Volatility's fear

Essay by vyasdhaval August 2005

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Back in the 1970's, a novel called Fear of Flying written by Erica Jong exploded onto the cultural landscape (in the western world).

While I never read it (except for the prurient parts), I understand it was about a woman who had a pathologic fear of flying, which she was able to overcome by engaging in virtually anonymous sex in airplane toilets. While the treatment was quite arcane, getting over her fear of flying was certainly very useful in terms of her being able to continue a contemporary life.

I believe that India's financial managers suffer -- and have suffered for years -- from an excessive fear of volatility, and, while I am not, by this reference, advocating that senior RBI officers scuttle into broom closets or anything like that, the point is that any pathological fear limits your ability to live your life.

In other words, the excessive fear India's financial stewards appear to have of volatility have, in my view, been constraining India's growth.

While current market movements indicate that RBI is -- slowly -- coming out of the volatility closet, which process appears to have been accelerated since Dr. Reddy took over from Mr. Jalan as governor a few months ago, the underlying 'fear of volatility' remains intact, seen both in word -- read any comment from the central bank on exchange rate policy, and, more recently, "remember the Asian crisis" comments from the Ministry -- and indeed -- ham-handed intervention in the markets, using even blunter instruments like constraining access to ECBs, etc.

In addressing this fear of volatility, which, to be fair to the RBI, does afflict all of us, we need to first understand that volatility -- uncertainty -- is a natural state. Everything is volatile, changing every moment.

The price of eggs...