What makes the RBI governor the best of his lot...

Aug 29, 2015

In this issue:
» Some Indian states more productive than others
» Another session of Parliament stalled
» Weekly Round-up of the markets
» ...and more!

In an ideal world, a country's central bank and the government need to operate independent of one another. After all, the key role of a central bank is to provide some stability to the currency. And this is by controlling inflation. In other words, central banks can in no way be influenced by political motives of the government in power. But this is easier said than done.

When the gold standard was in existence, before the First World War, it was a lot easier for central banks to maintain price stability. Governments at the time could not choose to print money at the drop of a hat.

But all of this changed when the gold standard was abandoned and paper currencies became more prominent. Over the years, the role of central banks also expanded. And nowhere was this more apparent than when the global credit crisis struck in 2008-09.

Big financial institutions and banks were bailed out. Liquidity had to be injected into the financial system to prevent it from collapsing. All of this was done by printing more money. In short, central banks in the US, Europe and Japan began dictating how economies have to be run.

Indeed, in the seven years since, the only ‘strategy' that the countries of the developed world have relied upon is an easy money policy. Not much else. And guess what? These countries are nowhere close enough to regain their glory days of the past.

Against such a backdrop, the Indian central bank, i.e. the RBI, stands as a stark contrast. For starters, at the height of the credit crisis, the Indian banks were hardly affected as its global counterparts. The RBI's prudent monetary policies had a lot to do with this.

Not just that. One thing that has stood out is the independence of the RBI and its refusal to give in to the demands of the government. Not just his predecessors, but present governor Dr Rajan too deserves a lot of credit for this.

At a time when the Indian economy had been slowing down, Dr Rajan stood his ground and refused to cut rates. Why? Because inflation at the time was still not under control. Dr Rajan has also been vocal about how the government needs to do its bit in giving a booster dose to the economy through reforms.

His prudent policies have not gone unnoticed. Indeed, as reported in leading financial dailies, noted investors such as Marc Faber and Jim Rogers have hailed Dr Rajan. Faber especially stated that he does not trust most central bankers because they are essentially money printers. But he showed a lot of respect for Dr Rajan because of the latter's solid grip on monetary policies.

There's more to this. In the latest RBI annual report for FY15, Rajan has for the first time in the history of RBI's annual reports actually put in a note from the governor. In this, he has discussed various challenges for the central bank, its view on inflation, various strategies to fine tune India's banking system as well as the organizational changes and human resource development. It is one of its kind and is almost like a letter to shareholders written by the Managing Director of companies. We believe this is a step in the right direction and something that every central bank should incorporate.

So India has certainly ticked all the right boxes as far as its central bank is concerned.

But what about the government? Although the Modi government has the potential to get India's economy going, a lot of work still remains to be done in this regard.

Do you agree that the RBI governor is the best central banker in the world today? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
Here is what my colleague Tanushree wrote to you when she explained one of the most important signals of the Megatrend for The India Letter.
    "Agriculture today contributes merely 20% of India's GDP. The share has consistently declined since 1991, while the contribution of industry and services has increased. However, more than 60% of Indian population continues to remain employed in agriculture. This was the case with the US and China too in the 1930s and 1970s. It was only over a period of time that skilled manpower moved to industries and services taking the US and China closer to the stature of developed economies. As of 2008, just 2% of America's population makes a living out jobs in agriculture and allied activities.

    While on one hand mechanization of farming activities has improved farm acreage, it has also reduced the labour requirement in agri activities of developed countries. Meanwhile, investments in industrialization coupled with innovations have helped job creation in industry and services sectors.

    The most technologically suave companies globally are increasingly looking at having a larger presence in India. The new services and industrial hubs will need to be catered by housing, utilities infrastructure and financial services. The job creation will therefore have a multiplier effect. The investments and hiring by these global majors will more a large part of India's working population out of agri and into industrial and services sectors”

So workers moving from farms to factories is a trend that is given. But as Tanushree warned, things will not happen overnight. And there is enough data to show why. An article in Mint explains why one of the foremost challenges facing the country today is to generate enough blue-collar jobs for a bulging workforce. That is because while some states have had a stellar record in generating factory jobs over the past few decades, other states have fared poorly.

Availability of natural resources and labour productivity are not the only reason why some states went ahead of others in creating factory jobs. But the hostile economic and political environments in some states are also to blame. It will therefore be a while before India can think of competing with China in manufacturing.

Some states enjoy higher worker productivity than others

There is a famous saying that India grows despite its Government and not because of it. If any further proof was needed, it came in the form of disruptions in the parliament during the latest monsoon session. And mind you, all of this despite the current Government having an absolute majority in the Lower House, a first in many years. What this has meant is that many reforms that could have given India's economy a huge leg up were effectively stalled. And the Government has now been forced to take them up at a future date. In other words, the window of opportunity is quickly closing for the Government. India Inc which already feels the current Government is losing momentum has been pushed closer to hopelessness. We felt that in an environment where economies across the world are struggling to grow, India had a fantastic opportunity to present itself as the rare Oasis. But with the disruptions, this chance is fast evaporating. We just hope that better sense prevails. After all, our economy and the people deserve to grow and prosper at a faster pace than before.

The week gone by started on an extremely bearish note as the global markets got burned on Monday. China ignited the crash and flames quickly spread to indices around the world.

The first signal of the deep downturn came when China's government announced a surprise currency devaluation a couple of weeks back. Then, in another sign of a slowdown in the Middle Kingdom, came weak manufacturing data. News that factory production had shrunk to a six-year low sent the financial markets into tailspin.

However, by the end of the week, the major global indices recovered some of the early-week losses. Positive US economic growth data and a rate cut in China cheered investor sentiment. Yet most indices in Asia finished the week in the red, stock markets in China, India and Hong Kong were the top losers. While the stock markets in US and Europe closed with gains.

Back home, the Indian indices closed the week down 3.6% after registering a single-day fall of more than 6% on Monday. The US Federal Reserve, however, lifted investor sentiment with some positive comments indicating a September rate hike seem less compelling. Among the sectoral indices, stocks from Capital goods and banking sector witnessed maximum selling in the week gone by. Both mid cap and small cap stocks too declined sharply by 4.2% and 5.3% respectively.

Performance during the week ended 28 August, 2015
Data source: Yahoo Finance

 Weekend investing mantra
"I have owned one stock since 1969, two since 1988 and one I started buying in 1986 or so. That's my portfolio. Six stocks. I once owned 17, but that was way too much." - Philip Fisher

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This edition of The 5 Minute WrapUp is authored by Radhika Pandit (Research Analyst).

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15 Responses to "What makes the RBI governor the best of his lot..."


Aug 30, 2015

He is the man of the moment who has strength of character, sagacity in fiscal management, guts to say and stick to his conviction.Govt is scheming to put all blames for ills of Indian economy on RBI. Dr Rajan has wisely suggested to the govt to pro actively initiate reforms to speed up the sluggishness in the agriculture, industrial,service sector.The govt in its arrogance and false sense of pride shirks from giving any space to opposition parties and consequently slowed the smooth conduct of parliamentary business.FM MR Jaitley is looking for a scape goat to transfer blame of his own benign policy cancer.India as of now has best of the financial managers under Dr Rajan who need to be trusted and shown that govt trusts them.



Aug 30, 2015

Mr.Raghuram Rajan is the Best Governor,RBI we have had so far in the independent India.He is a world renowned
economist.Mr.Modi should take note of it and under no condition he should yield to the pressure of Finance Ministry,if at all anything is there and should give a free hand to Mr.Rajan


havovy unvala

Aug 30, 2015

He stands out, as he firmly believes that principles are not to be sacrificed at the cost of cheap popularity.
Even if the finance minster has different views, he is right in exerting his way as a true economist


HG Sharma

Aug 30, 2015

In a democracy ,the politicians ( Governments ) exploit the public sentiments for their existance and promise short term gains , where as Central Bank uphold long term value of economy, particularly in India sofar. Thank God that the Governors post is not yet policalised in our country , thank the visionay Dr. Manmohan Sing for installing a righteous person in the saddle of RBI , before he himself demitted his office.



Aug 29, 2015

1.Philip Fisher:
Has only 6 stock Investments! But, What are the sizes of each Investment??
It is easy for Billionaires to invest Billions in CONTROLLING stake in 6 Companies (Almost OWN them?)!
What about retail investors, who have few hundred thousand $?( Rs.50 Lakh, Rs.100 Lakh)??

2.It is SAFER and easier to paint a -ve Picture of the Future....But, I feel, we should constantly project the +ve sides...

Indian Stock market is THE ONLY place, we can expect higher than inflation adjusted return-on-investment ,
China-Crash....US-Crash..Europe-Crash etc....

It is good for people to smile, when they are alive....!


G Darad

Aug 29, 2015

It is difficult for governments of all hues across the globe to tolerate independent thinking since it is the greatest stumbling block in the way of populist propoganda.But people across the world will have to understand that independence of thought is the most precious virtue for the progress and evolution of a democratic society and further, that this civilisation is not run by the political class but by the right-minded and benevolent people who are ahead of their time. What Dr. Rajan has been doing is a robust professionalism in action and not just ideology. He is not just a veteran economist but one of the greatest assets assets for our society and must be supported and protected against the myopic and half-baked populism being resorted to by a few self-serving theorists.His far-sighted moves sometimes give me a feeling whether we were waiting for this great fellow who can steer us ahead of all other economies in a very short time.He appears to be doing exactly that but we have vowed not to understand him knowing fully well that he is the only veteran visible on the horizon who can lead us to the light at the end of the tunnel.


Gopinathan k

Aug 29, 2015

Yes,unlike other central bank governors and like his
predecessors,he has stood his ground and not been lead
away by the wishful thinking of the Government in power..
He certainly deserves compliments for that..



Aug 29, 2015

Dr.Raghuram Rajan is the best person to head our Central Bank, the RBI as its Governor at present. He has his own role to play and he is doing this job exceedingly well. He has a firm grip on the state of Indian economy and knows how its pulse is beating particularly the Inflation and the inflationary trends. He is steadfast in doing what a person in his position ought to do for the health of our economy by taking independent decisions that are in the best interest of the country'economy.His decisions are notwithstanding what the government of the day wants him to do as per their political agenda. Likes of Dr. Rajan are very hard to find. He has the honour and experience of having worked at IMF, Washington. I think Dr. Rajan is the right person at right place at right time. No doubt he is the best of his lot at present.



Aug 29, 2015

Central banks alone in 21 century not ok.Technologists, inventors are future economy shapers.Days of Toxic finance alone are reducing.Our Governor has no plan for future, may be yesterday& this day. No incentive to leap frog to future. India needs disruptors too



Aug 29, 2015

he is the best because he is not buckle under the political pressure.inflation is worst nightmare for the poor more than 50% of the population.people will lose their buying power if the inflation go high.then how India SEE A SUSTAINED GROWTH.NO DOUBT high growth increase the demand thereby inflate the price.but the recession to the level of 5%of GDP never bring down the prices.who hold it.why the cong or the present govt sit idle on this score.example real estate.no demand but prices never come down.what happened to the economic theories?why blame RAJAN? He is doing right service to the masses.

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