Monthly Archives: April 2013

Apr 19

Currency War: Devaluation of Currencies

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Note: In one of our class on NISM currency derivatives a NISM exam aspirant inquired about the Bank of Japan’s announcement of doubling money supply and its after-effects. This leads to some good discussion and we thought to share our points of view in a refined way to help other students and professionals. So, test the impact of the cold war weaponry…..

Currency War: Devaluation of Currencies

A currency war sounds weirdly abstract, like a game played by rival politicians – but it can have devastating effects in the real world. It is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency. This policy is also referred to as “Beggar Thy Neighbour”.

However, the emergence of currency wars came from different sets of policies. The huge stimulus from developed economies’ central banks flooded the markets with their currencies leading to lower value of their currencies. This concern especially picked up in Sep-2010 when it became apparent that Fed would initiate another round of quantitative easing (or QE2). Brazilian Finance Minister Guido Mantega termed the practice of trying to keep currencies undervalued as ‘Currency War’ and this sentiment picked up after his comments.

It can be defined as competitive devaluation of a country’s own currency so that exports become more competitive and imports become costly. As a result imports are expected to reduce and exports are expected to go up. As a further result, employment within the country goes up and employment in the competing country may go down. The country which devalues its currency may get net trade surplus (exports more than imports) and its foreign exchange reserves go up.

Mechanism of Currency Devaluation: How it works?

In order to understand the mechanism and outcome of the currency devaluation game – let’s imagine a pair of brothers together owns a honey-making business in Lahore, (undivided) India. After the partition, one brother decided to move to India, just a few miles away to Amritsar, while the other one decided to stay back – so they divide the company in two.

Now, assume that both businesses make the same honey, sold in a 1 Kg. jar; priced the same, Rs. 1 per jar. When the partition happened and the brothers moved apart, the Indian and Pakistani Rupees were at parity, so a jar of honey – regardless of where it was made – was worth both 1 INR and 1 PKR.

All goes well, until….CURRENCY DEVALUATION! The brothers wake up, and find that 1 PKR is now worth just 0.50 INR! Or, to put it another way, 1 INR is worth 2 PKR. And now an Indian consumer can buy two jars of Pakistani honey as his 1 INR will now buy him 2 PKR.

The currency devaluation allows him to get two jars of honey for the price of one. It is great news for Indians, as it is a good deal; and it is great news for the Pakistani honey company, also, since the cheap Pakistani currency has allowed it to boost its share of the market.

But this is really bad news for the elder brother and his Indian honey company as he can’t afford to compete in given situations. Unless the government does something to weaken the INR, he’s going to go out of business, which means he’ll have to lay off honey workers and sell off those bees. And this will be happening all over the country, eroding India’s manufacturing base and accelerating unemployment.

History of Currency Devaluation
An important episode of currency war occurred in the 1930s. As countries abandoned the Gold Standard during the Great Depression, they used currency devaluations to stimulate their economies. Since this effectively pushes unemployment overseas, trading partners quickly retaliated with their own devaluations. The period is considered to have been an adverse situation for all concerned as unpredictable changes in exchange rates reduced overall international trade.

Following the turmoil of 2007-08 crisis, states engaging in competitive devaluation have used a mix of policy tools, including direct government intervention, the imposition of capital controls, and, indirectly, quantitative easing. As the price to buy a particular currency falls so too does the real price of exports from the country. Imports become more expensive. So domestic industry, and thus employment, receives a boost in demand from both domestic and foreign markets. However, the price increase for imports can harm citizens’ purchasing power.

This policy can trigger retaliatory action by other countries which in turn can lead to a general decline in international trade, harming all countries. While many countries experienced undesirable upward pressure on their exchange rates and took part in the on-going arguments, the most notable dimension of the 2010-11 conflict was the rhetorical conflict between the United States and China over the valuation of the Yuan.

Recent Woes
Japan has also joined the money printing spree like its peers from the developed world. The Bank of Japan (BoJ), in a statement released on April 4, 2013, said, “The Bank will achieve the price stability target of 2% in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years. It will double the monetary base.”

In plain language what the statement means is that the BoJ will try and create an inflation of 2% in the earliest possible time with an overall limit of two years.

Japan’s decision of doubling its money supply to $2.71 trillion in order to propel its economy out of two decades of stagnation eventually devaluing her currency, sparked concern of a possible second 21st century currency war breaking out, this time with the principal source of tension being not China versus the US, but Japan versus the Eurozone and other Asian nations.

Rationale behind this megalomania
For the period of three months ending December 2012, the Japanese economy grew by a minuscule 0.5%. In three out of the four years for the period between 2008 and 2011, the Japanese economy has contracted. To get over this, Japanese politicians have wanted to create some inflation so that people will start spending again.

The question is how will this inflation be created?
The BoJ plans to print Yen and double the money supply in the country. This money will be pumped into the financial system by the BoJ buying various kinds of bonds, including government bonds and exchange-traded funds from Japanese banks and other financial institutions. Banks can then go ahead and lend this money. As an increased amount of money chases the same amount of goods and services, the hope is that prices will rise and some inflation will be created. And this will put an end to the deflationary scenario that has prevailed over the last few years.

So by trying to create some inflationary expectations in Japan the idea is to get consumption going again and help the country come out of a more than two-decade-old recession. With prices of things going up people are more likely to buy now than later and thus economic growth can be revived.

There is another angle to this entire idea of doubling money supply, and that is to cheapen the Yen against the Dollar. As the BoJ starts printing the Yen to create inflation, there will be more Yen in the market than before. And this will lead to a fall in the value of the Yen against other currencies. A greater price competitiveness will ensure that exports pick up and that in turn will help revive economic growth. At least that’s how things are supposed to work in theory.
Neighbours, those are wary of becoming beggar…

The Japanese currency, the Yen, has dropped by 25% in value since the last government was voted in power in November 2012 as they pledged to kick start the economy by creating demand devaluing their currency. This has already given a major boost to Japanese goods and services. There is little confidence that the Yen will stop here as the government pursues an inflation rate of about 2% a year in order to end deflation and stimulate consumer spending.

With the price of Japanese exports becoming daily more attractive, neighbouring countries are weighing their options, and devaluing their own currencies is at the top of many lists. There is a good deal of outrage and anger among Japan’s neighbours. Not only neighbouring nations but even billionaire investor George Soros also criticize the Abe government and said, “If the Yen starts to fall, which it has done, and people in Japan realize that it is liable to continue, and want to put their money abroad, then the fall may become and avalanche.”

Although some of the strongest criticism of the Japanese program has come from China, the impact is unlikely to be felt as strongly there as in other parts of Asia. Most Chinese exports do not compete directly with Japanese products. Indeed, some Chinese companies may benefit from importing cheaper Japanese components.

The prospects for South Korea, whose manufactured goods from cars to washing machines do compete directly with Japanese brands, are much more troubling. About 60% of South Korea’s GDP comes from exports and the Seoul government has said it is very worried by the probable fallout from the Japanese stimulation program.

The barometer of currency values is also being watched carefully among the exporting countries of Southeast Asia.

Where it could go wrong?
In fact, by wanting to double money supply by printing the Yen, the BoJ is only doing what various other central banks around the world have already been up to. The Federal Reserve of United States has expanded its balance sheet by 220% since early 2008. The Bank of England has done even better at 350%. The European Central Bank came to the party a little late and has expanded its balance sheet by around 98%. The BoJ has been rather subdued in its money printing efforts and has expanded its balance sheet only by 30% over the last four years.

What is apparent that central banks can print all the money they want, they can’t dictate where it goes? Central banks which have tried this path have managed to create very little inflation and economic growth. The money that they have been printing is being borrowed by large institutional investors at close to 0% interest rates and being invested in all kinds of assets all over the world into speculative oil futures, luxury real estate in major financial capitals, and other non productive investments.

So the question is what stops all the money that will be printed in Japan from meeting the same fate, as the money that was printed by other central banks? And the answer is, Nothing.

With the BoJ expected to buy all kinds of bonds from banks and other financial institutions, it means that the financial system will be flush with money. This along with a depreciating Yen is expected to unleash a massive Yen carry trade.

Investors will borrow in the Yen at very low interest rates and invest it in various kinds of financial assets all over the world. This is called carry trade because investors make the carry – i.e. the difference between the returns they make on their investment (in bonds or even in stocks for that matter) and the interest they pay on their borrowings in the Yen. This money will be invested in all kinds of financial assets around the world.

What is the fate of such printing mania?
This stance of easy monetary policies has already been greatly criticized. Huge monetary accommodation by developed economies is being blamed for sharp surge in commodity prices elevating inflation levels globally. This has been sharply criticized by developing economies who have recovered smartly from the crisis but growth prospects are being hurt by inflation. Hence, any more monetary accommodation via the currency route is not going to be appreciated.

The BOJ says it just wants to get inflation to 2%. It says it will buy assets with money that didn’t exist previously…and keep buying…until inflation reaches 2%.

Then what? Well, we guess it will stop. And then what? Will the economy collapse when the money-printing stops? Or will the economy pick up…and the banks begin to lend…and the people go on a spending binge? Or will investors all over the world dump their Yen back onto the home islands…eager to get out of the Japanese paper money before inflation levels get out of control?

We don’t know. But neither do the Japanese nor for that matter other central bankers. As Reuters describes it is a ‘radical gamble’ and for a central bank to make a ‘radical gamble’ bespeaks desperation and lunacy.

Apr 17

Enigma of Indian Inflation

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Through this article, we’ll discuss today the much debated mystery of inflation and will try to seek the possible solution.

Most of the debates revolve around the theory that there is a trade-off between growth and inflation. This theory has its roots in conventional economic ideologies.

On the other hand, now a days, there are people those are the proponent of the idea that there is no tradeoff between growth and inflation.

Let’s have a look on these thoughts one by one.

First we’ll delve into the thoughts of old school which says that there is a trade-off between growth and inflation. Here are some thoughts from the Executive Director, RBI, Mr. Deepak Mohanty:

The conventional view
India is a moderate inflation country. In the eight year period from 2000 to 2007, the world inflation averaged 3.9% per annum. Even the emerging and developing economies (EDEs) which traditionally had very high inflation showed an average annual inflation at 6.7%. India’s inflation performance was even better at 5.2 % as measured by WPI and 4.6% measured by the consumer price index (CPI-IW).

In 2008 the global financial crisis struck following which inflation rose sharply both in advanced countries and EDEs as commodity and oil prices rebounded ahead of a sharp “V” shaped recovery. Thereafter, inflation rate moderated both in advanced economies and EDEs. In India too the inflation rate rose from 4.7% in 2007-08 to 8.1% in 2008-09 and fell to 3.8% in 2009-10, however, it backed up and stayed in double digits during 2010-11 and 2011-12 before showing some moderation in 2012-13. Given India’s good track record of inflation management, the persistence of elevated inflation for over two years is apparently puzzling.

Deceleration of growth and emergence of a significant negative output gap has failed to contain inflation. It is understandable if inflation goes up in an environment of accelerating economic growth. There could be a situation when the real economy is growing above its potential growth that could trigger inflation what economists call an overheating situation.

During a boom, economic activity may for a time rise above this potential level and the output gap becomes positive. During economic slowdown, the economy drops below its potential level and the output gap is negative. Economic theory puts a lot of emphasis on understanding the relationship between output gap and inflation. A negative output gap implies a slack in the economy and hence a downward pressure on inflation. So, India’s current low growth-high inflation dynamics has been in contrast to this conventional economic theory. Real GDP growth has moderated significantly below its potential. Yet inflation did not cool off.

Reserve Bank raised its policy repo rate 13 times between March 2010 and October 2011 by a cumulative 375 basis points. The policy repo rate increased from a low of 4.75 % to 8.5 %. Still it did not help contain inflation. Interest rate is a blunt instrument. It first slows growth and then inflation. But the growth slowdown has not been commensurate with inflation control.

With the persistence of near double-digit inflation in 2010 and 2011, the medium to long-term inflation expectations in the economy have risen, underscoring the role of higher food prices in expectations formation. If inflation is expected to be persistently high, workers bargain for higher nominal wages to protect their real income. This creates a pressure on firms’ costs and they may in turn increase prices to maintain their profits.

Only in an environment of price stability, a step up in investment accompanied by productivity improvements could bolster potential growth. Even when the supply side factors dominate the inflationary pressures, given the risks of spillover into a wider inflationary process, there is need for policy response. While monetary policy action addresses the risk of unhinging of inflation expectations, attending to the structural supply constraints becomes important to ensure that these do not become a binding constraint in the long-run, making the task of inflation management more difficult. By ensuring a low and stable inflation, the Reserve Bank could best contribute to social welfare. (Excerpts from the speech delivered on January 31st 2013).

So, here is the fact that despite raising interest rates progressively RBI failed to put a check on inflation and moreover puzzled by intrigue behaviour of it being high contrary to the low growth rate. At last, Mr. Mohanty opined on the supply side constraints for it being the culprit behind current high inflation.

Now let’s have a look on the other side of the story and see the perspective of opponent of above-mentioned conventional theory, who says that there is no trade-off between growth and inflation. Here are the views of eminent economist Mr. Ajay Shah, Professor, National Institute for Public Finance and Policy:

The counter-view
All of us are aware of India’s inflation crisis. It is very disappointing, how we lost our grip on stable 4-5% inflation which was prevailing earlier. From February 2006 onwards, in every single month, the y-o-y CPI-IW inflation has exceeded the upper bound of 5%.

We also agree that there is something insidious when 10% inflation effectively steals 10% of the value of my wallet or fixed income investments. In India, however, we often hear the argument “Yes, this is bad, but if high inflation is the way to get to high GDP growth, let’s get on with it”. It is, then, important to ask: Why is low inflation valuable?

Nominal contracting is very important
Complex organisation of economic life involves myriad written and unwritten contracts involving households and firms. The vast majority of these contracts are written in nominal terms, i.e. in rupee values that are not adjusted for inflation.

Inflation is an acid that corrodes all nominal contracts. Two people may have agreed on a contract two years ago at Rs.100, but that contract is thrown out of whack because of 10% inflation per annum. That contract has to be renegotiated. Bigger values of inflation corrode personal relationships also, given that there are many financial ties within friends and family.

Inflation messes up information processing
Essence of a market economy is adjustments to relative prices, reflecting changes in tastes and technology. Firms learn about the viability of alternative investments by watching relative prices change. Inflation messes up this information processing. It increases the `background noise’ by making a large number of prices change at once. This makes it harder to discern which price change is fundamentally driven, and merits a response in terms of increased or decreased production.

Impact upon pre-existing nominal savings
For a person at age 60 who expects to live to age 85 or 95, fixed income investments are absolutely crucial in the financial planning of these 25-35 years. These calculations can be destroyed by a short bout of inflation.

Impact upon relationship with banks
When households expect inflation will be 12%, they will see a 4% interest rate paid by the bank as yielding -8%. This has many consequences. On one hand, households and firms expend excessive (wasteful) effort on minimising their holdings of low-yield cash. In addition, they tend to shift away from fixed income contracting with the formal financial system. Both these distortions are caused by inflation, and exacerbated by flaws in the financial system.

These may seem to be small things but they actually are fairly large effects.

But is there not a tradeoff between growth and inflation?
For a brief period, the empirical evidence in the US suggested that there was a tradeoff between inflation and unemployment. Here’s the classic picture, for the 1960s in the US:

Graph shows a nice relationship where higher inflation has gone with lower unemployment. This evidence has led many people, particularly those concerned with the plight of the unemployed, to advocate higher inflation.

A look at the same evidence for the US, over a longer time period, shows no such tradeoff:


The proposition that there is a trade-off between inflation and unemployment was pretty much dead by the late 1970s. One by one, as central banks moved to inflation targeting, aiming and delivering 2% inflation, unemployment went down, not up. Hawkish central banks are the central story about how the stagflation of the 1970s was broken.

There is no tradeoff between inflation and growth. High inflation damages growth and one element of India’s growth crisis is India’s inflation crisis.

It is important to think carefully about the accountability of the central bank. RBI is not in charge of India’s welfare. RBI is in charge of India’s fiat money. The one thing that RBI should be held accountable for is delivering low and stable inflation, i.e. for holding CPI-IW inflation within the 4-5% range.

So that we have seen both the perspectives, it is pretty much clear that high inflation is not a freebie rapped up only in the name of high growth rate. On the same note, the reason identified by Mr. Mohanty held its ground that supply side constraints are the key responsible factor behind this bout of high inflation.

And now, on the solution front, we can’t expect RBI to perform the duties of the Govt. and involve in the state affairs of distribution and supply of the resources. Government, rather than forcing and looking towards RBI to ease interest rates, should do their work sincerely.

All of us are aware of the wastage of the resources; be it rotten grains in the custody of FCI, unused frequency of bandwidth lying with BSNL and MTNL or for that matter line-loss percentage in power transmission. If they can only use these scarce resources effectively and devise a plan and implement the same to bring down the wastage gradually, our Finance Minister, Union of India, would need not to trade the path of growth alone, on the contrary RBI and entire nation would accompany him.

Apr 10

Indian Financial Services – Onshore vs. Offshore Venues

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When India started trying to build a mature market economy in 1991, at first, it felt like a sophisticated financial system would emerge, which would both, serve India and start competing for the global market. From 1993 to 2001, India achieved a remarkable revolution in the equity market. This increased optimism in the ability of India to understand problems, to achieve change and to maintain high ethical standards.

It now seems that those hopes were premature. The revolution in the stock market used to be one of the best success stories of economic reforms in India. It might have fallen apart in recent month and years. The more likely scenario could be one where India-linked finance will happen offshore, while our regulators and government squabble over a minor and inconsequential onshore financial system that is riddled with ethics problems. In the short term, onshore Indian finance is suffering from one setback after another.

Business as usual, in India, is taking us to a destination where RBI, SEBI & company will preside over a minor and inconsequential financial system. The bulk of India-linked finance is taking place overseas, and the overseas market will dominate price formation for India-related financial products.

Why might this happen?

Money always follows the path of least resistance; therefore orders that used to come to India are easily being switched to other venues. An array of other venues has now come up:

  • Nifty futures trade in Singapore on the SGX and in USA on the CME.
  • An array of sophisticated derivatives on Nifty trade on the OTC market offshore (also termed `the PN market’).
  • Derivatives on the rupee trade overseas on the exchange traded market and OTC market (linear contracts are termed `the NDF market’).
  • Trading in individual stocks is taking place on the ADR and the GDR market.

Mistakes of domestic policy are giving a substantial shift in India-related finance to overseas locations. The two most important pillars of the Indian financial system are trading in the rupee and in the Nifty, and with both these, India is rapidly losing ground. If present policy mistakes continue, the role of the onshore market will continue to decline, for both the rupee and Nifty.

The plight of the Nifty

Let’s focus on Nifty – the most important financial product in India. The success and survival of the onshore securities markets is fundamentally about NSE. NSE faces an array of problems rooted in domestic policy whereas the overseas markets offering India-linked financial products are already developed financial centres and face no such problems. In the baseline scenario, Indian policy-making will meander on clueless and unconcerned and NSE will continue to lose ground.

Things are neither that much simple nor only stop here. First, NRIs pioneered sending order flow to overseas venues, and made them liquid. Next are Indian MNCs, who run global treasuries, who easily patronize the overseas venues. And then there are HNI residents, who can take $200,000 per year per person outside India. In addition, the richest 1% of India would systematically shift money out of the country through various means fair and foul.

With these kinds of possibilities, Singapore’s appeal goes beyond just the type of markets it offers. For one, India demands new investors deal with a thicket of documentation. While opening a foreign institutional investment account in most countries takes a few days, in India it is up to six weeks. So the start itself is a hurdle.

And then, there is taxation. We, as India, should not tax the activities of non-residents. For a global investor, sending orders to the Nifty futures on SGX is tax-efficient as Singapore follows a residence-based taxation system. Sending orders to India is inefficient today (owing to the STT and the stamp duty) and is apprehensive about tomorrow (if GAAR is used to abrogate the Mauritius treaty).

The bigger hurdle is India’s more severe taxation. Singapore does not tax capital gains and its tax on interest income allows for certain exemptions, such as foreign-sourced dividends. Whereas, India has a 15% short-term capital gains tax on listed securities. Most domestic debt instruments carry a 20% tax on income earned, which according to many market experts is the “biggest showstopper”.

The obvious choice

Put these factors together, and suddenly Nifty futures on SGX are a credible option. And this is exactly how things have worked out. In 2008, before these troubles had come together, SGX open interest was 59.78% of NSE. By 2012, where all these problems have come together, SGX open interest has come to 101.77% of NSE’s. It is astonishing to see that for the biggest Indian product – Nifty – an overseas exchange has got superior open interest.

Things changed when SEBI banned Participatory Notes (P-notes) in October 2007. SGX’s share in the total open interest (outstanding positions) in the Nifty futures product rose to around 50% from as low as 6% before the ban. A year later, the market regulator lifted the P-note ban, which led to a fall in SGX’s share to around 25%. But since then, SGX’s share has been rising steadily again. SGX now enjoys a 68% share in the total open interest on Nifty futures contracts.

And the recent blunder that added to the misery is the GAAR fiasco that resulted in exodus of foreign investors’ from the Indian regulatory boundaries. And while the government has softened its stand on GAAR considerably, foreign investors now seem increasingly concerned about the uncertainties of Indian policymaking.

The predicament of Rupee

The Indian rupee has grown rapidly to becoming the 16th most traded currency in the world. From less than 0.2% of the world forex turnover in 1998, it has grown rapidly to constitute about 0.9% of the world forex turnover in April 2010. It is one of the biggest emerging market currencies with the Korean Won, Russian Ruble, Chinese Renminbi and the Mexican Peso being its close competitors.

Trading in the rupee is composed of the following elements of the market:

The rupee-dollar is the most important price of the Indian economy. The overall market for the rupee is roughly $70 billion a day out of which roughly one-third is spot, and the rest is derivatives. The offshore market today is as big as the onshore market, as roughly half of rupee trading takes place in India.

In its 2010 triennial central bank survey on foreign exchange and derivatives market activity, Bank for International Settlements (BIS) also pointed out that about half of the dollar-rupee market was overseas.

Though the RBI has done away with many capital controls, access to the currency market onshore still has some restrictions giving rise to offshore currency trading. Having said that, it must also be noted that most emerging market currencies are traded heavily in prominent currency trading centres such as Singapore, Hong Kong, the UK and the US. This is an inherent feature of currency trading. Of course, countries which have capital controls tend to push a larger proportion of trading offshore.

The development in the Rupee market

InterContinental Exchange Inc. and CME Group Inc., among the world’s largest futures exchanges, have launched rupee-dollar futures contracts in the month of Jan 2013. This clearly shows the growing importance of the rupee in the global currency market.

Needless to say, large electronic exchanges will do their best to both capture market share and increase the size of the market. And given their advantage over domestic competitors of access to foreign market participants, as well as freedom with product design, the share of offshore trading could continue to rise.

Rupee trading on other markets does not necessarily mean that trading in local markets is shrinking. Though it may be the case that the cake is enlarging, but our slice isn’t.

As India internationalizes, domestic customers of financial services, and the foreign order flow, will increasingly shift their business to providers abroad considering the problems in the local financial system. NRIs do not like to send orders to India given that India as yet lacks a residence-based taxation framework; they would rather send their orders to US (on ICE & CME), Dubai (on DGCX) or London.

The obvious implication

When foreign investors send an order to India, there is an entire chain of activity where revenues are generated. This includes brokerage companies, accountants, lawyers, hotels, aviation services, etc. When the same foreign investor sends this order to Singapore instead, this entire chain fuels the Singapore economy instead. And as global interest in Indian derivatives surges, it is Singapore, not Mumbai that is reaping the benefits.

The swing shows how deeply a tax gaffe last year damaged foreign investor sentiment and the cost to an economy that has seen growth tumble to around 5.5% following the sharpest slowdown in a decade. India is now paying the price for poorly written rules last year aimed at ensnaring tax evaders, ironically including those routing investments through Singapore, which instead sparked outcry among foreign investors and an outflow of funds.

What worries India is that Singapore markets are now attracting flows in other derivatives, creating not only a missed opportunity for India, but also the risk of a parallel overseas market offering arbitrage opportunities that distort domestic prices.

Last but not the least, prospects of Bombay, emerging as an international financial centre will subside. If we can’t even hang on to market share for Nifty or the rupee, where is the question of competing against overseas financial firms or markets on things that aren’t India-linked?

Some steps in the right direction

Since all taxes are distortionary and a basic principle of public finance is that we should have a low rate that is spread across a large tax base; our first priority should be to achieve a low rate, a wide base, and the minimal distortions. Reduced rates will always yield welfare gains. The Budget 2013-14 makes progress on two fronts (reducing STT from 1.7 to 1 basis point, and reducing distortions between equities and non-agricultural commodities).

One more announcement from the budget was in best of the spirits: FIIs are allowed to trade in currency futures. This will also give more liquidity and depth to currency futures and there are two reasons for expecting this, taxation of commodity futures and the entry of FII orders flow.

Future finance ministers will need to navigate the difficult landscape of gradually scaling down taxation of transactions while retaining low taxation of capital gains (which has unfortunately come to be seen as a linked issue in the Indian discourse). There is much more waiting to be done: integrating currencies and fixed income, bringing sense to options, and getting away from the very high rates on the equity spot market.