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QUESTION: Dear Prof Raza

Can Central Bank's have securities listed on the stock exchanges?

If yes or no,what are the reasons?

Thanks
Prashant

ANSWER: Hi Prashant,

This is an interesting question relevant to the modern economies coming up in the fold of a “global village.”

Trading on the stock exchanges would have been extremely limited a few decades back. However, owing to the world shrinking and the economies converging to a common monetary objective within decipherable macroeconomic setup, central banks throughout the world pursue policies not only from the point of view of domestic objective but also from the point of view of international monetary constraint. When the monetary economy of one country sneezes, the monetary economy of another is likely to catch cold!

The stock market crisis of the 1930s and the consequent introduction of a new subject called macroeconomics ushered in not only the new concept of fiscal policies but also the underpinnings of monetary policies. In fact, the financial meltdown in 2008 was basically an outcome of stock trading going haywire. However, with knowledge percolated from the 1930s experience, much more serious trouble was withstood, and countries like Canada could brave the trouble with proper monetary policy. Stock exchange in fact impacts both on the monetary-policy arena and the fiscal-policy arena. Central banks have big roles to play.

One of the main functions of central banks is to buy and sell securities to keep the monetary health of the economy.

Many banks in the world today trade in securities on the stock exchange. The bank of Israel, the Czech National Bank, the Bank of Korea, Swiss Central Bank, and many other central banks are now stepping up on stock-buying spree. Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk-averse investors toward equities.

According to Gary Smith, London-based global head of official institutions at BNP Paribas Investment Partners, which oversees about $649 billion, “If reserves are growing, so are diversification pressures. Equities are not for every bank tomorrow, but more are continuing down this path.”

To be precise, this is new wine in old bottle.

Wish you best in your further research.


---------- FOLLOW-UP ----------

QUESTION: Dear Prof Raza

Thanks.

What could be the influencing
factors which will be for decision
making to Reserve Bank of India listing
securities/stocks on BSE or/and NSE stick exchanges?

Thanks
Prashant

Answer
Hi Prashant,

This is a deep question as it is difficult for anybody to pinpoint what should be the most influencing factor for the Reserve Bank of India to make in connection with decision-making regarding listing securities/stocks on BSE and/or NSE stock exchanges.

On the basis of what now looms on Indian business horizon, the most influencing factor seems to me to be modulation of the Fed rate. Right now, despite an aura of complacency that Indian stock market has grown resilient to Fed rate hike, the overseas portfolio investors are weighing on offloading stocks on BSE and NSE.

As of today, sharp fall in consumer price index gives the central bank an opportunity to weigh in bps rate cut depending on global cues (Badrinivas NC). Besides, India’s wholesale prices registered rise for fifth month last August.

We should, however, not forget that Modi is seeing some success in bring in money from overseas as India grows faster than any major economy as his administration seeks to ease investment curbs. Foreign direct investment into India climbed 23 percent to $55 billion in the 12 months through March 2016, according to government data.

The Bank has also to take into consideration its FE which fell by $1.980 billion to $351.547 billion in the week to October 23. This was so because the central bank had been intervening regularly in the market to stem volatility in the domestic currency. Taking this into consideration also, it seems caution need be taken about Fed rate hike.

There is no last word on matters relating to stock-dealing, and more so in matters of any central bank within the context of a global economy.

I hope, Prashant, this gives you some idea on which you can weigh how you will proceed with your further investigation. Best of luck.

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Eklimur Raza

Expertise

It appears some students in this website are confused about elasticity of demand and the slope of the demand curve when they are trying to figure out why rectangular hyperbola comes up in case of unitary demand curve. First, they don't know that RH can be depicted in a positive quadrant of price,quantity plane. Secondly, they make the mistake that the slope of RH is constant at -1. Two points could help them: first, e=1 at each and every point of the RH, because the tangent at any point shows lower segment=upper segment (another geometric definition of e); yet slopes at different points,dQ/dP, are different; second, e is not slope but [(Slope)(P/Q)]in absolute terms. Caveat: only if we measure (log P) along the horizontal axis and (log Q) up the vertical axis, can we then say slope equals elasticity --in which case RH on P,Q plane is transformed into a straight-line demand curve [with slope= -tan 45 deg] on (log Q),(logP) plane, and e= -d(log Q)/d(log P). [By the way, logs are not used in college textbooks --although that is helpful in econometric estimation of elasticity viewed as an exponent of P, when demand equation is transformed into log-linear form.] I have not found the geometrical explanation I have given in any textbook followed in undergraduate and college classes in Canada (including the book followed in a university where I taught for a short time and in the book followed in George Brown College, Toronto, where I teach.

Experience

About 11 years' teaching economics and business studies, and also English, history and elementary French.Practical experience in a development bank, working with international donor agencies like the World Bank and the ADB. Experience in free-lance journalism, including Canada's "National Post."

Organizations
I teach micro- and macroeconomics at George Brown College (continuing education), Toronto, ON, Canada.

Publications
Many articles and editorials, on different subjects, in English newspapers. Recently an applied Major Research Paper, based on a synthesis of the Solow growth model and the Lewis two-sector model, has be accepted by Ryerson University, Toronto. Professors Thomas Barbiero and Eric Cam, Ryerson University, accepted the paper.

Education/Credentials
Master degree in Interantional Economics and Finance and diploma with honours in Business Administration from Canada.

Awards and Honors
Received First Prize in an inter-university Literary Contest.

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