Liquidity Sinks and Speculative Flows
path of least resistance
India doesn’t have a free capital account. Governments will go to great lengths to prevent getting marked-to-market on their policies and we are no different. So, we have the RBI doing things like killing the entire currency derivative market (reuters) and capping overseas investments of domestic mutual funds (indmoney).
Low rates, high urban lifestyle inflation and trapped liquidity is what financial repression is made of. Savers are forced to invest in a narrow set of domestic assets and accept lower real returns.
However, trapping liquidity is only one part of the equation. Our real economy has high frictions - corruption, infrastructure bottlenecks and changing rules & regulations. It is no wonder then, that liquidity found the path of least resistance and flowed in to crypto, online gambling and 0DTE option speculation.
The Indian government’s management of these liquidity sinks has been, to put it mildly, haphazard.
It doesn’t want to outright ban crypto because it wants to maintain the charade that it is a forward looking, progress oriented administration. However, the tax treatment of digital assets and enforcement actions pretty much achieved the same result (cleartax, thehindu).
The legal online gambling market was growing at around 13% annually and was worth around $3 billion in 2024 (ey). After trying to stifle its growth the same way it did with crypto, the government finally banned it this year (thehindu) inspite of it likely being unconstitutional (indianexpress).
The fight against options trading has entered the final round with everybody waiting for the knockout from SEBI.
Stock brokers took the cue last year and moved fast to pump their Margin-Trading-Facility programs (stockviz) and have steeled themselves to their fates. Stock exchanges are negotiating alternatives (economictimes). However, the prognosis is pretty grim.
Shutting off liquidity sinks is easy. Providing viable alternatives requires reforms that the government is unable and unwilling to do. So, where will the money flow to now?
The Indian equity market is the most expensive in the world.
Indian micro-caps have been on a tear over the last five years but earnings growth has levelled off.
Foreign investors and Indian promoters alike have dumped their bags onto retail shareholders and fled the scene.
Insider and promoter selling reached $30 billion in the first half of the calendar year (livemint). Private equity and venture capital participants have also been realising profits (businessworld).
The presense of return-insensitive investors has driven rental yields to below the cost of capital. Residential yeilds at 4% and commercial yeilds at 8% (assetmonk) make RE a bet on future land appreciation. However, land speculation is the turf of insiders (deccanherald).
So, if not speculation, equities or real-estate, then what?
Markets this Week
More here: country ETFs, fixed income, currencies and commodities.
Links
Research
Generative AI as Seniority-Biased Technological Change (SSRN)
Beginning in 2023Q1, junior employment in adopting firms declined sharply relative to non-adopters, while senior employment continued to rise. The junior decline is driven primarily by slower hiring rather than increased separations, with the largest effects in wholesale and retail trade. Heterogeneity by education reveals a U-shaped pattern: mid-tier graduates see the largest declines, while elite and low-tier graduates are less affected.
Understanding Accountability Failures in Developing Countries (NBER)
We argue that these shortcomings stem from weaknesses in accountability mechanisms, which leave governments vulnerable to corruption, clientelism, and elite capture. A central finding is that accountability institutions rarely fail on their own; instead, they are actively undermined by political actors seeking to preserve rents and entrench power. This dynamic weakens electoral competition, erodes judicial independence, and curtails media freedom, producing a mutually reinforcing cycle of weak accountability. Additionally, we argue that sustainable reforms cannot be achieved by strengthening any single channel in isolation. Effective reform requires bolstering all three simultaneously.
The Market Value of Fed Independence (SSRN)
ollowing media reports of escalating efforts to dismiss him, prediction markets sharply repriced dismissal risk within a two-hour window, creating a unique high-frequency setting to estimate market responses. Regression estimates imply that the certainty of Powell’s dismissal could erase $0.88–1.51 trillion in total market capitalization. These results show that markets price not only near-term policy-rate expectations but also the Federal Reserve’s ability to act independently.
India
A new piece of legislation introduced in the US Congress, the "Halting International Relocation of Employment Act" or HIRE Act, has the potential to upend the foundational model of India’s thriving IT services industry and emerging Global Capability Centres (GCCs) (economictimes).
Trump has asked the EU to impose tariffs of up to 100% on India and China as part of a joint effort to increase pressure on Russia to end its war in Ukraine (ft). US urges G7 to impose up to 100% tariffs on China and India over Russian oil (ft).
India is leaning towards not creating legislation to regulate cryptocurrencies in the country and instead will maintain partial oversight, fearing that bringing the digital assets into its mainstream financial system could raise systemic risks (reuters).
High energy costs, long a drag on India’s manufacturing competitiveness, are finally easing. Power and fuel expenses accounted for 1.98% of net sales in 2024–25, the lowest level in over the past two decades (business-standard).
Mahindra & Mahindra Ltd is set to become the first Indian automaker to issue an advisory on the use of E20 ethanol-blended fuel, acknowledging that older vehicles may face reduced performance (livemint).
If Chinese firms have become R&D powerhouses in the past two decades, it is because they face stiff competition in both domestic and foreign markets. Indian firms are relatively protected. We have always given ourselves good reasons for this: from central planning, socialism and economic nationalism to geopolitics and economic statecraft. Well, if we believe that these are higher priorities, we should stop accusing Indian capital of under-investing in R&D. If necessity is the mother of invention, protectionism is its contraceptive (livemint).
row
Trumpism isn’t full-blown Peronism yet. Large parts of the U.S. economy fortunately remain outside the president’s crosshairs and grasp. But each emergency declaration, Oval Office favor, and presidential intervention into private enterprise moves us closer to the Argentine model, and will make reversing course more difficult (theatlantic).
It’s Only a Matter of Time Until Americans Pay for Trump’s Tariffs (bloomberg)
US commercial truck manufacturers and fleet operators are largely frozen as they await long-term clarity on tariffs. That’s sent this year’s commercial truck sales expectations down more than 20% from the start of 2025 (autonews)
China’s consumer prices slipped into deflation in August, adding to signs that the world’s second-largest economy is losing momentum after exports grew more slowly last month (ft).
Alibaba, Baidu begin using own chips to train AI models (reuters)
A new eurozone debt crisis: France now. Is Spain next? (tomorrowsaffairs)
Nasdaq is working with U.S. regulators to introduce trading of tokenized securities (reuters).
Blackrock is weighing ways to make exchange-traded funds available as tokens on the blockchain (bloomberg).
Cboe announced plans to launch bitcoin and ether continuous futures. Unlike traditional futures contracts that may require periodic rolling, Cboe Continuous futures are planned to be structured as single, long-dated contracts with a 10-year expiration, reducing the need to roll positions over time and simplifying position management. These contracts will be cash-settled and aligned to real-time spot market prices (i.e., spot prices of bitcoin and ether, respectively) through daily cash adjustments, using a transparent and replicable funding rate methodology (cboe).
An ever growing number of retirees in Switzerland are withdrawing their pension capital and emigrating to cheaper countries (swissinfo).
Switzerland remains the most popular destination for German emigrants (destatis).
More than 100 South Korean women forced to work as prostitutes for US soldiers stationed in the country have filed a landmark lawsuit accusing Washington of abuse (yahoo).
Odds & Ends
If so many developers are so extraordinarily productive using these tools, where is the flood of shovelware? We should be seeing apps of all shapes and sizes, video games, new websites, mobile apps, software-as-a-service apps — we should be drowning in choice. We should be in the middle of an indie software revolution. We should be seeing 10,000 Tetris clones on Steam.
AI is not just ending entry-level jobs. It’s the end of the career ladder as we know it (cnbc)
Albania appoints AI-generated minister to avoid corruption (france24)
83% of Chinese professionals actively use generative AI in their daily work, compared to just 65% of Americans. China’s AI deployment rate is growing at 37% annually (yupyork).
5,000 Podcasts. 3,000 Episodes a Week. $1 Cost Per Episode. Inception Point AI is betting on flooding the zone with audio content (hollywoodreporter).
Widespread npm Supply Chain Attack Puts Billions of Weekly Downloads at Risk (paloaltonetworks)
Meme of the Week
