Freezing Russia's Fx Reserves - A blow to Global Commons

 This was published in the Times of India on 7th Mar 2022

Stock market volatilities - Its about the inflation, honey

 This was published in the The Times of India on 17th Feb 2022

Investing in 2022

 This interview with Zee Business was published on 19th Jan 2022

Regulation of Crypto Assets - Need for a new Bretton Woods

This was published on the 8th Dec 2021 in Times of India  

It is crypto season around the world. Some countries are banning private cryptos (China), some enthusiastically embracing it (El Salvador), some moving towards wary acceptance (US) and yet some more are cautiously examining the landscape without foreclosing options (India).

As a fascinating new frontier of technology, the potential of crypto assets are immense — financial inclusion, tokenisation of illiquid/physical assets (like property and art), cheaper/faster payment systems. Alongside the immense potential, there are emerging areas of risks such as money laundering, terror finance, disturbing global financial stability, that need careful consideration.

Cryptos are large, and growing

Source: IMF

Through 2021, the total market capitalisation of crypto assets nearly doubled. At $2 trillion, it is still smaller than mainstream asset markets like equities and credit globally. But the pace of growth, despite intense volatility in the asset, demonstrates its rapid socialisation and acceptance.

Cryptoisation: Potential loss of sovereignty
Independent conduct of fiscal and monetary policies are a key feature of national sovereignty. It is not uncommon, however, for countries with weak macros to lose control over some or many aspects of the two.
There are dozens of African and Latin American countries, for example, where the US dollar has been (and is still) the default primary currency in use. Zimbabwe and Venezuela, in recent times, represent examples, where there are widespread questions on the ability of the state to govern, hence monetary and fiscal policies are outsourced to foreign or supra-national entities.

In some ways, it is similar to private residents raising private militias for security, as a result of a breakdown of confidence in the state’s monopoly over violence.
But “dollarisation” of domestic economies has a serious impact on monetary and fiscal policy settings. Domestic central banks lose the ability to influence interest rates and manage liquidity in the economy, if the dominant currency is issued by a foreign government. Further, the domestic central banks lose their seigniorage revenues — difference between the 0% interest on each currency note issued and the same deployed by the central bank into interest-bearing domestic financial instruments (like bank reserves, government securities etc). In effect, dollarised countries end up importing the monetary policy of the US Fed and losing seigniorage revenues to the US Fed.
Private cryptos as “currency” are rightly feared to have similar potential impact. Just as “dollarisation” effectively results in the economy importing US monetary and fiscal policy, “crypto-isation” will mean importing the monetary policy engendered by a privately owned currency. The larger the developed ubiquity of cryptos as a medium of exchange, the less influence will domestic monetary policy tend to have on monetary aggregates like interest rates, money supply, capital flows.

Cryptos are structurally global: Challenges to localised regulation

Most private cryptos, like the popular Bitcoin, have a public blockchain ledger. Transactions on Bitcoin are untethered from a specific financial institution or country, a peer-to-peer transfer can be made as long as someone has an internet connection and a Bitcoin wallet. There is no central repository in any one country that can be used to shut down or regulate Bitcoin activity.
The near-tautological incapability to control cryptos engender governments to completely ban them. Bans too, because of the same characteristics, are difficult to enforce. Ergo, global coordination is a sine qua non for effective regulation of cryptos.

National regulations have signalling effects, but not always in the right direction

Recently, rumours of the new crypto bill in India proposing to ban private cryptos sent crypto prices tumbling across all Indian exchanges, completely disconnected from price movements elsewhere in the world.
The Kimchi Premium, referring to the persistent premium of Korean-traded Bitcoins over US-traded ones, reflects both limits to the global free-trading presumptions as well as potential of local regulatory interventions on cryptos. But while local regulations can influence prices in a specific country/market, crypto exchange trading happens primarily through entities in offshore financial centres.

Source: IMF Global Financial Stability Report, 2021

In other words, independent national regulatory actions merely drive capital flows and trading outside to offshore financial centres. China, in a series of measures starting in 2017, has banned private crypto ownership and trading in mainland China.

But the impact of that has been a shift of Chinese crypto activity from exchanges to per-to-peer Decentralised Finance (DeFi), which it allows users to trade sans any exchange or intermediary, making it harder to ban/control.
China remains the largest centre of crypto activity in Asia, although the bulk of it is now in the form of DeFi. DeFi, given its architecture, has less oversight possible from regulators; and doesn't have the same KYC/AML obligations of regulated exchanges (and market participants). Net effect: A national ban has moved cryptos towards riskier, less-monitorable avatars.

Need for Crypto Bretton Woods

The end of World War II, with its horrific human and physical costs, led to the creation of Bretton Woods institutions. The aim was to promote international economic cooperation to rebuild a better economic architecture via new institutions, rules and globally accepted common norms.
Eight decades on, the report card can be judged to be quite positive. Expansion in global prosperity (even if unequal), especially in Asia, massive increase in global trade, cooperative mechanisms like FATF to tackle financial crimes, it’s an impressive record.
Cryptos present a new requirement for a Crypto Bretton Woods today. It’s a feature of the asset that it spans geographies, is nimble enough to find new variations, and if left unregulated, can wreak havoc at weaker economies. Above all, it has natural immunity against isolated national regulations. It also holds great promise as a technology frontier. A new set of globally coordinated rules are urgently needed, so that we harness the promise while mitigating the real risks.

Markets post Covid - What's next?

 This was telecast on CNBC on 3rd Dec 2021

Cryptocurrency regulation - Web 3.0 or Digital Haji Mastans?

 This was published on 30th Nov 2021

Why Timing is Perfect for India-UK Trade Deal

 This was published in the Times of India on 14th Oct 2021

Free trade is dead, long live free trade!

A 75 year old, post-WW2 global consensus on rules-based free trade is breaking down. Some of it for good economic reasons – global supply chains have grown massively, but have also sacrificed redundancies at the altar of efficiency. As a result, small disruptions (or even potential disruptions) cause snowball effect on global supplies of critical goods – the recent semiconductor shortage being a case in point. But a lot of it is political – the axiomatic assumption of “winners and winners” out of free trade are being questioned by those who think there have been too many “losers” too. Add to that the recent geopolitical tensions around China, the factory of the world, and free-trade-wallahs are at the receiving end of sharp backlash.

India’s public junking of RCEP, the China-led mega trade bloc that was supposed to be the mother of all multilateral trade blocs in Asia, was in the same mien. Endemic trade deficits with China and heightened border tensions meant India was loathe to risk being in a Chinese tent where China could dominate rule-making. Brexit was driven by UK’s very similar frustrations – too many seemed to be “losing out” due to a rigid rules-based EU architecture.

A different set of compulsions have come to the fore in a post-Covid world. Faced with severe economic slowdown and having adopted a tight-fisted fiscal strategy, Government of India (GOI) has been pushing through a slew of supply-side “reforms” to prepare the ground for the cyclical upturn, whenever the latter happens. Strategic bilateral FTA are part of the reform tool-kit, and hence back in flavour. Similarly, a big premise of Brexit was UK’s ability to strike “better deals” individually with strategic partners like India. An Indo-UK comprehensive FTA is a key part of the Enhanced Trade Partnership understanding reached at Prime Ministerial levels.

In a nutshell, the rationale for an Indo-UK FTA has gotten stronger on politico-strategic grounds. However, the economic rationale too is quite compelling.

Indo-British trade has moved significantly away from a shared colonial legacy. Looked at from a headline perspective, India and UK are no longer very important to each other on trade – neither country figures in the other’s Top 10 list of trading partners.

But looked under the hood, the importance is rather more than headline numbers.

Beyond the Headlines

For starters, UK is one of the few large economies with which India enjoys a merchandise trade surplus – amongst the G20 countries, India’s trade surplus with UK is second only to that of the US. Once trade in services is added, the total trade surplus is even higher. Further, UK is the third largest export market for India’s textiles – an industry that has long been the focus on policy attention due to its high employment-intensity.

Complementarity of trade

India and UK also have complementary trade profiles. World Bank’s Trade Complementarity Index (TCI) for both countries are at relatively high 50s and 60s – demonstrating that India export basket fits in well with UK’s import basket and vice versa.

Source: WITS, World Bank

Investment Flows and Geopolitics – Linking up the sinews

India’s interest in UK as an investment destination outstrips, on relative importance, India’s trade relations. Led by the Tata group’s acquisitions of marquee British companies like Corus and JLR in the early part of the 21^st century, India is today the second-largest source of FDI for UK (behind US). The London capital market eco-system has also proved to be one of the leading hubs of capital raising for Indian companies. Several British institutions are setting up operations in GIFT City IFSC.

However, it is at the geopolitical level that the congruences have gotten sharper. India’s a key pillar of Indo-Pacific strategies of all Western powers, UK included. The China variable has gotten ever-so-angular in recent months, prompting a revisit of military level equations in geopolitics by all major powers. UK, while undergoing a massive reprioritization of defence expenditure, has committed to a continuous naval presence in the Indo-Pacific. The AUKUS arrangement further cements those commitments.

India’s experience with FTA – At the margin, not bad

A popular chestnut is that India has been on the receiving end of FTAs and has ended up importing more and exporting (relatively) less. The Economic Survey 2020 did an exhaustive analytical study on the point – it showed actual results to the just the reverse. The coverage of the study was 14 FTAs concluded by India with various countries and regional groupings (like ASEAN) in the 21^st century. On the whole, India exported more than it imported, incrementally, as a result of FTAs.

 

Source: Economic Survey 2019-20

In terms of total trade, overall impact of FTAs was 10.9% on exports and 8.6% on imports. Specifically for manufactured products, the impact was higher – 13.4% for exports and 12.7% for imports. Ergo, India “gained” a trade surplus of 2.3% per annum on total merchandise trade and 0.7% on manufactured products trade.

 An Indo-UK FTA checks most of the contemporary boxes – strategic alignment, economic interests and above all congruence of local political opinion about the deal. Its an idea whose time has come, and come quite clearly.

 

The author is the Managing Partner and CIO, ASK Wealth Advisors. The views and opinions expressed in this article are personal.