The market seems to be having a free fall despite a slew of measures. The sensex has taken a dive from 13500 to touch 8000 in october 2008 as if panic button has been kept continuously on. FIIS play havoc with our market and make a kill taking the market up and down and dictating terms and creating helpless situation. To counter the FIIS move,it is better for banks, insurance companies and mutual funds to enter the market with Government's guarantee. As it is, banks are allowed to have capital market exposure upto 5 % of their net worth. Most of the banks have not gone for this as a matter of abundant precaution and prudence. Banks having capital adequacy ratio of 12% and above ,NPA level less than 1%, and having no exposure to real estate and capital market exposure of less than 5% can be made to enter the market in a caliberated manner and boost the market sentiments and confidence. Since the sensex has fallen drastically despite fundamentals of our economy remain strong, finacial and banking system remain largely insulated from global crisis and claim to be resilient to absorb the shocks there is nothing wrong if banks are allowed to increase their capital market exposure a bit . There is no serious downside risk and and at the same time banks can think of improving their trading profit . What the markets want now is the confidence level and this can be achieved only by making institutions to enter the market. Even strong mutual funds having good financials and insurance companies with sound business base can enter the market with a guarantee from the Government. The cost is only notional and the benefit is substantial.
Even investments by retailers upto Rs 1 lakh in capital market can be considered for tax concession if not exemption. Of course risks have to be borne by them. We are facing an unusual situation and nothing wrong if we take some unusual measures.
The cost incurred by the Government will be more than offset by the direct and indirect gains.
Monday, October 27, 2008
Saturday, October 4, 2008
Why not an International Market Stabilisation Fund
Why not An International Markets Stabilisation Fund?
Volatility in markets and instability of markets have of late been the order of the day world over. Reasons can be attributed among other things to the failure of the regulatory and supervisory system, aggressiveness of some institutions in introducing exotic products in the garb of minimizing and distribution of risks, unchecked expansion of business particularly under off balance sheet category and generating hype without much of base about the economic growth prospects and exploiting sentiments of people ignoring business ethics and values. Using jargons, mathematical formulas ignoring the basic concepts of margin and safety are observed to be the guiding principles in the present day banking and investments. Principles of accounting have been grossly violated in such a way that it is humanly impossible to track the transactions and get a feeling of the final destination of the transactions. This is termed as distribution of risk under the modern risk management system using derivatives in an infinite manner. Because of the inter-linkages of markets and institutions under financial liberalization and integration of economies and usage of complex products , the real risk is unidentifiable and the coverage of risk is therefore unmanageable. The good old principle of lending ie not to carry all eggs in one basket has been systematically ignored through mysterious ways and the present failure of well known institutions is nothing but due to concentration of risk in one or two portfolios camouflaged in some derivative products. This has been going on for quite sometime and many institutions have totally disappeared or have been fast disappearing from the scene. The result is erosion of confidence in institutions, markets, products and the regulatory and supervisory
System. The question is how long this can go on?
The only solution perhaps is to think of setting up an International Markets Stabilisation Fund on the model of International Monetory Fund. Both developed and developing countries can be made members of the fund and they can subscribe to the fund based on certain parameters like GDP growth, turnover in various markets,
efficacy of the regulatory and supervisory system etc. In case markets fail due to various reasons and stability of the system gets disturbed beyond certain reasonable limits, the fund can consider bail out measures depending on the circumstances and the extent of cooperation from member countries. The objective of setting up of the Fund should be basically to maintain the confidence level of various economies in institutions, markets and products in the world financial system and ensure to have a backing in case of crisis situation like the one the markets are experiencing now. The institution can be on the model of IMF and can be set up in any developing economy. The modalities of setting up of the institution, its management, method of operation and etc details
can be worked out in coordination with all economies. Such an institution can certainly come to the rescue of institutions, markets and economies from irrational exuberance and collapse of the financial system.
Dr.T.V.G.Krishnan
Volatility in markets and instability of markets have of late been the order of the day world over. Reasons can be attributed among other things to the failure of the regulatory and supervisory system, aggressiveness of some institutions in introducing exotic products in the garb of minimizing and distribution of risks, unchecked expansion of business particularly under off balance sheet category and generating hype without much of base about the economic growth prospects and exploiting sentiments of people ignoring business ethics and values. Using jargons, mathematical formulas ignoring the basic concepts of margin and safety are observed to be the guiding principles in the present day banking and investments. Principles of accounting have been grossly violated in such a way that it is humanly impossible to track the transactions and get a feeling of the final destination of the transactions. This is termed as distribution of risk under the modern risk management system using derivatives in an infinite manner. Because of the inter-linkages of markets and institutions under financial liberalization and integration of economies and usage of complex products , the real risk is unidentifiable and the coverage of risk is therefore unmanageable. The good old principle of lending ie not to carry all eggs in one basket has been systematically ignored through mysterious ways and the present failure of well known institutions is nothing but due to concentration of risk in one or two portfolios camouflaged in some derivative products. This has been going on for quite sometime and many institutions have totally disappeared or have been fast disappearing from the scene. The result is erosion of confidence in institutions, markets, products and the regulatory and supervisory
System. The question is how long this can go on?
The only solution perhaps is to think of setting up an International Markets Stabilisation Fund on the model of International Monetory Fund. Both developed and developing countries can be made members of the fund and they can subscribe to the fund based on certain parameters like GDP growth, turnover in various markets,
efficacy of the regulatory and supervisory system etc. In case markets fail due to various reasons and stability of the system gets disturbed beyond certain reasonable limits, the fund can consider bail out measures depending on the circumstances and the extent of cooperation from member countries. The objective of setting up of the Fund should be basically to maintain the confidence level of various economies in institutions, markets and products in the world financial system and ensure to have a backing in case of crisis situation like the one the markets are experiencing now. The institution can be on the model of IMF and can be set up in any developing economy. The modalities of setting up of the institution, its management, method of operation and etc details
can be worked out in coordination with all economies. Such an institution can certainly come to the rescue of institutions, markets and economies from irrational exuberance and collapse of the financial system.
Dr.T.V.G.Krishnan
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