TaxTMI 
TaxTMI 
TaxTMI 
Global spillovers: Managing capital flows and forex reserves
X X X X Extracts X X X X
X X X X Extracts X X X X
....lobal spillovers: Managing capital flows and forex reserves <br>News and Press Release<br>Dated:- 15-12-2017<br><BR>PDF DOWNLOAD ============= Document 1 Global spillovers: Managing capital flows and forex reserves Viral Acharya (based on "Capital flow management with multiple instruments" w/ Arvind Krishnamurthy) NSE NYU Conference on "Indian Financial Markets, 2017 December 14, 2017 1 The views expressed are entirely those of the authors and do not in any way reflect the views of the Reserve Bank of India. Outline Motivation - Sudden stops and reversals -> Forex reserves - Rey (2013), Obstfeld, Shambaugh and Taylor (2010). A measure of external sector resilience - - (Foreign-reserves - Short-term external debt or ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....flows)/GDP Reserves and capital controls are complements - De Gregorio (2010), Ostry et al. (2010), Aizenmann (2011), Jeanne and Ranciere (2011), Aizenman and Marion (2013), Key insights: - - - Foreign reserves do not work absent macro-pru/capital controls Reserves undone by short-term external debt; can make things worse! Macro-prudential comes first; makes reserves effective . FPI flows in domestic debt versus external debt • ◠Tradeoff: Lower external issuance costs versus greater vulnerability Arbitrage -> Need to tax both foreign debt and FPI in domestic debt • Greater the reliance on external debt, greater the needed reserves Macro-prudential measures to deal with the tradeoff ◠Size limits....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., maturity of investors and investments, rationing the risky. 2 SUDDEN STOPS AND REVERSALS: THE TAPER "TANTRUM" 3 4 5 6 Monetary easing->EM capital flows Rock-bottom interest rates... Emerging markets received close to half of global inflows after the crisis compared with less than 20 percent before... Composition of Global Capital Flows (Share of total flows) Policy Interest Rates (in percent) Lehman event Post-crisis Pre-crisis 2002-2008 2010-2013 IAM IEM 0% 20% 40% 60% 80% 100% Source: IFS Capital Flows Taper Tantrum (May-June 2013) (Bond & Equity) 3 3 UK US -Japan Euro 2 1 -3 0 -4 2007 2008 2009 2010 2011 2012 2013 2014 -5 210125 -1 -2 -6 Source: IMF staff estimates. Source: Emerging Marke....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t Volatility - Lessons from the Taper Tantrum, IMF Staff Discussion Note, September 2014 May June South Africa 4 -4 -2 0 QE, Taper Tantrum, EM MF Flows Emerging Markets 4 $Billions 2 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: Market Tantrums and Monetary Policy by Feroli, Kashyap, Schoenholtz and Shin (Feb 2014) 2012 5 TAPER TANTRUM AND INDIA 6 Volatility of FPI flows- 'Surge' & 'Stop' 50.0 40.0 30.0 20.0 10.0 0.0 -20.0 Net Foreign Direct Investment Net Portfolio Investment Financial Crisis Source: RBI Data for 2017-18 updated till July 2017 Taper tantrum ས 7 Taper Tantrum and Exchange rate 75.00 0.0180 -USD/INR reference rate(LHS) 70.00 -JPMorgan EM Currency Index inve....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rse(RHS) 0.0160 € 65.00 USD/INR reference rate in INR 60.00 55.00 50.00 45.00 40.00 35.00 བྷྲ ༔ ༔ ą ལྟུ ༔ བྷྲ བྷྲ ༔ བྷྲ སྠཽ བྷྲ བྷྲ ནྟི Source: Bloomberg and RBI 0.0140 0.0120 0.0100 0.0080 0.0060 0.0040 8 MEASURING RESILIENCE 9 ◠A measure of external resilience International or external-sector liquidity - Country has issued net short-term (ST) debt claims to foreign investors • In the aggregate, should include unhedged foreign exposures and all reversible "hot money" flows. - If foreigners run, does the country have adequate ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....FX reserves? - Liquidity; = - FX Reservesâ‚-ST Ext Debti GDP i Simply looking at reserves is inadequate and a potentially misleading indicator of vulnerability - Akin to Guidotti-Greenspan (1999) “rule†10 2.00 1.80 Foreign reserves and short-term debt for EMs tend to rise together 0.80 0.70 0.60 1.60 1.40 0.50 1.20 0.40 1.00 0.30 0.80 0.60 0.20 0.40 0.10 0.20 0.00 0.00 1999 2001 2003 2005 2007 2009 2011 2013 2015 1999 2001 2001 2003 Source: IMF (in trillion USD), see also Carstens (2016) 2003 2005 2007 2009 2011 2013 2015 11 425 400 375 350 325 300 275 250 225 200 175 150 125 100 75 50 USD Billion Trend in Forex Reserves for India Source: RBI 12 110 100 90 90 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....80 00 USD billion 70 0 60 60 50 50 40 40 30 20 20 Movement in Short term External debt 10 10 26.0 24.0 22.0 20.0 18.0 16.0 14.0 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 â– Short-term debt - Short term Debt as % of Total Debt (RHS) 12.0 10.0 Source: INDIA'S EXTERNAL DEBT, A Status Report, 2016-17 by Government of India 13 USD billion 300 250 200 150 100 50 (Reserves Short-term external - debt)/GDP 400 0.25 350 0.20 300 250 0.15 Reserves/Short-term External Debt 00 8 4 2 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 | Reserves-Short term external debt (USD bilion) (Reserves-Short ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....term external debt)/GDP (RHS) 0.10 USD billion 100 0.05 50 0.00 150 200 Short term external debt Reserves/Short term external debt(RHS) Source: INDIA'S EXTERNAL DEBT, A Status Report, 2016-17 by Government of India 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Reserves 14 Does the measure work more broadly? Cross-country outcomes during the taper tantrum explained by liquidity ◠Reserves,2013-ST Debtį, 2013 Debti,2013 Liquidity,2013 = GDP1,2013 Asset price changes from June '13 to Oct '17 15 3.00 -TUB 2.30 2.00 1.50 -MEX SAS 1.00 0.30 -556 -0.30 -1.00 -1.50 -2.00 • MYS - RUS 5% 15% 20% 25% • IDN + COL - IND ■BRA + THA CHN (a) Change in Sovereign ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Bond Spread 50% IND 40% - SAS - BRA 30% +TUB - IDN 20% - RUS PHL 10% 3396 -10% -20% - CHN - PER PAK 586 10% " 15% MYS209 25% 30% 359: COL (b) Stock Market Return -5% 586 10% 15% 2056 25% 3056 35% PAK - THA - CHN -10% - IND -20% - MYS -30% - IDN SAS • BRA -405 -50% -60% (TU -70% - MEX + COL - RUS PHL (c) Currency Appreciation PER 16 Does the measure work more broadly? Cross-country outcomes against global risk factors also explained by liquidity Reserves,2013-ST Debti,2013 Liquidity i,2013 GDP1,2013 Global factor: the first principal component of the time series of - 10 year US Treasury yields (Rey, 2013) - VIX (Rey, 2013) - S&P500 stock return - - Return on the US....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... dollar basket index - Return on the commodity price index 17 (a) Change in Sovereign Bond Spread Global Factor (1) -0.0753 (2) (3) -0.0627 -0.1228 (4) -0.1162 (3.94)** (3.32)*** (7.35)*** (6.72)*** Global Factor x Liquidity 0.0748 0.0784 (4.13)*** (3.21)*** Liquidity 0.0012 -0.03 -0.03 -0.33 Country FE Y Y Y Y Year FE Y Y Y Y Restrict to Large Shock N Y N Y R² 0.01 0.04 0.01 0.05 N 21,331 2,188 13,733 1,413 (c) Currency Appreciation Global Factor 0.1539 (4.84)*** 0.1297 0.217 0.1828 (4.97)*** (3.68)** (3.71)*** Global Factor x Liquidity -0.0986 -0.0843 (2.23)** (2.28)** Liquidity 0.0035 0.1021 -0.18 (1.94)* Country FE Y Y Y Y Year FE Y Y Y Y Restrict to La....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rge Shock N Y N Y R² 0.07 0.21 0.08 0.24 N 27,615 2,848 17,823 1,843 18 ** *** P<BR> News - Press release - PIB....