Theories of Professor John Forbes Nash, the Nobel Prize winner currently touring India, might explain why despite all the Tata-Corus and Hutch-Vodafone deals in India, none of the biggest investment bankers actually have headquarters in the country.
If his ideas are anything to go by, domestic investment bankers and insurance companies might do well to at least hold their financial assets in a strong currency like the dollar or Euro, till the rupee reaches similar stability.
According to him, the quality of a country's money may be getting better if the number of investment bankers and insurance companies setting up subsidiary offices in the country increase.
However, the ultimate quality of the rupee can only be known once Indian merchant bankers begin to dominate the scene and hold their assets in the rupee, much like the way most merchant banking companies in Mergers and Acquisitions (M&A) have their headquarters in USA and Switzerland.
"It is observable that internationally operating commercial banks can do better if they are based in countries where the conventional money is of relatively higher quality. The same principle also applies to…investment banking," he said in Mumbai Monday.
That means that in turn, countries where M&A and investment banking activity is higher, it could mean that the currency is of a better quality. The professor was speaking at length on the topic of ‘ideal money’, a kind of medium of exchange, or currency, that would have a natural stability of value. This type of 'money' needs to be less prone to inflation.
The Economics Nobel laureate of 1994 said that the stability of a currency has to be measured in the long run, and on whether commercial banking activity is continuing in a country without having to cope with interest rate fluctuations in that period.
Nash is an expert in game theory, which creates models of competing companies and states in economics or politics using the example of 'cooperative games' that include mergers and acquisitions.
According to Nash, M&A is facilitated or 'lubricated', by money, which ensures smooth 'transfer of utility', that is the ownership of all assets. Thus Tata's acquisition of Corus actually includes debts built up by Corus in its pension fund. However, the currency in which the deal is preferred indicates the strength of that currency. Tata Corus deal was done in Euros.
India's current rate of inflation is a sure sign of 'bad money', or money that is not good for a stable rupee in the long run which would enable the emergence of a strong indigenous merchant banking and investment banking community in India.