Saurabh Ghosh

The Post-Offering Performance of Ipos in the Indian Banking Industry

In the literature, the underperformance of IPOs is a well-documented empirical anomaly. This study concentrates on IPOs from the banking sector of an emerging economy, India. In a developing country, the role of the banking sector for economic development is undisputed. In view of its importance in economic resource allocation and its distinction from other industries in general, this paper analyses the post offering performance of banking sector IPOs in detail. The performance evaluation on the basis of stock returns did not find significant evidences of underperformance for the IPOs from the banking sector. Moreover, the study, based on key accounting parameters, found improvement in the performance of the banks in the post-listing period. There were no significant differences across ownership groups (public sector banks vis-à-vis their private counterpart) in the IPO performance.

Net Interest Margin: Does Ownership Matter?

Net Interest Margin (NIM) or spread is the difference between interest earned and interest expended by a bank divided by its total assets. A competitive banking system is expected to foster greater efficiency which should get reflected in lower NIM. In the Indian banking industry, NIM has come down subsequent to banking sector reforms but the decline has been very slow. However, it is commonly believed that NIM in developing countries is higher than that in developed countries. The reasons could be lack of sufficient competition, higher intermediation costs, and response to changing regulations. To the extent that NIM can be considered as an indicator of bank performance and efficiency, it is very important to study what are the factors that affect NIM. On the other hand, an ongoing debate in the context of industry performance is the relation between ownership and performance. The theoretical literature suggests that private enterprises are more efficient than public enterprises. However, the empirical evidence is mixed in this regard. It is in this context that this paper studies the determinants of NIM in Indian banking and attempts to draw policy implications based on the exercise. The authors use balance sheet data of all Scheduled Commercial Banks (excluding Regional Rural Banks) for the period 1997–98 to 2000–01 and explore, inter alia, the relationship between ownership and performance. Using econometric techniques of panel regression, viz., fixed effects model and random effects model, they find that even after accounting for bank-specific variables indicating health of banks and regulatory requirements, nature of ownership per se matters in determining NIM. Ownership is represented by dummy variables which take a value of one when a bank belongs to a particular ownership group, and zero otherwise. Statistical significance of the coeffi- cients of the dummy variables indicates that ownership may have a significant associa- tion with NIM. The major findings emerging from the regression analysis can be summarized as follows: NIM is not significantly associated with size of banks. Proportion of non-interest income does not have a significant impact on NIM. Proportion of investment in government securities adversely affects NIM. Proportion of advances to the priority sector positively affects NIM. Higher Capital Adequacy Ratio is associated with higher NIM. Higher Non Performing Assets are associated with lower NIM. Nature of ownership is a significant determinant of NIM. Foreign banks have the highest NIM, followed by public, private, and new private banks. Insights emerging from such an analysis can be useful to both bank managers and policy makers. Managers can benefit from knowledge of the ways in which business decisions can affect spreads. It is also useful for the policy makers to be aware of how regulatory and supervisory decisions can affect efficiency in the banking industry, both group-wise as well as across banks.

Volatility spillover in the foreign exchange market: the Indian experience

We find evidence of significant volatility co-movements and/or spillover from different financial markets to the forex market in India. Among a large number of variables examined, volatility spillovers from domestic stock, government securities, overnight index swap, Ted spread and international crude oil markets to the foreign exchange market are found to be significant. There is evidence of asymmetric reactions in the forex market volatility. Comparisons between pre-crisis and post-crisis volatility indicate that the reform measures and changes in financial markets microstructure during the crisis period had significant impact on volatility spillover. During the post-crisis period, the lagged volatility component that represents persistent or fundamental changes had significant spillover effect on forex volatility, rather than the temporary shocks component. There is evidence of a decline in the asymmetric response in the forex volatility during the post-crisis period in India.

Capital Flows, Financial Asset Prices and Real Financial Market Exchange - Rate: A Case Study for an Emerging Market, India

In this paper we empirically investigate the relationship between capital flows and exchange rates in India based on a new index of real effective exchange rates for the Indian Rupee. Instead of using consumer price indices we deflate exchange rates by MSCI asset price indices. The cointegration analysis indicates a long-run equilibrium relationship between real financial market exchange rate and the net outstanding equity investment in India. In the short run capital inflows are accompanied by an appreciation of real financial exchange rate of the Rupee

Spread, volatility and monetary policy: empirical evidence from the Indian overnight money market

This study uses a GARCH model to estimate conditional volatility in the Indian overnight money market during the period 1999–2006. It finds that the bid-ask spread in the overnight market was positively related to conditional volatility during 1999–2002. This relationship, however, has undergone a structural break since 2002 and lagged spread, along with conditional variance of the call rate, played an important role in determining spread during 2002–2006, indicating the improvement in market microstructure in recent years. Regarding monetary policy measures and money market volatility, the empirical findings indicate that expansionary monetary policy reduces volatility of both the weighted average call rate and the bid-ask spread. Among individual policy instruments, announcement of cash reserve ratio changes have a negative impact on the volatility of both call rate and spread. The other policy variables like Bank Rate, repo and reverse repo rates have a mixed impact on volatility of call rate and spread.

Volatility spillovers to the emerging financial markets during taper talk and actual tapering

ABSTRACT On 22 May 2013, Fed chairman, Ben Bernanke surprised markets by indicating to the media that the US Fed may taper its quantitative easing programme. This set out financial volatility across the globe over the next several months that spilled over to the financial markets of emerging market economies (EMEs). It prompted many EME central banks to take varied policy actions. Looking into this widely known event, this article presents formal empirical evidence establishing that (i) conditional volatility during taper talk exceeded that during actual tapering and (ii) volatility spillovers took place ‘contemporaneously’ from the US markets to the key EMEs during this period. The results suggest importance of careful communications by advanced economy central banks and the possibility of establishing ‘rules of the monetary game’. They also suggest that in the absence of international policy coordination to contain spillovers, EME central banks should build adequate buffers and reinforce financial stability ahead of the reversal of the global interest rate cycle.

Quantifying the cyclically adjusted fiscal stance for India

Taking cue from recent debate in the literature, we attempt to disentangle cyclically adjusted fiscal balance (CAB) for India broadly using the methodology recommended by the IMF, an indigenous revenue elasticity for India and a range of potential output estimates. Our results indicate that after initial success in containing CAB, it increased considerably during the crisis period. Notwithstanding a positive output gap in the post-crisis period (2009–11) and subsequent increase in inflation, the CAB continued to be expansionary, with limited withdrawal of expansionary stance, albeit a reduction in fiscal impulse. This calls for further reforms and binding framework that can withstand business cycles.