September 2013

Markets And Economy
Markets And Economy

Monetary Policy and Inflation

  The announcement of Monetary policy is awaited by businesses and investors alike, who are eager to know the impact of the change in policy on their savings or on their business. Here we look at how monetary policy impacts the economy.The objective of Monetary policy is to control the supply of money to boost economic growth while keeping inflation within acceptable limit. Some tools of monetary policy that are used by the central banks are: Lowering of short-term Interest Rates: This is the first tool used by the central banks around the world. When interest rates are lowered, it becomes cheaper to borrow money and less lucrative to save.  This brings about a decline in savings, individuals and corporations are encouraged to spend; more money is borrowed, and more money is spent, thus increasing the overall economic activity. Open Market Operations: Under OMO, the central bank buys bonds (from banks or general public) in the open market.  By exchanging bonds for cash, the central bank increases money supply in the economy. Due to increase in the supply of money relative to demand, money can be borrowed at lower interest rates. This means that the short term interest rate for borrowing decreases. Conversely,…

Markets And Economy

The Case for Raghuram Rajan and Economy of India

  Recently in an article in the Economic Times, popular Indian columnist and novelist Ms Shobha De, touted the newly appointed Reserve Bank of India (RBI) governor Raghuram Rajan, as the ‘rock-star economist’, the ‘Poster Boy of Banking’ who can easily top easily top ‘India’s Most Desirable’ lists and is also expected to pull India out of the financial mess. The post has attracted lot of media attention and has succeeded in flaring up imagination and  varied emotions of the readers, ranging from interesting, to disgusting or even revolting! To add substance to the article, it might have made better sense to also look at some of the problems facing India’s economy and the challenges that Rajan has to deal with while he tries to walk his talk. Let’s have a go at those less appealing aspects that are actually the areas of concern for all Indians. The economic problems in India can be attributed more to the country’s fiscal policy and other government policies than to monetary policy of the Reserve Bank of India (RBI). The central bank often finds itself reacting to the consequences of inaction and policy conundrum of the government.  

Markets And Economy

Shareholder Engagement or Activism ?

  Continuing from my last post ‘ Is shareholder engagement good for companies? ’,  here we look at the scope of shareholders engagement and different approaches to shareholder engagement. What is the scope of shareholder engagement? Shareholders have a legitimate role in areas pertaining to: Corporate Strategy – such as mergers, diversification, restructuring, non core asset sale. Capital Structure – such as capital allocation discipline, use of cash on balance sheet. Governance – such as audit-related issues, board structure, managerial remuneration. However shareholders are not expected to micromanage companies. Nor is it desirable that shareholders push for short term profitability over sustainability and long term value creation. It is important that shareholders and board members engage effectively in the shared pursuit of high quality governance. What are the different ways in which shareholders engage with companies? Shareholders can either have a proactive approach for engagement with a company or may adopt a passive approach towards a company. Passive investors sell off their shares if they are dissatisfied with the corporate decisions. On the other hand, active investors engage proactively with the management, prior to a corporate decision being affected, in order to change the outcome of the decision. While the term…

Markets And Economy

Is shareholder engagement good for companies?

  Shareholder activism has increased significantly in the last few years, particularly after the financial crisis of 2008. However, it has since then been a debatable topic, as it is difficult to quantify “appropriate” level of shareholder engagement, which is desirable for achieving effective governance, while adding to business value. Quite often there is an apprehension that excessive shareholder intervention may consume a lot of valuable management time and result in short term profit orientation. Why should shareholders engage with company management and boards? A business needs capital to finance its growth Shareholders are the providers of capital to a business and as such are part owners of the business. Shareholders invest in the business hoping for a higher potential return from the investment while accepting a greater potential risk than other providers of capital. As shareholders own a share of the organization in which they have invested, this entitles them to ownership rights (i.e. rights to profits and assets in proportion to their shareholding) and in most cases control rights (i.e. rights to have a say in the running of that company, e.g. they may vote on key issues). Management makes use of the capital to run the business…

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