Raghuram Rajan is Right in post-poning Rate Cuts

The markets can take a walk for today but they will come back to re-appreciating what RBI Governor Rajan did when they can. Even if Rajan hadn't made the signal announcement on rate cuts, we better listen to what he says. In the 15 months since he took over, currency has stabilised, stock markets have rebounded to lifetime highs, bond markets have seen bigger FII participation than stock markets, gold imports have fallen until recently, and bond yields have fallen over 150 per cent insinuating a big fall in sovereign borrowing rates which should augur well for the borrowers generally. Today, the INR Bond has become one of the best fixed-income investments in the world - giving positive dollarised returns - better than many G8 economies. Even if the Fed Taper is pre-dated in 2015, Rajan is leaving no stone unturned to ringfence the economy from shocks coming from hot money flows. Remember the last time he warned a few quarters back: "We must use this window of capital flows to strengthen our economy". The markets were not expecting a rate hike then. He hiked for a solitary reason to attract short-term inflows and prevent a run on Indian bonds. Again, two quarters ago, he warned the world is not yet out of the woods as if he got premonition about a second crisis coming. The last time around, he was the only one who saw it coming  - earning the wrath of Gods like Greenspan and Goldman CEO. This time not many paid heed to his warning again but we just saw the European unravelling and the rumblings in the US and Japan forcing most Central Banks in the world to think independent of each other, to fend off their wounds. 

I followed his press conference closely today and feel there is a lot he says that is still work-in-progress before India can expect a rate cut even if the path is now more or less visible. His concerns are valid: Core Inflation is still high, we got relief on Crude Oil prices yes, but we may again see a sharp shoot-up in gold prices putting pressure on the current account deficit, we have yet to see the clouds lifting on the road ahead for savers and producers, we have yet to see the big banks cut rates despite bank rate lowered some time back, we have to still clear the projects on Infrastructure and clear the cobwebs on coal and power issues,  the issues of reducing the fiscal deficit, we have to address the issues of accountability of big promoters running away with bad debts (a quick rate cut will once again make the banks run with the wolves again) and we have to address the whole issue of return of confidence on financial market investments. Anyone who read the book "Faultlines" by Rajan, especially the chapter on India will find all these concerns well-highlighted by him. I am sure he is not going to give away the concessional cuts Corporate India unless he addresses these bottlenecks or fixes themfor good. He has talked about why growth is crucial for India but he wants to see growth on a sustainable path - a path that will not just appear as a false-start but run course for several years taking the step-up approach from 5.5 to 6.5 per cent and beyond in GDP growth. 

Unlike the previous RBI Governors, Rajan has an immaculate gentlemanly nature to explain how his policy translates into action and what it means for all the stakeholders in the economy. He was not talking down to the audience today like Dr.YV Reddy,  he didn't make it sound like rocket science like Dr Rangarajan and he was not sounding amateurish and out-of-control like Mr Subba Rao - although all of them gave RBI its much-revered autonomy better than three-fourths of the world central banks. Indians in general and markets in particular should weigh his words more seriously because this is a home-grown talent that is being sought after by world leaders. When the BRICS Bank was set up early this year, the Chinese Premier sought our PM's green signal to make Dr Raghuram Rajan its first Chairman. Modi rightly said no because Rajan has been a lucky find for India. Let's not push our luck fast by pressurising Rajan to do tokenism. He is capable of more than that. Let him decide that. If he has his way, now that his batchmate has joined Ministry of Finance as Minister of State Jayant Sinha, then the duo will herald a golden era for Indian Banks and Financial Markets and also restore the confidence of the savers and investors in the Indian Rupee assets. Amen.

#RaghuramRajan #RBI #CreditPolicy #RBIMonetaryPolicy #RBIGovernor

Duvvury Subbarao's farewell speech puts RBI on top.

RBI Governor Mr Subbarao may not have earned the popularity that other Governors have earned but that maybe more because of the misgovernance of the UPA Government. Subbarrao's biggest follly is that he tried to fight the wrong dragon (inflation) while killing growth. But the dilemmas of Modern Central Banking in Emerging markets is getting tougher by the day. I have interacted with atleast two deputy governors (S.Venkitaraman, S.S.Tarapore) and one RBI Governor Dr.YV Reddy (I was travelling first-class next to him in a flight from Mumbai to Hyderabad). The minds of these people are quite different from the minds of businessmen and professionals and housewives and students in our midst. They have to track so many variables and have to take decisions that may not be pleasant to most people and yet be guided by impact on the society as well. While I will share my experiences of my interviews with such top-brains later, this one is to put in right perspective the achievements of Subbarao after his farewell speech recently.

1. He has extended the streak of fearlessness and autonomy set forth by the preceding Governor Dr.YV Reddy. He was always clear that for every step the RBI takes, the Government has also to match it with fiscal initiatives. Too bad, the UPA Government slipped on many counts in this ground and wants to blame everything on RBI for the follies of the slippages on GDP growth, the exchange rate, etc.

2. Mr Rao, I believe, carried a resignation letter in his pocket everyday. So, nobody could have arm-twisted him to do anything that was not in principle appealing to his perception of Central Bank sensibilities. Neither the nincompoop Shankar Sharma with his unethical market behaviour or his un"bear"able fixations, nor opposition leaders like Yashwant Sinha and Arun Jaitley nor businessmen like Ambanis and Kris Gopalakrishnan nor PM or his FM could influence Mr Rao to curry favors on easing of monetary policy.

3. The incoming governor, Raghuram Rajan, will have a lower base of expectations and a weakened currency regime and an economy that will eventually climb the wall of worries. But the times that Subbarao managed are the most difficult and will help him earn more than a footnote in history even if he is thanked less now.

4. Inflation, is clearly, under control but beyond a point, if it refuses to die down, there are many factors at play - supply-side bottlenecks, reckless fiscal policy, exogenous forces at play, Fed's exorbitant privileges, etc.

5. Mr Rao is the first governor to open the doors of transparency and increase the frequency of interactions with public. He started the practice of monetary policy review eight times a year instead of four-six reviews a year in the previous stints.

6. Subbarao also participated in the most enlightened debates on central bank policies and its transmissions on the broad economy besides opening the Pandora's box on corporates getting new bank licenses, role of CRR etc. Of course, the debates that RBI had with the top guns at SBI are stuff of legend now - but that is only to be expected because SBI always felt it is more senior (and hence more ancient) than RBI in age.

7. Subbarao, like Dr.YV Reddy, opened the culture of TV debates and informal talks and continued the respect of peers across G-20 countries. He has also acknowledged the complexity of having multiple regulators and created the framework for right debates between the relevant regulators. If the US has today got six regulators, RBI also has created room for co-ordinated maneuvres. 

8. Willingness to act tough and learn from the history of banking crises has helped Subbarao to earn credibility. You should read his prescient essay on Basel-III norms to understand the mind of the man. Ministers like Chidamabaram who sit on intellectual tags and cannot steer clear of personal and career conflicts will never be able to hold a candle to men in public institutions like Subbarao who have nothing but unquestioned integrity, broad experience, nonconflicted judgment devoid of pollitical partisanship and the will to act. 

9. One fatal flaw that undermined Subbarao's endearing appeal is the rapidity with which he raised interest rates while cutting the interest rates in a lazy manner. He has realised the mistake but with grave consequences for the economy. He would have loved the unleashing of animal spirits had he taken more than baby steps in cutting interest rates for the little leg room that showed up somewhere in the period from September 2012-June 2013 but that proved to be a remiss too costly to miss.

10. Subbarao, despite that one fatal flaw, has kept the flag of autonomy in a developing country Central Bank unusually high. Let there be no doubt about his competence, his sense of humor, his resolve to tame inflation which was touching double-digits, his integrity and his independence. If RBI has earned its spurs today as one of the most respected central banks on the planet - whose working papers, whose policies and methods have become beacon lights of textbook economic responses, then let's credit Subbarao for joining the ranks of the great institution-builders.

 Subbarao is one of the commonest names in Telugu, it means the lucky one in Telugu. Even though Subbarao's stint in RBI has proved unlucky for India, it is not uneventful. In another country, another time, there would be a testimony of sorts. But this is India, we are like this only. Goodbye, Mr Subbarao. I will end with the words of Paul Volcker that clarify on how to size up crntral bankers: "The Federal Reserve, after all, has only one basic instrument so far as economic management is concerned—managing the supply of money and liquidity. Asked to do too much—for example, to accommodate misguided fiscal policies, to deal with structural imbalances, or to square continuously the hypothetical circles of stability, growth, and full employment—it will inevitably fall short. If in the process of trying it loses sight of its basic responsibility for price stability, a matter that is within its range of influence, then those other goals will be beyond reach."