Why two-eyed Rajan is King! - The Honest Truth By Ajit Dayal

Why two-eyed Rajan is King!

9 MAY 2016

You can trust politicians to say what they wish in total defiance of facts and take offence at any statement which seems to question the divine outcome of a booming economy.

During the meetings of the World Economic Forum in Davos the world's business leaders were busy telling themselves why India was a "bright spot". The IMF - the same folks who forced the Asian countries to suffer pain after their leverage binge in the 1990's but allowed the western economies to get away with a lighter punishment post the Lehman collapse -has also been saying that India is a "brighter" picture in a pretty gloomy world.

Prime Minister Modi and his ministers also wish to show the break out that the Indian economy has achieved after the "policy paralysis" of mis-governance of the previous corrupt and hollow UPA-2. Of course, low oil prices help the case for the Modi miracle. As do the normal cyclical patterns of any economy which tends to be self-correcting and is taking India from its recent lower level of GDP growth to a higher level of GDP growth. To top it all, the changes in the way GDP has been computed since 2015 have added another 1% or so to the headline number which the newspapers are happy to carry. So, with all this boom in India, how dare anyone say anything otherwise!

Chart 1: India's GDP real growth rate across 10 governments is slightly above 6.2% p.a. over the past 35 years - because of a changed methodology of calculation? India is running on one leg, not to its full potential.

Note: 10 Governments of which 7 were coalition governments

Enter Raghuram Rajan; the frank and blunt Governor of the Reserve Bank of India whose 3-year term is ending in September, 2016. In an interview to a US publication, Governor Rajan tried to downplay the "headline story" of a bright spot India and used an old expression: In the land of the blind, the one-eyed man is king.


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Immediately he was pounced upon by ministers of the Modi government with a "how dare he" tone and attitude. To top it all, a bunch of people felt that Governor Rajan had insulted the blind. Poor Governor Rajan. On his very first public speech in India after his return, he spent a fair amount of time explaining that he had no intention to insult the blind. He was, he emphasized, merely using an expression to describe a situation.

But Governor Rajan has sharp eyes to go along with his sharp mind. While at the IMF he did warn the world about the consequences of high debt. And, like Dr Reddy - his predecessor at the RBI - Governor Rajan is concerned about the actions of the global central banks who are printing money with no idea of where it will all end.

Table 1: Peter Pan, pigs, and central bankers have wings....and are flying blindfold!

Central Bank 2013 activity 2015 activity
US Fed USD 85 bn / month Zero
Europe ECB USD 11 bn /month USD 68 bn / month
Japan JCB USD 60 bn/ month USD 83 bn / month
Total USD 156 bn/ m USD 151 bn/ m

Source: www.federalreserve.gov. www.ecb.europa.eu, www.boj.or.jp

While the world remains uncertain and Governor Rajan is an outcast amongst the community of central bankers who seem to be inhaling non-tobacco stuff when dreaming up their decisions, things are looking better in India.

Over the past 6 months, there seems to be an understanding between the government and the RBI on how to steer India to a more stable path. With state elections around the corner - culminating in the UP election by May 2017 - there will be a massive surge of promises by every party to win votes. We are already witnessing this in Tamil Nadu. When politicians get elected for private profit, the bills for their promises are borne by the state. In a world where investors are looking for countries likely to have imbalanced budgets, high debt, and a need for foreign exchange - India needs to ensure that the "bright spot" adjective does not go to our heads and a lax government or RBI messes up. Governor Rajan's two eyes see the pitfalls, the risks, and the bottlenecks that can - once again - ruin yet another opportunity for India to break out of its one-eyed rate of growth. And risk seeing a decline in the INR.

Table 2: If India misbehaves, the Rupee will take a hit - RBI may have to raise rates to defend the INR


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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site.

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10 Responses to "Why two-eyed Rajan is King!"

Jai

Jun 19, 2016

It will be very interesting to see how soon the successor resorts to cutting rates until they go below inflation again.

Is that not the secret to ensure that real estate goes soaring and unleashing animal spirits and the demand for credit? When everyone must spend today for tomorrow will not deliver the same bang for the buck. And the crony capitalists will rub their hands with glee as money becomes cheap and their land bank values soar and caution is thrown to the winds.

Where will the Rupee go ?

Like 

D K Basu

Jun 16, 2016

Mr. Rajan has all along been highly overrated.

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indusekhar

Jun 8, 2016

have you checked with common people to whom ATMs were a boon, specially of private banks, where a host of services were on the platter ? haven't RBI under rajan killed that ? didn't RBI pulled up private banks to be at par with nationalised banks in terms of ATM services ? is that justified ? don't we, who bank with private banks, and despise nationalised banks for their as-it-please-me services, been forced to visit the bank ? whatever garland economists may bestow on Rajan and RBI we, the troubled ones, have one of old shoes for them.

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Chandramouli

May 31, 2016

I dont think i am competent to judge Dr.Rajan.But one thing I understand is , inflation hits the common man.He was the only one trying to reign it , even though everyone else were interested in reducing the interest rates at the cost of inflation.He had an eye on the good of the commom man more than anything else.

Like (3)

Dr. K. S. Ananda Kumard

May 27, 2016

Now,t has become an old story already. But our beloved Modi should understand the Truth and honour Dr. Rajan for another term, in the interest of the country. Dr. Rajan is the only one among the bankers who foresaw the debacle of subprime crisis of USA. He knows the problem of printing too much money. He also knows why rich people become richer, and poor become poorer. Is there a single politician who has such wisdom and intelligence? Let js respect him, and honour him, and praise him.

Like (2)

P ARULSELVAN

May 13, 2016

One of the best RBI governors I have ever seen. I have been watching the governors from Dr. YV Reddy's time. I find the present governor to be having a mind of his own--he knows exactly what he is doing. He tells the facts on the face of the politicians and he does not beat around the bush.
And, looks like, he does not want to belong to the cozy private club where the crony capitalists and the powerful belong, and he does not seem to be worried about his next government assignment! He is the only governor I hear talking about savers, and financial prudence. Now, who on earth will worry about such people (in the age of helicopter money, only stupid people can save money!).
All he should do is to join the cozy club, keep mum, keep cutting interest rates, and please the crony capitalists and the politicians.
In fact, politicians need not collect tax to fund their extravagance. All they have to do is to print money. It is like stabbing from the back--nobody is going to see and raise any alarm. But the problem is money printing is done through RBI and, for once, the RBI governor seems to understand the consequences of (printing) fiat currency.
Yes, I agree with USB. He has not achieved much. It is rather very less compared to the achievements of:
--US Fed
--Europe ECB
--Japan JCB
Because in these countries, the rich has become super rich, the middle class has shrunk to become poor, and the poor has been pushed below poverty line. How old people, who are supposed to survive from their savings, will survive if the yield from savings is negative? What a great achievement! Yes, compared to this monumental achievement, Dr Rajan's achievement is very small indeed.

Like (8)

sethu

May 11, 2016

Guv Rajan does not have any personal agenda as his IAS predecessors had like state governor,Gubernatorial assignments etc. Rangarajan was good but adjusted with Political class as he wants to continue to live in india ,does not want to get back to acadamecia etc .But Rajan does not have any such Agenda;so he is in a position to put forth his views bluntly.he loves teaching and would love to get back to academicia;
Modi like him for his caliber and outspoken views.I am sure Modi will give another term to rajan ahether Jaitley and other aspiring finance ministrys IAS like that or not.

Like (8)

Pramod P Bhave

May 10, 2016

India is mainntaing a steady course of financial stability because of the decisions taken by the successive Governors of the R B I over the last decade, without yielding to to pressures from the short sighted political bosses wanting to play to the galleries with an eye on the elections (and bye elections) that are scheduled every 6 months, leading to those in power , making populist promises to the electorate throwing all prudence and caution to the wind.

Like (1)

USB

May 9, 2016

In his tenure there has been no great or brilliant achievements. In my opinion he is over rated in this article.

Like (1)

Pradeep Kumar Nair P

May 9, 2016

We have been blessed to have 3 great RBI governors in the last 15 odd years . I personally rate Dr. Rajan and Dr. Reddy greater than Duvvuri Subbu Rao, though he was no mean guy either.

Incidentally, you mention Dr. Reddy has Dr.Rajan's predeccesor , it was actually Subbu Rao.

People like these give us hope that some good can happen in the world!

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