tag:blogger.com,1999:blog-5043138489010794057.post6108918659470443370..comments2024-03-27T15:57:09.192+05:30Comments on Urbanomics: Bond market distortions amplify capital flows volatilityUrbanomicshttp://www.blogger.com/profile/16956198290294771298noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-5043138489010794057.post-69336262767017640832015-09-02T07:08:57.788+05:302015-09-02T07:08:57.788+05:30Pratik, thanks for the comment. You are spot on wi...Pratik, thanks for the comment. You are spot on with these two market failures. <br /><br />Unfortunately, if history and global experience is any indicator, these two failures are not going to go away anytime soon. The second one is simply way ahead in time and is covered in voluminous academic literature (original sin etc)... it is for this reason that even countries like China struggle with internationalization of its currency and countries like Brazil have been trying to do this for decades without any success (except in financial market booms, when cross-border capital flows indiscriminately, only to flee abruptly when the tide turns)... the first one is liquid and broad enough only for dollar hedging. again global experience is instructive. further, even if the hedging is available, borrowers (and lenders) become complacent and prefer not to hedge at the slightest signs of exch rate stability (again, vast body of behavioral finance literature on this available) <br /><br />as to the underlying reasons, I have blogged about both in great detail. the MGI report on 2014 gives an idea of the limited depth and breadth of such markets... a bit of a chicken and egg problem.<br /><br />so i agree that if we can mitigate these market failures then we can stop worrying about these concerns... but conditional on the world (markets) as we see and its history, my concerns. Urbanomicshttps://www.blogger.com/profile/16956198290294771298noreply@blogger.comtag:blogger.com,1999:blog-5043138489010794057.post-71375590975158807872015-09-02T02:12:15.734+05:302015-09-02T02:12:15.734+05:30External commercial borrowing (ECB) in foreign cur...External commercial borrowing (ECB) in foreign currency without hedging exposes the domestic borrower to currency risk. However, this can be avoided in 2 ways: (a) by allowing the borrower to hedge its risk by creating a liquid currency derivatives market - for borrowers with natural hedge (exchange earning through exports), this may not even be necessary; (b) by allowing the domestic borrower to take ECB in domestic currency. For example, India is now opening up to the idea of INR denominate off-shore bonds. This passes on the currency risk to the investor and therefore, even if the Indian borrower's revenue stream is in INR, its debt burden is immune from currency risk. Even with these two safeguards, some Indian firms may take ECBs and go bankrupt - this is perfectly fine. Bad firms should die off. Besides this, there is no other market failure that Indian regulators need to be worried about. Pratik Dattanoreply@blogger.com