An Overview of Global Development Horizons 2011 - Multipolarity: The New Global Economy

On Tuesday (i.e. 17.05.2011), World Bank has released a Report titled "Global Development Horizons 2011 - Multipolarity: The New Global Economy". The Report said that Six major emerging economies - Brazil, Russia, India, China, Indonesia and South Korea - will account for more than half the global growth by 2025. It further stated that  international monetary system will no longer be dominated by a single currency.

The Reports projected that these economies will grow on an average of 4.7 per cent annually,  while, the developed economies will grow at an average of 2.3 per cent annually (in the period of 2011-2025). In this report it is stated that, the Developing countries percentage share in the international trade flows has risen steadily, from 30 percent in 1995 to an estimated 45 percent in 2010.

The report also says that " ...... high-income countries are only gradually recovering from the financial crisis, most developing countries have swiftly returned to their fast pre-crisis growth trend." It further states that China was one of the first economies to emerge from the crisis and returned quickly to around 10 percent growth rate. While, India had experienced a stronger contraction, still attained more than 10 percent growth in 2010 and the government is putting in place an ambitious new Five Year Plan (with improved policies and necessary investment programs) to keep growth at that level.

It also expressed that "Even in the absence of such exceptionally high growth rates in the developing world, the balance of global growth is expected to shift dramatically." In the report, the world bank further stated that "The changing role of developing countries will come with major transformations to their economies,corporate sectors, and financial systems" 

Mansoor Dailami, lead author of the report and manager of emerging trends at the World Bank, in a press release said that "The projected changes in the global economy are fundamental. Overall, these shifts will likely be positive for developing countries. However, a key question is whether existing multilateral norms and institutions are sufficiently strong to accommodate the passage toward multipolarity. The challenges of managing global integration among power centers makes strengthening policy coordination across economies critical to reducing the risks of economic instability"

World bank report forecasts that there are 3 possibilities of changes in international currency scenarios during 2011-2025. They are

1. U.S dollar's may remains dominance without any Challenger.

2. Multipolar international monetary system might emerge most likely with the Dollar, Euro and Renminbi at the centre of the system.

3. Dissatisfaction with an international currency system based on national currencies leads to reforms that make supply of world's currency the result of  multilateral decisions. It is a role intended for the SDR when it was introduced.

The report provides us a clear view on the transformational changes happening in the developing countries and how the emerging economies are going to take the lead of global economy in near future.

RBI's Annual Monetary Policy Statement for 2011-12 - An Overview

Yesterday (i.e. 03.05.2011)  RBI have announced Annual Monetary Policy Statement for 2011-12. Whoever read the Monetary Policy Statement  would be little puzzled with what RBI is trying to do. The Statement as usual starts with Factors which have shaped the outlook and monetary strategy for the year (2011-12) followed by Monetary Policy Stance. Everybody who follows Monetary Policy knows that there will be Changes in Operating Procedure of Monetary Policy.

The Changes in Operating Procedure of Monetary Policy is as follows:

Last July, the Reserve Bank of India constituted a Working Group to Review the Operating Procedure of Monetary Policy. The report of the Group, chaired by our Executive Director, Deepak Mohanty, was put out in the public domain in March 2011, also invited for feedback and comments over the Report. Based on that Group’s recommendations, and in light of the feedback received, it has been decided by RBI to make the following changes to the operating procedure of monetary policy: 

First, the weighted average overnight call money rate will be the operating target of monetary policy of the Reserve Bank.

Second, there will henceforth be only one independently varying policy rate, and that will be the repo rate. This transition to a single independently varying policy rate is expected to more accurately signal the monetary policy stance.

Third, the reverse repo rate will continue to be operative, but it will be pegged at a fixed 100 basis points below the repo rate. Hence, the reverse repo rate will no longer be an independent variable.

Fourth, we will be instituting a new Marginal Standing Facility (MSF). Banks can borrow overnight from the MSF up to one per cent of their respective net demand and time liabilities or NDTL. The rate of interest on amounts accessed from this facility will be 100 basis points above the repo rate.

As per the above scheme, the revised corridor will have a fixed width of 200 basis points. The repo rate will be in the middle. The reverse repo rate will be 100 basis points below it, and the MSF rate 100 basis points above it.

These changes in the operating framework, except that pertaining to the MSF, will come into force immediately. The MSF will come into effect from the fortnight beginning 7th May, 2011.

When one go through the Report one may find the descritpiton about Standing Marginal Lending Facility (same has been put  as MSF in the statement). But, What exactly Standing facility means? here is the definition

"Standing facilities are aimed at providing and absorbing overnight liquidity, signal the general stance of monetary policy and bound overnight market interest rates."

The Bank of England gives the Definition of operational standing facilities as follows

"The operational standing deposit facility is uncollateralised. The operational standing lending facility is for overnight reverse repo against Narrow Collateral. The operational standing facilities are available all day subject to operational constraints arising from deadlines in payments and securities settlement systems."

Not going further on the MSF but let us see what the Monetary Measure was and RBI have decided to take the following policy measures:

The repo rate under the liquidity adjustment facility (LAF) has been increased by 50 basis points. Accordingly, it goes up from 6.75 per cent to 7.25 per cent.

As per the new operating procedure, the reverse repo rate under the LAF, determined with a 100 basis point spread below the repo rate, will stand adjusted at 6.25 per cent.

The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, gets calibrated at 8.25 per cent.

The Bank Rate remains at 6.0 per cent. The cash reserve ratio (CRR) remains unchanged at 6 per cent of NDTL of scheduled banks.
RBI have decided to increase the savings bank deposit interest rate from the present 3.5 per cent to 4.0 per cent with immediate effect.

So by these measures RBI expect that Inflation will be tamed and  they can put anchor on inflation expectations along with sustained growth in medium term.

In the beginning  as I said that "Whoever read the Monetary Policy Statement of RBI may be little puzzled with what RBI is trying to do". The main reason for this comes in the form 2 questions as follows:

1.  Why RBI has raised 50 basis point in one go?
2.  What this neccessity for new MSF?

To curtail inflation (alongwith expectations) RBI have hiked 50 basis points on repo rate as a quick remedy. The MSF has been introduced to absorb excess money overnight and to give more clear signal to the market about interest rate. It's too early to say whether the MSF will make any impact on the market right away; whether it will able to make sustainable growth in the medium term and also whether it will tame the inflation along with repo rate. (Note: According to my perspective the prevailing Inflation is still a structural problem and not monetary problem).