the current economic climate is likely to produce deep disparities

The current economic climate is likely to produce deep disparities in economic performance over the long-term. Ultimately, while some countries will be far more adversely affected than the other, those that do (relatively) better will share three key characteristics: relatively low public debt, strong domestic demand-led growth and a robust democracy.

The world economy faces considerable uncertainty in the short term. Will the eurozone manage to sort out its problems and avert a breakup? Will the United States engineer a path to renewed growth? Will China find a way to reverse its economic slowdown?

The answers to these questions will determine how the global economy evolves over the next few years. But, regardless of how these immediate challenges are resolved, it is clear that the world economy is entering a difficult new longer-term phase as well – one that will be substantially less hospitable to economic growth than possibly any other period since the end of World War II.

Regardless of how they handle their current difficulties, Europe and America will emerge with high debt, low growth rates, and contentious domestic politics. Even in the best-case scenario, in which the euro remains intact, Europe will be bogged down with the demanding task of rebuilding its frayed union. And, in the US, ideological polarization between Democrats and Republicans will continue to paralyze economic policy.

Indeed, in virtually all advanced economies, high levels of inequality, strains on the middle class, and aging populations will fuel political strife in a context of unemployment and scarce fiscal resources. As these old democracies increasingly turn inward, they will become less helpful partners internationally – less willing to sustain the multilateral trading system and more ready to respond unilaterally to economic policies elsewhere that they perceive as damaging to their interests.

Meanwhile, large emerging markets such as China, India, and Brazil are unlikely to fill the void, as they will remain keen to protect their national sovereignty and room to manoeuvre. As a result, the possibilities for global cooperation on economic and other matters will recede further.

This is the kind of global environment that diminishes every country’s potential growth. The safe bet is that we will not see a return to the kind of growth that the world – especially the developing world – experienced in the two decades before the financial crisis. It is an environment that will produce deep disparities in economic performance around the world. Some countries will be much more adversely affected than others.

Those that do relatively better will share three characteristics. First, they will not be weighed down by high levels of public debt. Second, they will not be overly reliant on the world economy, and their engine of economic growth will be internal rather than external. Finally, they will be robust democracies.

Having low to moderate levels of public debt is important, because debt levels that reach 80-90 percent of GDP become a serious drag on economic growth. They immobilize fiscal policy, lead to serious distortions in the financial system, trigger political fights over taxation, and incite costly distributional conflicts. Governments preoccupied with reducing debt are unlikely to undertake the investments needed for long-term structural change. With few exceptions (such as Australia and New Zealand), the vast majority of the world’s advanced economies are or will soon be in this category.

Many emerging-market economies, such as Brazil and Turkey, have managed to rein in the growth of public debt this time around. But they have not prevented a borrowing binge in their private sectors. Since private debts have a way of turning into public liabilities, a low government-debt burden might not, in fact, provide these countries with the cushion that they think they have.

Countries that rely excessively on world markets and global finance to fuel their economic growth will also be at a disadvantage. A fragile world economy will not be hospitable to large net foreign borrowers (or large net foreign lenders). Countries with large current-account deficits (such as Turkey) will remain hostage to skittish market sentiment. Those with large surpluses (such as China) will be under increasing pressure – including the threat of retaliation – to rein in their “mercantilist” policies.

Domestic demand-led growth will be a more reliable strategy than export-led growth. That means that countries with a large domestic market and a prosperous middle class will have an important advantage.

Finally, democracies will do better because they have the institutionalized mechanisms of conflict management that authoritarian regimes lack. Democracies such as India may seem at times to move too slowly and be prone to paralysis. But they provide the arenas of consultation, cooperation, and give-and-take among opposing social groups that are crucial in times of turbulence and shocks.

In the absence of such institutions, distributive conflict can easily spill over into protests, riots, and civil disorder. This is where democratic India and South Africa have the upper hand over China or Russia. Countries that have fallen into the grip of autocratic leaders – for example, Argentina and Turkey – are also increasingly at a disadvantage.

An important indicator of the magnitude of the new global economy’s challenges is that so few countries satisfy all three requirements. Indeed, some of the most spectacular economic success stories of our time – China in particular – fail to meet more than one.

It will be a difficult time for all. But some – think Brazil, India, and South Korea – will be in a better position than the rest.

If the credit cycle has got out of hand, who is to blame?

Fifteen years ago this month, Thailand at last allowed its currency, the baht, to fall against the dollar, abandoning a long, losing battle with market forces. “I haven’t slept for two months,” said the governor of the central bank on the day of the devaluation. “I think that tonight I’ll be able to sleep at last.” What followed was a five-year nightmare for emerging markets, as the financial crisis spread to Thailand’s neighbours, then to Russia and Brazil, before eventually claiming Argentina and Uruguay in July 2002.

After the tossing and turning of 1997-2002, the next decade went like a dream. In 2003 China resumed double-digit growth; India’s economy expanded by 8%, a feat it would surpass in four of the next six years; Brazil’s new president, Luiz Inácio Lula da Silva, appeased the IMF and the bond markets by cutting public debt and achieving the first of five annual current-account surpluses. Goldman Sachs released the first of its 2050 projections (“Dreaming with the BRICs”, its catchy acronym for Brazil, Russia, India and China), suggesting that the big emerging economies would eventually inherit the Earth.

The crisis-hit countries emerged from devaluation, default and distress with low expectations, cheap and flexible currencies, scope to borrow and room to grow. Global capital markets welcomed them back, buying their equities and their bonds, even when denominated in their own currencies. The popular emerging-markets stockmarket index compiled by MSCI rose by over 350% from the end of 2002 to its peak in October 2007.

Rather than spend these capital inflows, emerging economies recycled them. They amassed foreign-exchange reserves as a guarantee against ever again succumbing to a currency crisis or the ministrations of the IMF. Some have even begun to help fund the fight against crises elsewhere. On July 10th Indonesia’s central bank confirmed it would buy $1 billion of the IMF’s notes, a poignant reversal of roles.

But after a dream decade, something is amiss. China is now struggling to grow as fast as 8% (its GDP expanded by 7.6% in the year to the second quarter). India, a country that once aspired to double-digit growth, can now only dream of ridding itself of double-digit inflation. None of the biggest emerging economies stands on the edge of a dramatic financial precipice, like their counterparts in the euro area, or a fiscal cliff, like America’s. But their economic prospects have nonetheless started to head downhill.

The MSCI emerging-market index is flat for the year and still 30% below its 2007 peak. Only 15 months ago, the IMF’s forecasters expected Brazil’s economy to grow by over 4% this year. This week their 2012 forecast was just 2.5% (see chart 1). Over the same period, South Africa’s 2012 growth forecast was cut from 3.8% to 2.6%.

Some of this slowdown can be blamed on events elsewhere. Europe’s pain, for example, has spread far beyond its immediate neighbours. The European Union remains the biggest foreign market for many emerging economies, buying about 19% of China’s exports and 22% of South Africa’s. Euro-area banks have also begun to sell assets and withdraw lending. They account for about 45% of credit to emerging Europe and a substantial share of trade credit in Asia.

Some of the slowdown was also orchestrated by governments nervous about price pressures or property bubbles. Poland’s central bank raised rates as recently as May to quell inflation, which persists above its 2.5% target. China’s premier, Wen Jiabao, fell into a game of chicken with the country’s 50,000 property developers, waiting for them to cut prices, even as they waited for him to lift restrictions on multiple home purchases. As growth slows, policymakers will ease in response.

But there is more to this story. The slowdown is not simply a demand-side phenomenon, the result of weak exports and past tightening dragging growth below its long-run potential. The underlying rate of sustainable growth may also be less impressive than previously thought. As the IMF pointed out this week, the last decade or so may have “generated overly optimistic expectations about potential growth”.

High commodity prices boosted some emerging economies, such as Brazil, Russia and South Africa. They also flattered emerging-market share prices. As Bank of America Merrill Lynch observes, natural-resource industries account for more than a third of the market capitalisation of the BRICs and over a quarter of the market cap of MSCI’s benchmark index.

The dream decade was also sweetened by rapid credit growth, according to the fund. The ratio of bank credit to GDP has risen steeply in many emerging economies over the past ten years. From trough to peak, it rose by over 20 percentage points in Brazil, China, the Czech Republic, Hungary, Malaysia, Poland, South Korea, Taiwan and Turkey. It rose almost as far in India and Russia.

In some emerging economies, the upswing began late in the decade. In China, the credit ratio has risen by over 27 points since 2008 alone. In others, it has already ended: in South Africa, Hungary and South Korea, the credit ratio has fallen substantially since the financial crisis.

A rising credit ratio may represent healthy “financial deepening” as the banking system does a better job of capturing household saving and reallocating it to its best use. But it may also reflect a potentially destabilising “financial cycle”, an upswing in credit and other financial variables, which overlays and often outlasts the swings in GDP and inflation that mark conventional business cycles.

The upturn in the financial cycle may flatter growth, as easy credit encourages spending and speculation, boosting the value of collateral and thus easing credit further. This may have lulled emerging economies into thinking they could grow faster than they really can, just as permissive finance helped persuade the rich world that its growth was more stable than was actually the case.

When credit booms show up in inflation, central banks are typically quick to react. But consumer prices often remain tame, because rising exchange rates and imports fill the gap between expanding domestic demand and supply. That allows the booms to grow dangerously large. Selim Elekdag and Yiqun Wu of the IMF have identified 99 “credit balloons”, episodes of fast credit growth over the past 50 years in rich and emerging economies alike. Of these balloons, 44 popped badly (resulting in a banking crisis, currency crisis or both) and another 13 very badly, with a 9% contraction of GDP on average.

In Asia’s emerging economies, credit ratios have risen further and faster than they did before the Thai crisis, says Frederic Neumann of HSBC. Even so, the region’s central bankers need not lose too much sleep. Now, unlike then, bank loans have not outstripped deposits. And in most countries, domestic investment has not outstripped domestic saving. If foreign capital were to withdraw abruptly as it did 15 years ago, the effects would not be as ruinous. Most foreign-capital inflows come in the form not of debt but equity, which shrinks to fit an economy’s ability to pay. The debt of Asian economies is also now partly in their own currency, which would fall in a crisis, taking some of the strain. If foreign capital retreats, Asia’s surplus countries should have enough resources to replace it, although the switch may not be entirely smooth.

The picture is different in Europe. In Poland, for example, credit to the private sector grew by an extraordinary 36.6% in 2008, contributing to a current-account deficit of almost 9% of GDP. The crisis interrupted these excesses but did not reverse them: the country’s external deficit remains over 5% of GDP. In recent months, the FDI and portfolio capital Poland requires to fill this gap has flowed in the wrong direction. That leaves the country uncomfortably “susceptible” to the euro crisis, says Raffaella Tenconi of Bank of America Merrill Lynch, if it prompts a further withdrawal of cross-border lending.

If the credit cycle has got out of hand, who is to blame? Policymakers in emerging economies sometimes present themselves as powerless victims of vague global forces, such as the “tide of liquidity” supposedly sweeping across the globe, thanks to near-zero interest rates in America, Japan and the euro area. But research by Mr Elekdag and Fei Han, also of the IMF, suggests that such external factors explain only a small portion (16%) of the variation in credit growth in emerging Asia. By imposing curbs on domestic credit and allowing greater flexibility in their currencies, economies can regain greater control.

Winds of Change Affecting Asia

Asia, as a whole, has witnessed tremendous growth in the past decades and city-states such as Hong Kong and Singapore have since joined the ranks of advanced economies. Asian giants are not only home to the largest number of millionaires in the world; Asian millionaires are also becoming increasingly wealthier. With US and European economics stuck in doldrums, could it be Asia’s turn to shine now?

wo recent speeches featured on the Monetary Authority of Singapore website give a pretty good indication of the momentum building up in Asia’s desire to become a global financial super centre. By comparison with the established centers in the West, such as the City of London or Wall Street, Asia suffers from being a highly fragmented “zone“. Indeed, it is so fragmented that it barely qualifies to be considered a zone, despite all the hype about the shift of financial power from West to East. The lack of a pan-Asian settlements infrastructure, the absence of a pan-Asian bond market and capital controls scattered like confetti across the region, all speak of the infancy of the Asian bloc by comparison with its Western rivals. However, it will not be ever thus, and things are changing fast.

Speaking on the occasion of the opening of the second Raffles Tower in Singapore (Raffles Tower One, opened in 1988, is still the third tallest building in Singapore) Finance Minister Tharman Shanmugaratnam spoke both of the rising affluence of Asia’s middle classes and of the opportunities for Asian banks: “Asian banks, which are moderately leveraged, largely deposit-funded and generally conservative in lending, have in recent times, stepped-up their financing activities. As traditional European lenders continue to deleverage, there are opportunities in corporate funding, trade finance and infrastructure finance which Asian banks are well placed to take hold of.”

Asia has also seen rising affluence amongst its population and increased interest from international investors as an investment destination. This has presented greater investor demand, paving the way for the growth of Asia’s capital markets and asset management sectors. These developments will help drive a new chapter in Asian finance.

Those opportunities in trade finance, corporate funding and infrastructure finance highlighted by the Minister are going have a hugely transformative impact on Asian finance in the decades ahead. It seems pretty obvious that the major western investment banks are not going to sit on their hands while this happens. They are already actively forging joint ventures with and investing in Asian players, positioning themselves to share in what promises to be an extremely profitable few decades for Asia – provided, ofcourse, the continent doesn’t fall prey to internecine quarrels, the recent saber rattling between Japan and China over a few rocks protruding from the ocean being a case in point.

While the active involvement of top Western investment banks will undoubtedly bring management skills to Asia, there is always the danger that these bankers will also import that “gotta dance when the music’s playing” attitude that gave us the 2008 global financial smash. So Asian regulators are going to have to keep a sharp weather eye out for incipient bubbles fuelled by advanced economy banksters playing high wide and handsome in developing markets.

The second speech, by Ng Nam Sin, Assistant Managing Director, Development, was given at the OCBC Global Treasury Forum in September 2012. The theme of the forum was “Winds of Change Affecting Asia“, with the larger gales coming, unsurprisingly, from the ongoing European sovereign debt crisis and the fiscal deficit issues in the US. Ng Nam Sin would probably have added QE3 to the list if his speech hadn’t pre-dated the Federal Reserve Chairman’s announcement. As he pointed out, despite all the talk of decoupling, Asia is far from immune to what happens in advanced markets:“Despite our deepening domestic markets, Asia is not insulated from the rest of the world. Outcomes in the developed markets have a profound global impact through trade, commodities prices, and in the valuation of currencies and financial instruments. Through these channels, global winds of change can shake Asia from its long-term path of growth and development”.

On top of this, of course, there is regulatory change, which Asian markets are having to ponder and to decide whether to follow suit exactly, or instead amend to Asian circumstances and risk encouraging regulatory arbitrage. Above all, he wants to see Asian capital markets moving forward and reaching the kind of maturity where indigenous capital can be put to work furthering Asian growth. That is now the Holy Grail of Asian investment initiatives and we can expect to see a continued flurry of developments in this area. Should make for an interesting next 10 years!

In search for stronger and stable currency

Over most of history, most countries have wanted a strong currency—or at least a stable one. In the days of the gold standard and the Bretton Woods system, governments made great efforts to maintain exchange-rate pegs, even if the interest rates needed to do so prompted economic downturns. Only in exceptional economic circumstances, such as those of the 1930s and the 1970s, were those efforts deemed too painful and the pegs abandoned.

In the wake of the global financial crisis, though, strong and stable are out of fashion. Many countries seem content for their currencies to depreciate. It helps their exporters gain market share and loosens monetary conditions. Rather than taking pleasure from a rise in their currency as a sign of market confidence in their economic policies, countries now react with alarm. A strong currency can not only drive exporters bankrupt—a bourn from which the subsequent lowering of rates can offer no return—it can also, by forcing down import prices, create deflation at home. Falling incomes are bad news in a debt crisis.

Thus when traders piled into the Swiss franc in the early years of the financial crisis, seeing it as a sound alternative to the euro’s travails and America’s money-printing, the Swiss got worried. In the late 1970s a similar episode prompted the Swiss to adopt negative interest rates, charging a fee to those who wanted to open a bank account. This time, the Swiss National Bank has gone even further. It has pledged to cap the value of the currency at SFr1.20 to the euro by creating new francs as and when necessary. Shackling a currency this way is a different sort of endeavour from supporting one. Propping a currency up requires a central bank to use up finite foreign exchange reserves; keeping one down just requires the willingness to issue more of it.

When one country cuts off the scope for currency appreciation, traders inevitably look for a new target. Thus policies in one country create ripples that in turn affect other countries and their policies.

The Bank of Japan’s latest programme of quantitative easing (QE) has, like most of the unconventional monetary policy being tried around the world, a number of different objectives. But one is to counteract an unwelcome new appetite for the yen among traders responding to policies which have made other currencies less appealing. Other things being equal, the increase in money supply that a bout of quantitative easing brings should make that currency worth less to other people, and thus lower the exchange rate.

Other things, though, are not always or even often equal, as the history of currencies and unconventional monetary policy over the past few years makes clear. In Japan’s case, a drop in the value of the yen in response to the new round of QE would be against the run of play. Japan has conducted QE programmes at various times since 2001 and the yen is much stronger now than when it started.

Nor has QE’s effect on other currencies been what traders might at first have expected. The first American round was in late 2008; at the time the dollar was rising sharply. The dollar is regarded as the “safe haven” currency; investors flock to it when they are worried about the outlook for the global economy. Fears were at their greatest in late 2008 and early 2009 after the collapse of Lehman Brothers, an investment bank, in September 2008. The dollar then fell again once the worst of the crisis had passed.

The second round of QE had more straightforward effects. It was launched in November 2010 and the dollar had fallen by the time the programme finished in June 2011. But this fall might have been down to investor confidence that the central bank’s actions would revive the economy and that it was safe to buy riskier assets; over the same period, the Dow Jones Industrial Average rose while Treasury bond prices fell.

After all this, though, the dollar remains higher against both the euro and the pound than it was when Lehman collapsed. This does not mean that the QE was pointless; it achieved the goal of loosening monetary conditions at a time when rate cuts were no longer possible. The fact that it didn’t also lower exchange rates simply shows that no policies act in a vacuum. Any exchange rate is a relative valuation of two currencies. Traders had their doubts about the dollar, but the euro was affected by the fiscal crisis and by doubts over the currency’s very survival. Meanwhile, Britain had also been pursuing QE and was slipping back into recession. David Bloom, a currency strategist at HSBC, a bank, draws a clear lesson from all this. “The implications of QE on currency are not uniform and are based on market perceptions rather than some mechanistic link.”

In part because of the advent of all this unconventional monetary policy, foreign-exchange markets have been changing the way they think and operate. In economic textbooks currency movements counter the differences in nominal interest rates between countries so that investors get the same returns on similarly safe assets whatever the currency. But experience over the past 30 years has shown that this is not reliably the case. Instead short-term nominal interest-rate differentials have persistently reinforced currency movements; traders would borrow money in a currency with low interest rates, and invest the proceeds in a currency with high rates, earning a spread (the carry) in the process. Between 1979 and 2009 this “carry trade” delivered a positive return in every year bar three.

Now that nominal interest rates in most developed markets are close to zero, there is less scope for the carry trade. Even the Australian dollar, one of the more reliable sources of higher income, is losing its appeal. The Reserve Bank of Australia cut rates to 3.25% on October 2nd, in response to weaker growth, and the Aussie dollar’s strength is now subsiding.

So instead of looking at short-term interest rates that are almost identical, investors are paying more attention to yield differentials in the bond markets. David Woo, a currency strategist at Bank of America Merrill Lynch, says that markets are now moving on real (after inflation) interest rate differentials rather than the nominal gaps they used to heed. While real rates in America and Britain are negative, deflation in Japan and Switzerland means their real rates are positive—hence the recurring enthusiasm for their currencies.

The existence of the euro has also made a difference to the way markets operate. Europe was dogged by currency instability from the introduction of floating rates in the early 1970s to the creation of the euro in 1999. Various attempts to fix one European currency against each other, such as the Exchange Rate Mechanism, crumbled in the face of divergent economic performances in the countries concerned.

European leaders thought they had outsmarted the markets by creating the single currency. But the divergent economic performances continued, and were eventually made manifest in the bond markets. At the moment, if you want to predict future movements in the euro/dollar rate, the level of Spanish and Italian bond yields is a pretty good indicator; rising yields tend to lead to a falling euro.

The reverse is also true. Unconventional interventions by the European Central Bank (ECB) over the past few years might have been expected to weaken the currency, because the bank was seen as departing from its customary hardline stance. They haven’t because they have normally occurred when the markets were most worried about a break-up of the currency, and thus when the euro was already at its weakest. The launch of the Securities Market Programme in May 2010 (when the ECB started to buy Spanish and Italian bonds), and Mario Draghi’s pledge to “do whatever it takes”, including unlimited bond purchases, in July 2012 were followed by periods of euro strength because they reduced fears that the currency was about to collapse.

Currency trading is, by its nature, a zero-sum game. For some to fall, others must rise. The various unorthodox policies of developed nations have not caused their currencies to fall relative to one another in the way people might have expected. This could be because all rich-country governments have adopted such policies, at least to some extent. But it would not be surprising if rich-world currencies were to fall against those of developing countries.

In September 2010 Guido Mantega, the Brazilian finance minister, claimed that this was not just happening, but that it was deliberate and unwelcome: a currency war had begun between the North and the South. The implication was that the use of QE was a form of protectionism, aimed at stealing market share from the developing world. The Brazilians followed up his statement with taxes on currency inflows.

But the evidence for Mr Mantega’s case is pretty shaky. The Brazilian real is lower than it was when he made his remarks . The Chinese yuan has been gaining value against the dollar since 2010 while the Korean won rallied once risk appetites recovered in early 2009. But on a trade-weighted basis (which includes many developing currencies in the calculation), the dollar is almost exactly where it was when Lehman Brothers collapsed.

Many developing countries have export-based economic policies. So that their currencies do not rise too quickly against the dollar, thus pricing their exports out of the market, these countries manage their dollar exchange rates, formally or informally. The result is that loose monetary policy in America ends up being transmitted to the developing world, often in the form of lower interest rates. By boosting demand, the effect shows up in higher commodity prices. Gold has more than doubled in price since Lehman collapsed and has recently reached a record high against the euro. Some investors fear that QE is part of a general tendency towards the debasement of rich-world currencies that will eventually stoke inflation.

The odd thing, however, is that the old rule that high inflation leads to weak exchange rates is much less reliable than it used to be. It holds true in extreme cases, such as Zimbabwe during its hyperinflationary period. But a general assumption that countries with high inflation need a lower exchange rate to keep their exports competitive is not well supported by the evidence—indeed the reverse appears to be the case. Elsa Lignos of RBC Capital Markets has found that, over the past 20 years, investing in high-inflation currencies and shorting low-inflation currencies has been a consistently profitable strategy.

The main reason seems to be a version of the carry trade. Countries with higher-than-average inflation rates tend to have higher-than-average nominal interest rates. Another factor is that trade imbalances do not seem to be the influence that once they were. America’s persistent deficit does not seem to have had much of an impact on exchange rates in recent years: nor does Japan’s steadily shrinking surplus, or the euro zone’s generally positive aggregate trade position.

In short, foreign-exchange markets no longer punish things that used to be regarded as bad economic behaviour, like high inflation and poor trade performance. That may help explain why governments are now focusing on other priorities than pleasing the currency markets, such as stabilising their financial sectors and reducing unemployment. Currencies only matter if they get in the way of those goals.

SENSEX ends day slightly higher

The benchmark BSE Sensex rose 0.07 percent, or 13.09 points, to end at 19,255.09.The broader Nifty rose 0.14 percent, or 8.05 points, to end at 5,855.75.

The BSE Sensex edged slightly higher on Monday as Tata Motors extended its recent rally on hopes of improved sales at its key unit Jaguar Land Rover, while short-covering helped technology shares such as Infosys advance.

Volumes were thin, with global shares steady, as the holiday mood set in across markets despite tensions over the U.S. budget dispute.

The thin volumes could exacerbate the volatiliy expected later this week ahead of the monthly derivatives expiry on Thursday.

“Indian shares are adopting a wait-and-watch policy to await the outcome of the U.S. fiscal cliff and not moving in a tangible manner,” said Kaushik Dani, fund manager at Peerless Mutual Fund.On the domestic front, third-quarter earnings will also start and developments on earnings will determine the direction of the market, Dani added.

Tata Motors Ltd ended 2.52 percent higher, extending a rally on hopes of improved sales at its key unit Jaguar Land Rover and as the company planned investment into passenger vehicles.

The auto-maker’s shares have gained 9.5 percent so far this month, as of Friday’s close.

Technology shares gained on short-covering as the recent underperformance was seen as overdone. Infosys Ltd rose 1.1 percent after falling 5.75 percent this month, as of Friday’s close.

Tata Consultancy Services Ltd was up 0.6 percent.

Analysts expect the technology sector to see some pick-up in outsourcing activity as the sector has been beaten down in 2012 due to the eurozone crisis and unfavorable election rhetoric in the U.S.

Glenmark Pharmaceuticals gained 4.23 percent after a unit entered into a development pact with Forest Laboratories, which will make an upfront payment of $6 million to the Indian drugmaker.

Loss-making Kingfisher Airline rose 5 percent, its maximum daily limit, after TV news channels reported it had submitted a revival plan to the civil aviation authorities, without citing sources.

Oil & Natural Gas Corp shares fell 1.9 percent after the stock went ex-dividend on Monday. The explorer had offered a dividend of 5 rupees for 2012/13.

Shares in Tata Steel fell 0.5 percent after the company reported a clash between contract workers and security guards at its main Jamshedpur plant in eastern India on Monday.

Maruti Suzuki Ltd shares ended 1.73 percent lower on concerns about its domestic passenger car sales outlook.

Angel Broking says Maruti Suzuki expects “muted” volume growth of around 6 percent in fiscal 2013 and 6-7 percent in fiscal 2014, according to a note on Monday, citing the automaker’s management.

Integration of countries with rest of world

How integrated countries are with the rest of the world varies more than you might expect? And the world is less integrated in 2012 than it was back in 2007. These are the conclusions of the latest DHL Global Connectedness Index, which found that the Netherlands is the most globalised of 140 countries, just ahead of Singapore; landlocked Burundi is the least. (North Korea was not ranked.)

The index measures both the depth of a country’s connectedness (ie, how much of its economy is internationalised) and its breadth (how many countries it connects with). The economic crisis of 2008 made connections both shallower and narrower. The depth measure has rebounded since 2009, and is now 10% higher than it was in 2005—though it remains below what it was in 2007. But the breadth of connectedness has continued to slip, and is now 4% lower than in 2005.

At first, as the economic crisis took hold, both trade and capital flows became less globalised, but since 2009 trade has bounced back whereas capital flows have continued to become less globalised, says DHL. This seems to reflect a fall in the number of places into which companies from any given country are willing to put their foreign direct investment.

Even the Netherlands could benefit a lot by becoming more globalised, says Pankaj Ghemawat of IESE Business School, who oversees the index. Mr Ghemawat conducts surveys of popular views of globalisation. He finds that people consistently assume that the world is much more interconnected than it really is. This is why they underestimate the gains that could be made by further globalisation, he argues. Intriguingly, no group overestimates global connectedness more than company bosses. Perhaps this is why their efforts to expand abroad so often stumble.

India’s fight against high prices

The remark appeared innocuous, reasonable even, but for a country with few respected public institutions, it was unnerving. If India’s bond market were not so tightly controlled it might have created a minor scare. At a public event on December 2nd the governor of the Reserve Bank of India (RBI), Duvvuri Subbarao, was asked by his predecessor if it would relax its medium-term goal of 4-5% inflation. This is not a strict target of the kind some Western central banks try to stick to. But it is an ambition that the RBI has long held.

Mr Subbarao replied: “I am not saying that we will definitely change the number, but we will certainly revisit our strategy.” Only last month the RBI published a paper saying the opposite. In the battle against inflation, abandoning the goal would be “nothing short of admitting defeat,” says Rajeev Malik of CLSA, a broker.

The cock-up theory is that Mr Subbarao mis-spoke. But the RBI has not backed away from his remarks, which come at a difficult time for India. Since 2008 inflation has remained high, despite the RBI’s repeated tightening. GDP growth slowed to an annual 5.3% in September; investment by firms is low; and the fear of bad debts stalks some industrialists and their banks, which want relief.

Commodity-price shocks help explain stubbornly high inflation. But the government is also to blame, thanks to its lack of reforms and high borrowing. The new finance minister announced a mini-package of economic measures in September with much fanfare, and has made it clear he now wants the RBI to cut interest rates. With a general election due by mid-2014 politicians are desperate for faster growth.

The idea that the RBI might yield to such political pressure is not so far-fetched. It is not statutorily independent. Its bigwigs are often hired from the government and return to it after their stints: the prime minister used to be governor. The one outsider among the RBI’s top brass, Subir Gokarn, who has lots of fans among investors but has been critical of the government, is yet to have his tenure as deputy governor renewed. It expires at the end of the year. The RBI also has contradictory mandates, like many central banks nowadays. As well as its monetary duties, it also acts as the government’s banker and guards financial stability. In the name of these latter two goals it forces banks to buy government bonds and purchases some itself, depressing yields. That arguably makes it complicit in the public-sector borrowing binge that fuels inflation.

Critics argue that the RBI has already been cutting by stealth, using liquidity-management tools and verbal guidance to make sure market interest rates have dropped even as the policy rate has stayed unchanged since March. Ditching the inflation target would, by this account, just be an admission that it never had the stomach to enforce it in the first place.

The RBI would put things differently. Although its empirical work has previously suggested that 5.5% is the maximum healthy level of inflation, lately something has changed. Despite a sharp economic slowdown prices have kept on rising. A big chunk of demand seems to be insensitive to what the RBI does. The government borrows regardless. Rural consumers, who are doing well and are often outside the formal financial system, are shifting to richer diets, pushing up food prices.

That leaves the RBI with a lousy option, to temper demand by disproportionately hitting the narrow range of activity that is sensitive to interest rates, in particular private-sector investment. But that means fewer new factories and roads, which damages India’s long-term potential. Clearly, it would be good if the government got its act together. Assuming it does not, though, the lesser of two evils might be higher prices and a perkier private sector.

Yet there is no guarantee investment would revive: the main problems are graft and red tape. Real interest rates are already looser than during the boom of 2003-08. Higher inflation might prompt a wage spiral. The public’s inflation expectations are uncomfortably high, at 13%, one reason why they buy so much imported gold, hurting the balance of payments. And without the RBI providing discipline of sorts, politicians might behave even more recklessly. India has many public institutions run on the basis of deferring difficult decisions for short-term gains. The RBI should think hard before joining them.