Economics Symposium with Samiran Chakraborty

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Economic Symposium – Mr. Samiran Chakraborty

The much awaited interaction with Dr. Samiran Chakraborty, Chief Economist, CITI India, gave students a profound banking insight of the economy and its various dimensions. The session helped students develop an understanding of important macroeconomic concepts and the matters of present debate.

Following is the highly informative Q&A session that our students had with Dr. Samiran:

1) What it means to be a “Market Economist”?

I would begin by saying that it is an amazing job opportunity. There are no particular academic courses for this role and the vacancies are very few. Mostly, banks hire Market Economists.

A few important pointers for those planning to take up this job:-                                    

  • Never ever let go your theory. You need to have complete command on it.
  • You need to know and have techniques to deal with data, massive amount of data.
  • Whatever you learn you should be able to explain it to others.
  • We are in a business where we need to have a view on everything under the sun.
  • We are in the business of forecasts.
    • It is perfectly okay to have a wrong view or wrong forecasts
    • Economist should be able to explain the sound logic behind his/her forecasts and be able to defend it.
    • An economist also needs to have humility to accept in front of clients that his/her forecast is wrong. This builds credibility.
    • Interface with clients is very important. Therefore, one needs to be humble and straightforward.
    • Economist also needs to have a strong command on economic history. This will only help make better forecasts.
    • One needs to be unbiased with a neutral view on everything.
    • So read, read a lot. Read everything.
    • Economist needs to understand business, understand his/her clients and their requirements. Only then can one do the right research and make correct forecasts.
    • An Economist’s job is very diverse.

 The Cons of being a market economist:-

  • In academia, research is independent and completely a matter of individual choice. Even a CEO from a respective company cannot reject and/or question it. It is hardcore theory. However, this is not the case with Economists.
  • Compliance to the company policies doesn’t allow an economist to share his/her opinion or view without it being published officially before. If done, it will be charged as insider trading.
  • Economists’ views go out as officially the company’s/bank’s views. So huge accountability and responsibility.
  • Time to work on research is barely 3 days in a corporate set-up. This is not the case with academia. They get ample amount of time for their research.
  • Also, corporate sector gets very demanding at times. An Economist is required to submit a report every week when probably it is not even needed. Like for e.g. studying inflation data every week is not necessary but an economist might be required to submit reports accordingly.

2) You talked about transitioning from academia to industry? What about the other way round i.e. industry to academia?

It is very difficult, especially in Economics. So after teaching in DSE and moving to the corporate sector, can I go back to teaching at DSE – Probably No!

This is because of many reasons –

First and foremost, academia (especially the Economics academicians in India) doesn’t construe a shift to corporate for money very well. That way the return is very difficult as people are not very welcoming.

Secondly, when one gets into the corporate sector, you unlearn a few things – mostly theory – to learn new things. Therefore, the touch with theory is lost.

In best case scenario, I get to take guest lectures at these credible academic institutes. If I want to do it full-time, then I probably can exploit the option of teaching at Management schools.

In India, in fields like engineering, this academia-corporate interface has grown immensely. So most IIT professors are working professionals (the industry guys!) But this is not the case with Economics. And the closest academia and corporate can get in India is for a conversation/dialogue involving problem solving techniques and theory implementation. The upcoming field of Data Analytics has widened the scope of this interaction by getting numerous econometric tools in the main stream.

3) Coming from DSE, did you have to give up your ideological leanings to get into the corporate sector?

In the job I do, there are no ‘isms’ and there cannot be any such ideologies. My work as an Economist doesn’t involve the need for any such leanings or for that matter even identifying them. This is because RBI increasing or decreasing interest rate has got nothing to do with the political ideology that our country is following. It is just doing its job like all other Central banks across the world. And so my job is not to identify such leanings but to get into the head of the Governor and analyze the logic behind the present policies or predict the future policies/steps.

4) Elaborate the role of primary research and secondary research in an Economist’s job.

Primary data is all the data that is available through research, generally provided by the company that the Economist is working with. It is the raw feed that we get. It is then processed and analyzed using various techniques and thus facilitates formulation of forecasts.

On the other hand, secondary data comes from very dynamic sources. Say for e.g. interacting with the top industry guys and influential people from various fields and understanding their perspective and take on some economic issues. It will not always be helpful and for that matter even directly related but nevertheless it is important. It gives an insight into the market tendencies which might not be reflected in the primary data. So it is my job as an Economist to have a quantitative as well as qualitative approach in extracting information from this secondary data. And maybe, I don’t tell anyone about this self-developed approach for competitive reasons thus keeping it like a trade secret.

Furthermore, I need to identify the relation between primary & secondary data – see where there is interplay between the two. For this, I have to keep a lot of filters while assimilating and analyzing all the secondary data. And this comes with experience.

Because of its undefined nature, secondary data is a problem for Economists across all countries. However, if you just discard it as horrible and useless then you are useless as an Economist because your job revolves around data. My role is to get the analysis of data right and for that I need to have as much as information possible. This builds an information base to forecasts.

I am an Economist, not an Equity Analyst. Equity Analysts strongly follow technical analysis. Fundamental analysis & technical analysis are antitheses in reality. Technical analysis only believes in reading charts without considering the background data while making forecasts. And it works for them because most of the share market follows the same method. Consequently, even the markets behave like that. But this is not even distantly suitable for an Economist as they deal with larger markets and numerous parameters. Hence, secondary data becomes important as it significantly aids the decision-making and forecasting process.

5) In the beginning, you mentioned that there are fewer vacancies for market economists. Is this the case internationally too?

I can’t comment on the Demand & Supply model as such. But internationally, the demand is definitely higher. But then so is the supply. There even MBAs can apply for such roles whereas in India it is mostly the domain of theorists. Also, the primary requirement for such economists comes from the banking sector in India and every bank can have at the most 2-3 of them. Internationally, market economists see widespread absorption across the verticals of financial sector.

Therefore I said there are fewer vacancies for this role as compared to the massive number in the upcoming Data Analytics sector.

Getting Market Economist roles is also a matter of luck because an extra head count in economics research is a luxury for banks and so they try to avoid the extra expenditure.

As beginners, I would suggest to you guys that you be clear on your end goal. This way you will not take up any job just for the sake of it. Further, if you want to get into research, it is always advisable to join companies that have a bigger research team as opposed to the ones having barely 2-3 people. That increases your probability of being retained and climbing up to the post of a ‘Chief Economist’.

6) What are the dynamics of research in the banking sector in terms of the business strategy for diversifying your market base?

In banking, you generally have 3 types of clients: equity clients, fixed income clients and corporate clients. Research caters to all three of them but with varying significance.

Equity clients will actually pay for research and vote for it. So quality of equity research determines how much brokerage your firm i.e. the bank can earn.

Fixed Income market faces huge competition in terms of price. Therefore, clients might appreciate the research but not actually pay for it. And so, biggest challenge for Fixed Income research guys is monetizing their research. This involves a significant amount of conviction and credibility building in order for the bank to make profits from it.

Corporate clients look at banks as planning tools. The planning requirements vary from client to client and so it becomes a little subjective as to how much the bank will benefit from corporate research.

An economist is the overlapping link between all these 3 research teams. However, this makes them hard pressed for time as the sales guys get demanding in order to appease their respective type of clients. Also, an economist needs to factor in the monetary benefits that his/her bank will accrue from such research assignments – an added responsibility!

While Oxford sells research, we at CITI group don’t. So I, as an economist, need to know where I can make money from research for my bank.

7) How was it possible that economists and all the research work couldn’t predict the crisis?

Understand that, pre-crisis and post-crisis worlds are different. Pre-crisis, banks often had two distinct research teams – external focused and internal focused. Post-crisis, banks no more have the internal focused research. After crisis, regulations have become very tight. It requires that any research that banks do has to be published simultaneously for both external and internal domains. This is one thing.

Secondly, understand that by its very nature, economic science is much better in predicting trends and much worse in predicting turning points. All our economic tools and techniques that we learn, work very well when the economy is moving in a particular direction. But to predict that the cycle will turn and when it’ll turn i.e. prediction of these turning points doesn’t come very naturally to economists.

Furthermore, large part of what was going on during the pre-crisis era and what ultimately led to the crisis was not a macroeconomics issue. It was more of a market micro-structure issue. The kind of products that were being developed before crisis, the ways in which they were being sold, etc. is not in the domain of macroeconomics. So if you look at the macroeconomic data set for this time period, the data is all fine, it never predicted the crisis. That is, at the top things were all okay, the problem was at the bottom. Things were odd at the micro level.

Additionally, as a macro-economist, be it during the pre-crisis or the post-crisis period, the info that I have from my bank is not of the daily transactional nature. I don’t know whom the bank is lending to and at what rate. And I don’t even ask for such data. Economists, in most cases, don’t know what their own banks are trading and they are not even required to know that. Understand that every bank is extremely large in its functionality. Therefore, it is impossible for one individual to know everything about the bank.

So I don’t blame the bank economists as such on why they couldn’t predict the crisis. They will also not be able to predict the next crisis because structurally they are not in a position to do so unless it’s a macroeconomic crisis. Say for example, India in 2013, some of us were concerned because the current account deficit (CAD) was becoming very large, the fiscal deficit was getting significant in number, the inflation was at 10%. So, there were certain macro-level signs which would have told us that things are not probably good in the economy and maybe forewarn a crisis. But still, if you ask me if the Indian banking sector will be hit by a crisis and if you ask me to predict it sitting in my chair, then the probability of it is none.

8) One of the things that is a matter of significant debate in the western advanced industrialized economies is the matter of what central banks should do. The new RBI governor is taking over and there is a lot of speculation about what he is going to do and what approach he would adopt – whether it would be people-centric, whether he’ll focus on inflation targets. How is all this going to be resolved? What do you see are the challenges that India is going to face in the next 2-3 years?

So I’ll go back to where I started. During my days as a student and even when I was an academician in the field of macroeconomics, we have only had big fat chapters and books on how to deal with inflation. We never had even a footnote on how to control deflation. So the economic theory on how to control deflation is at a very rudimentary stage.

People talk of Japan having low interest rates for the last 20 years. But it rarely prompted people to do research on what Japan needs to do to get out of this situation. Japan was ignored probably because it lay in one corner of the world, and people thought it is their problem and not ours. So the US and the European economists never really got into a major economic debate on how to control deflation except for this gentleman called Ben Bernanke. Bernanke was approached by the Bank of Japan to come to Japan and give them a lecture on what Japan needs to do. That’s when Bernanke talked about ‘Helicopter drop of money’.

Essentially, he said, if the problem is that people don’t have enough purchasing power and so there is no demand then the solution is to give them more money in their hands. You take a helicopter and literally drop money from it in people’s hands. This will give them more purchasing power and therefore make them spend. This in turn will increase the demand and thus things will get back to normal.

Now as luck would have it, it was Bernanke who was asked to do a similar thing in the US 8-9 years after the above incidence.

Now, if you think of the first big debate and this debate has been happening in the economy for a very long time, it is: what is the right amount of inflation in the economy? After a lot of debate, 2% was crystallized as the amount of inflation we need. Some might argue saying why not 0%? Studies have shown that at 0% inflation, the producer has no incentive to produce. And so there needs to be a certain amount of inflation i.e. 2%

Today most of the world is standing at 0-1% inflation rate and is grappling with the thought as to how do we go back to that 2%. This is where the entire interest rate argument comes into picture.

Traditional theory suggests cutting interest rates. Reeling from the after-effects of the global financial slowdown, countries have even resorted to 0% interest rates. But none of these techniques have helped.

This led economies to experiment with unconventional monetary policies like quantitative easing, forward guidance and negative interest rates. But due to interplay of various factors, even these policies have failed to yield results.

So now the debate has moved towards the thought where people are considering that we actually live in a Fisherian world. Irving Fisher, a great economist, proved in his equation that there is a positive relation between interest rates and inflation. This is in contradiction to the standard theory that states there is an inverse relation between the two. And going by the Fisherian theory, countries will have to actually hike interest rates to attain the targeted inflation rates. But there is a critique of the Fisherian model as well that says perfect rationality in the Fisherian equation is a flawed assumption.

Theoretically, the cause of failure of these monetary policies is the Ricardian problem of equivalence. So the solution would be a true version of helicopter drop of money – in this case, an absolute promise by policy makers that such monetary policies will not be reversed.

This has not happened anywhere in the world so far, but it is now under strong consideration.

So this is how radical debates are on monetary policy in the West. Thankfully, closer home in India, monetary policy debate is still driven by traditional theory. In this too, we have very interesting and active debates-

For instance – What should be the actual measure of inflation? Should it be WPI or CPI or CPI core or CPI Headline? Or should it be inflationary expectations?

In this regard, I think it is a massive achievement of Raghuram Rajan that he was able to push such a contentious issue through the Indian political system about a monetary policy framework in just about 9 months. In my experience, such an achievement is almost unheard of in India. He convinced that the Central Bank i.e. RBI will strictly follow an inflation band of 4%, plus-minus 2%. It means that you and your children will never see 10% inflation in India which I have seen for at least half of my life. So, there’ll never be inflation of more than 6% for a sustained period and this in my view is a commendable achievement for India. And all this has been achieved without any bloodshed or fighting. All credit goes to ex-Governor Rajan for his efforts.

9) Will Fed hike the interest rates?

Let me begin by mentioning the Star theory – R*, U* and Y* – advocated by Ben Bernanke and others. According to them, Fed does not need to hike interest rates as it is already hiked.

They say that the Fed Terminal rate which once used to be 3.5-4% has now scaled down to 2.5-3%. Some market researches even say 2%. And therefore, the gap between the existing rates and the terminal rate (which is now 2.5%) is lower than what was predicted. Accordingly, even if you are at 0.5%, you are tight and there is no need to hike the interest rates further.

10) What, according to you, are the challenges that the new RBI Governor will be facing?

India has now moved from the system of the RBI Governor setting policy rates to the system of a new Monetary Policy Committee (MPC) setting the policy rates.

The challenge for the new governor is to build consensus amongst the members of this MPC.

Also, the approach that he takes in formulating monetary policy will have significant consequences. Monetary policy is not a science. It is, in the words of ex-RBI Governor Reddy, a craft. So transitioning from a mathematical model of monetary policy to a model that considers larger parameters and gives a broader perspective is in the domain of the new RBI Governor.

11) Do you think the MPC will be subjected to political pressures? Would it become a show of biases?

I don’t think that’ll be the case or for that matter, it will be a problem. Like I mentioned earlier, the challenge is to build a consensus within the MPC.

The MPC has 3 members from the RBI and 3 from the Executive. In case of a 3-3 verdict, the RBI Governor has a casting vote and therefore even in the extreme case scenario where the government and RBI have contradicting views, the RBI view will prevail.

But, a frequent show of 3-3 verdict will be a poor show for the country as a whole and it is therefore important that the MPC have a consensus. A 5-1 verdict is completely fine but not a 3-3 one.

12) What is the solution for the NPA menace that the Indian banking sector is facing?

The issue is more complicated than it appears to be.

Let’s say that by the simple credit growth cycle arithmetic, the credit growth rate stays at 10-15%. Let’s also say that there’ll be no further addition to NPAs.

Also, the stressed assets ratio which is presently at 11.5% will come down according to the credit growth cycle math. Let’s say we want to bring it down from 11.5 to 7% which was the case before the NPA problem blew out of proportion.

Now, as per the calculations of a credit growth cycle, this downfall will happen in the next 3-5 years. So, it is a long run process.

Compressing this long time period is the real challenge. For that, either of the 2 measures can be taken: increase the credit growth rate form the present 10-15% range; or get the NPA growth rate to negative, not zero.

One way of doing the former is by capitalization, especially in the case of Public Sector Banks (PSBs). The latter can be achieved by: adopting sector-specific measures to solve the NPA problem; getting the lender and the borrower on the same table and arriving at a settlement; etc.

For PSBs, implementing the settlement option can be a problem as they might be questioned by the Central Vigilance Commission (CVC) or the CBI about taking the haircut call. This is where the insolvency bill comes into picture. It acts as a mediator between lender and borrower in setting the haircut. But there is still time to implement it.

Thus, all the solutions are a matter of long haul. There are no immediate solutions.

13) What is the role of political economics in the forecasts made by economists?

At CITI, we do have a separate team for political economic research. But at the end of the day, I go by the principle – ‘What makes my needle move and by how much’. So the immigration problem or refugee crisis has been happening since 2011 but it is only now that it is having significant economic impacts.

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Date(s) - 09/09/2016
3:00 pm - 5:00 pm

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