The effect of information unshrouding on financial product purchase decision

Individuals are often unable to discern different features of financial products and
become victims of aggressive and shrouded sales practices. We estimate the impact
of an instrument-specific education video on the intention to purchase a sub-optimal
insurance product in Delhi, India. The video highlights questions individuals should
ask before making a purchase and specific rules of thumb to evaluate the answers to
those questions. Our intervention results in a three percentage points increase in the
intention of not purchasing the sub-optimal product. Our effects are driven mainly
by an increase in product feature knowledge, suggesting that individuals are more
informed after watching the rules-of-thumb video, making better choices. A calibration
exercise suggests that this impact is sufficient to push the market from a shrouded to
an unshrouded equilibrium, suggesting that not all uninformed individuals need to act
on financial education to improve information provision in retail product markets.

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The Household Finance Landscape in Emerging Economies

We survey the household finance landscape in emerging economies. We first present statistics on household balance sheets from official micro-surveys in countries comprising 45% of the global population: China, India, Bangladesh, Philippines, Thailand, and South Africa. We contrast these patterns with those in data from advanced economies. We then survey the nascent literature on household finance in emerging economies and discuss areas of overlap with the more well-established literature on household finance in advanced economies, as well as the large body of literature on development finance. We highlight useful directions for future research.

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Learning from Noise: Evidence from India’s IPO Lotteries

Abstract:  We study a natural experiment in which 1.5 million investors participate in allocation lotteries for Indian IPO stocks between 2007 and 2012. Random gains on these stocks cause winning investors to increase applications to future IPOs, tilt portfolios towards the IPO’s industry sector, and substantially increase portfolio trading volume in non-IPO stocks relative to lottery losers. Effects are symmetrically negative for experienced losses, and decline monotonically with the number of past IPO allocations received. We consider a number of different models; the evidence is most consistent with investors learning about their own ability from experienced noise, drawing inferences about their skill from luck. These results suggest that economic agents learn about their own ability from noise shocks, though repeated exposure to these shocks and/or selection can significantly attenuate these responses.


RBI Committee on Household Finance

The Reserve Bank of India set up a committee to look at the various facets of household finance in India and benchmark India’s position against both the peer countries and advanced countries. The terms of reference of the panel include suggestions to benchmark the current depth of household financial markets in India vis-a-vis those in other major world markets and identify areas of priority for growth and change. It will also characterise and evaluate Indian households’ demands in formal financial markets (for assets such as pensions as well as liabilities such as home loans) over the coming decade. The panel will also consider whether, how, and why the financial allocations of Indian households deviate from desirable financial allocation and behaviour (e.g., the large household allocation to gold). It will evaluate the design of new systems and the redesign of existing systems of incentives and regulations to encourage and enable better participation by Indian households in formal financial markets. The panel will assess the role of new financial technologies and products — like robo-advising, automatically refinancing mortgages — in the cost-effective provision of high-quality and suitable financial products to Indian households while containing risks.

The report can be found on the RBI website here.

Working Group on Foreign Investment in India

This report examines foreign investment law and capital flow management pol- icy as it is manifested in the norms, institutions and processes of law. The Group examined the structure of regulation and the ways in which practices, institutions, and procedures inflect and shape these policy decisions. The report also offers, alongside an economic policy piece contextualising these flows in relation to the Indian and global economy, close scrutiny of the structures and incentives created by the law in the main areas of our mandate; capital flows management regulations with regard to listed and unlisted equity, corporate and government securities regulation and derivatives trading. The focus of the Group has been to identify procedures and practices which can help avoid uncertainty, delay or unequal treatment and to recommend measures which could simplify the portfolio investment environment; at the same time laying a strong emphasis on KYC norms.

Role: Research Team Member

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Financial Sector Legislative Reforms Commission

The Financial Sector Legislative Reforms Commission was constituted by the Government of India, Ministry of Finance, in March, 2011. The setting up of the Commission was the result of a felt need that the legal and institutional structures of the financial sector in India need to be reviewed and recast in tune with the contemporary requirements of the sector. The institutional framework governing the financial sector has been built up over a century. There are over 60 Acts and multiple rules and regulations that govern the financial sector. Many of the financial sector laws date back several decades, when the financial landscape was very dierent from that seen today. For example, the Reserve Bank of India (RBI) Act and the Insurance Act are of 1934 and 1938 vintage respectively. Financial economic governance has been modified in a piecemeal fashion from time to time, without substantial changes to the underlying foundations. Over the years, as the economy and the financial system have grown in size and sophistication, an increasing gap has come about between the requirements of the country and the present legal and regulatory arrangements. Unintended consequences include regulatory gaps, overlaps, inconsistencies and regulatory arbitrage. The fragmented regulatory architecture has led to a loss of scale and scope that could be available from a seamless financial market with all its attendant benefits of minimising the intermediation cost. A number of expert committees have pointed out these discrepancies, and recommended the need for revisiting the financial sector legislations to rectify them. These reports help us understand the economic and financial policy transformation that is required. They have defined the policy framework within which reform of financial law can commence. The remit of the Commission is to comprehensively review and redra the legislations governing India’s financial system, in order to evolve a common set of principles for governance of financial sector regulatory institutions. This is similar to the tradition of Law Commissions in India, which review legislation and propose modifications. The main outcome of the Commission’s work is a draft ‘Indian Financial Code’ which is non-sectoral in nature (referred to as the draft Code throughout), which is in Volume II of the report and replaces the bulk of the existing financial law.

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