to afford such high credit costs. Finally, these are government mandated ceilings on interest rates (compared to the repo floor of current times). Readers can see it as an attempt by the government to regulate the private credit markets. We don’t know for sure if it was to stop some kind of predatory lending practices!

Coming back to the last day of September 2020 AD from 300 BC, we see that the Dow Jones closed down by 0.5%, the dollar index is below 94, US 10 yr yield at 0.65, gold at 1890$/oz and brent crude at 40.65$/bbl. Both the euro and pound sterling are expected to remain volatile with the passing of the internal markets bill in the UK parliament. Domestically, today we will have the announcement of the borrowing calendar of the government for H2. The expectation is that there won’t be any surprises and a figure close to 5.5 lac Crore INR is likely. The 10 year benchmark bond is trading at 6.04. The rupee opens at 73.80 today.