My chance meeting with Raghuram Rajan!

Feb 3, 2015

In this issue:
» No repo rate cut by the RBI
» India to run a current-account deficit for the foreseeable future
» Is the auto sector set for a revival?
» ....and more!

Readers of The 5 Minute WrapUp will be aware that we strongly believe in the independence of India's central bank. We have praised the Reserve Bank of India (RBI) on many occasions for taking a view different from the central government. In fact, it often seems that the RBI governors have chosen to value their independence over everything else. Dr Rajan's independent thinking was evident whenever he refised to oblige with political corporate demands for rate cuts. While he may have left the benchmark Repo rate unchanged today; he did surprise everyone with a rate cut a couple of weeks ago.

On a Saturday evening last month, I got a chance to ask him about this very issue. Lady luck was kind enough to grant me an opportunity of a lifetime. A couple of weeks ago, I was at Phoenix, in Lower Parel Mumbai to watch the movie 'The Imitation Game'. While the movie was good, I will remember that evening for a different reason.

I was waiting outside the movie hall before the start of the show. There weren't too many people around. That's when I saw a woman approach a tall man standing a few feet to my right. I noticed that she had spoken to him only for a few seconds. To me it felt as if she had just approached a celebrity. I realised then that I'd heard her say the name 'Rajan'. I turned to face the tall man and sure enough, there he was, the Governor of the Reserve Bank of India. In a bit of a daze, I approached him.*

Sarit: Err... Hello! I don't mean to disturb you but are you Dr Raghuram Rajan?

Raghuram Rajan (RR): Yes (nodding)

Sarit: (smiling) I just want to say that it's an honour to meet you.

RR: Thank You

Sarit: My name's Sarit. I have read your books. It's wonderful to actually meet you in person.

RR: Thank You. What is it that you do?

Sarit: I work for Equitymaster as an equity research analyst.

RR: Oh... everyone over here seems to be into equity research!

Sarit: If you don't mind Sir, may I ask you a question?

RR: Sure (nodding)

Sarit: Do you really believe in taking actions that surprise the markets?

RR: (Shaking his head) No no... It's not like that.

Sarit: It's just that in your books, you have criticized Alan Greenspan (former Fed Chairman) for leading the markets. So I was wondering if you believed that central bankers should not try to lead the markets but instead act in a way as to surprise the markets. That monetary policy might be more effective that way.

RR: No it's not like that. Anyone who has read my books will know that I did not mean to say it that way. I have spoken about my views before.

Sarit: Yes Sir. Your words and actions are very much in sync. What I meant was, do you as governor, believe that surprising the markets is the best way to go?

RR: No I don't believe that.

Our short conversation had to end at that point. As Dr. Rajan and his wife had come to watch the movie, I did not want to pester him with more questions. Our interaction might have been just about a minute long but I don't regret that. I got a chance to talk to someone who I admire enormously and the opportunity itself was more than enough for me.

I did understand what he meant though. He was trying to say that just because something is wrong does not mean that the opposite is necessarily right. My main take away from the interaction was that he was doing his best to maintain objectivity in conducting monetary policy. He did not want to be influenced by anyone. This reinforces the view that we at Equitymaster have about Dr. Rajan. He has always been a voice of reason highlighting risks that corporate India would like to ignore. We at Equitymaster admire him for it. Do you?

* Conversation not verbatim

Do you think that Governor Rajan has been objective in conducting India's monetary policy? Let us know your comments or share your views in the Equitymaster Club.

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Today's monetary policy certainly reinforces our view further about Dr. Rajan. While every so called 'expert' was clamouring for a rate cut, he has not obliged them. Yet again the RBI governor has stated that his job is not to boost stock prices. By keeping the benchmark rates unchanged, he has stated that rate action will depend on inflation remaining in check. While maintaining the Jan 2016 inflation target of 6%, he has once again highlighted the risks faced by the economy. The governor also stressed the need to bullet proof India's balance sheet before the US Fed starts to hike rates. This is a big risk as it could result in an outflow of money from India. So while corporate India might complain as usual, we are satisfied that the RBI is firmly focused on the long term health of the economy.

Central bankers the world over may have lost the plot trying to revive their economies through pointless money policies, but the RBI is a different central bank altogether. Indeed, as we have pointed earlier, one of the reasons why India's banking system has been resilient to global shocks is because of prudent policies followed by India's central bank. In fact, at a time when growth was slowing down, the RBI refused to cut rates when inflation was still high. Clearly it had its priorities right.

Indeed, the governor Dr Raghuram Rajan is of the view that for India to succeed, it will have to deepen domestic demand, strengthen its financial institutions, considerably ramp up infrastructure and improve in human capital through investments in healthcare and education. Dr Rajan also opines that India will run a current-account deficit for the foreseeable future. Thus, the funding for this will have to be through foreign direct investment (FDI), which is longer term in nature. But for this, policies will have to be transparent and not mired in red tape.

And the governor has also stressed on how important it is for the RBI to pursue prudent monetary policies. He states in an article in Project Syndicate, "It will be important to remember that the central bank's role is not to boost stock prices, but to ensure that the economy's underlying fundamentals and its financial system enable sustainable growth."

Thus, in the RBI, India clearly has a central bank that can be relied upon to remain independent and focus on maintaining stability. Now it is up to the Modi government to do its bit as well.

 Chart of the day
The auto sector is a likely beneficiary of interest rate cuts. After a couple of bleak years, the auto volume numbers for the first nine months of FY15 appear to be much better. In other words, better growth in volumes probably points to recovery in the sector albeit gradual. The segment to give evidence of this is commercial vehicles (CVs). Indeed, in the CV industry and in that the medium and heavy CV (MHCV) space, the last couple of years saw volumes plunge by as much as 50% combined. Although volumes have been down in 9mFY15, the pace of fall is much lower and is largely due to the 13% YoY drop in volumes of light commercial vehicles (LCVs). MHCV volumes grew by 10% YoY during the period and are an encouraging sign since the growth in this segment is closely linked to that of the economy. Exports have done the best and most of these have largely been to the markets of Asia, Latin America and Africa.

A revival in auto industry seems underway
*Passenger vehicles, **Commercial vehicles

In the meanwhile, led by heavy selling activity, the Indian markets were trading weak with the BSE-Sensex trading lower by about 210 points or 0.7% at the time of writing. Realty and banking spaces leading the losers; while FMCG stocks were trading firm. As for markets in Asia, most ended the day on a strong note; while European indices were also trading strong at the time of writing.

Today's investing mantra
"Be fearful when others are greedy, and be greedy when others are fearful." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Radhika Pandit.

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7 Responses to "My chance meeting with Raghuram Rajan!"

Ravish Gupta

Feb 5, 2015

Yes, I do believe, Mr. Rajan has so far been objective.


sujit s chattopadhyay

Feb 4, 2015

I have no doubt about about Dr Rajan's sincerity,probity and integrity. But i am not a great believer in the omnipotence of the Market and effectiveness of complete autonomy of the Central Bank ,especially in the Indian context.For recession atleast, in the short term, Keynesian remedy is still useful and his policy requires govt intervention with the joint application of monetary and fiscal policy,with relative emphasis on the latter.And this needs govt coordination.But govt intervention is anathema to most American and Fundbank economists.On the other hand, conquest of inflation 'once for all'may remain a chimera. Economics is no mathematics as Karl Popper had argued convincingly

Like (1)

Prof Firoz Ahmad

Feb 4, 2015

I wish I could share the admiration for RR. I am rather disappointed. For last fie years RBI is trying to control the price pf potatoes at the cost of Indian economy. Its over emphasis on inflation digits and totally ignoring the purchasing power(pp) which has risen so much that India is placed third just behind USA and China.Lower rates are in key sectors would improve supply and moderate the inflation. RBI should be guided by inflation/pp in its policies. Sorry I must admit that I am a Professor of chemistry and economics I do by commonsense.

Like (1)

T T Krishnan

Feb 4, 2015

Dr Raghuram Rajan has been absolutely objective in deciding the monetary policies for the country. He has not been swayed by political pressures or comments of some economists. He does not believe in taking knee-jerk actions to situations but likes to assess how stable are the conditions and whether the easing of inflationary pressures are temporary or going to continue for some time. He therefore does not believe in surprising the markets by decisions that are not backed by strong ground realities

Like (1)


Feb 4, 2015

No doubt, he is the right person for the JOB. The industrialists, Bankers, and the Ministers are looking only in one direction i.e lowering the repo rate/ Interest rates to benefit the industry.
If the interest rates are lowered, how do the retired and old people who deposited their hard earned money in banks can make their living. A balanced approach is the need of the hour.

Like (1)

Dr Prem Sagar

Feb 4, 2015

Yes I do consider him a man of firm determination and well of well understanding of his job.

Like (1)

somenath ganggopadhyay

Feb 3, 2015

Yes i do admire Mr Rajan a right person for the job of RBI Governor.

Like (1)
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