Raghupati Rajan Raja Ram

20 JUNE 2016

On May 17, 2004 the Indian stock market slumped by -11.1% in one day after hitting two circuit breakers because the BJP led by Prime Minister Atal Bihari Vajpayee lost the general election and was knocked out of power. During the day the market was down by over -15% but intervention by the Reserve Bank of India saw a recovery from those intraday lows.

On May 17, 2009 the Indian stock market surged +17.3% after hitting two circuit breakers in less than 70 seconds of trading on the back of the unexpected win by the UPA government in the then general elections.

The emotional reaction to an unexpected win defied all logic.

In the 8-month period between September 2013 - when Narendra Modi was nominated as the Prime Ministerial candidate of the BJP - and his victory in May 2014, many stock market indices gained over 100%.

On June 20, 2016 the Indian stock market deserves to lose -17.3% on the back of the shabby treatment by the Modi government to Governor Raghuram Rajan, the head of a respected institution, the Reserve Bank of India and a king amongst central bankers.

The Indian Rupee deserves to slip by -5% and bond yields deserve to surge from 7.5% to 8%.

But the markets may be steady.

Of course, none of this may happen. The collapse may actually see a boom!

In addition to praying to Lord Ram for the destruction of its foe, the government must have used the weekend to make the phone calls to government institutions to ensure that there will always be buyers in the market for Indian bonds, Indian Rupee, and for Indian stocks to avoid a sell-off.

Indian corporates of the crony kind - allegedly experts at tapping phones and having politicians tap-dance to their bags of money - will probably turn buyers of their own stocks.
With Rajan out of a vigilant RBI, the corporate clean-up begun by the heroic Prime Minister Modi may stall and eventually reverse course.
The large weight of these crony stocks in the Indian indices may see a gain in the stock markets because Rajan, their barrier to crony profits, has been steamrolled into an exit.

Long ignored in New Delhi by a stern Prime Minister intent on sweeping out corruption in corporate India, those who relied on cronyism to make profits had the double-whammy of a honest Prime Minister and strict guidelines from the Reserve Bank of India.

The RBI forced the PSU banks and private sector banks to recognize a rotten loan. Dead and dying loans could no longer be imaginatively classified as a "performing loan". This myth of robust paper profits allowed many private sector banks to reward their staff with great salaries and bonuses. The Rajan clean-up and the Modi broomstick has resulted in suppressed profits or in outright reported losses for the banks.
Either way, this has threatened the very existence of the oversized salaries, bonuses, and ESOPs for these so-called Most Powerful Men and Women in Indian finance. Their money (and with money comes power!) was derived from being beneficiaries of acting as financiers of the crony capitalists.

In addition to the continuous undermining of the position of the RBI Governor (enumerated by other authors), there was a deliberate attempt to paint Rajan as anti-national, as a non-Indian, and as someone who was fighting the bogey of inflation when what they wanted Governor Rajan to do was to reduce interest rates and try to go for rapid growth. Differences over interest rate policy spilled over into wide gaps over economic policy - and differences in social policies.

When Finance Minister Jaitley said cut rates in late 2015, Rajan retorted by focusing on the budget deficit.
When Prime Minister Modi and Arvind Panagriya, the Vice-Chairman of the NITI Ayog, wanted businesses to Make in India and focus on exports, Rajan (correctly) said Make for India. The export story died with China in 2012.

While other RBI governors obliquely spoke about corruption and crony capitalism, Raghuram Rajan called a spade a spade and reflected on the future of authoritarian regimes.

Unlike the meek bankers that politicians are used to, Rajan said: "I am Raghuram Rajan. I do what I do".

Chanda Kochhar, the head of ICICI Bank has been quoted as saying: "Rajan's decision to return to academia is a personal one which we must respect. I wish Rajan all the very best for the years ahead," Kochhar said in a statement (source: Rediff.com).

Here is an extract from the letter that Governor Rajan sent to his colleagues in the Reserve Bank of India and released on June 18th.

  • I am an academic and I have always made it clear that my ultimate home is in the realm of ideas. The approaching end of my three year term, and of my leave at the University of Chicago, was therefore a good time to reflect on how much we had accomplished. While all of what we laid out on that first day is done, two subsequent developments are yet to be completed. Inflation is in the target zone, but the monetary policy committee that will set policy has yet to be formed. Moreover, the bank clean up initiated under the Asset Quality Review, having already brought more credibility to bank balance sheets, is still ongoing. International developments also pose some risks in the short term.
  • While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016. I will, of course, always be available to serve my country when needed.

I am sorry, Ms Kocchar, but when I focus on the portion of the text highlighted by me above, I sense that:

  • Governor Rajan wanted to continue to lead the effort to complete the work that he and his colleagues at RBI had begun,
  • He consulted with the government,
  • They probably said "No, you don't have an Indian mind",
  • Therefore he is returning to academia - which he loves and is his ultimate home
  • BUT he is open to - AT ANY TIME and ALWAYS - serve his country, India, when invited and when people in power believe he is needed. This burning desire supersedes his love for academia.

The people in power have spoken and believe that they can do away with a Governor who brought central banking out of the dark caves of invisibility and - as some wrote - made him a rock star.

The support by government funded institutions - which will use tax payer's money - may keep the market from declining. Or, on a more optimistic note, the government may announce a sensible replacement to take up the position left vacant by the departure of Governor Rajan before the markets open on Monday morning. But a PSU head - or even the name of Kamath ex Chairman of ICICI Bank hardly inspires confidence!

If markets can surge or collapse on losses and wins of political parties, there is no reason to believe why they cannot react equally sharply to questionable changes in key policy makers.

But more important than the action of the market, will be the action of a government that may be so focused on winning the UP state elections to be held by May 2017 that they may be willing to undermine the only institution that many still have faith in: the Reserve Bank of India.

For this, we may be punished with a whack in share prices, in the value of the Rupee, and a surge in interest rates.

Other external factors look questionable.
The fact that the arrival of what could be a very crucial monsoon is late in large swathes of the country does not help investor confidence. The 91 key reservoirs only hold 15% of the water that they can hold.

Low oil prices have been a big benefit to India. Though global oil prices are still about 60% below their peak levels of 2014, they have bounced 60% from their recent lows.

While Rajan prepares to leave India for his academic career in Chicago and dive into the "realm of ideas", I suggest that - much as we like the long term India story - investors should fasten their seatbelts!
Our government may have just shown to the world that they are incapable and inept of steering the country.

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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of 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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29 Responses to "Raghupati Rajan Raja Ram"

Satyendra Sinha

Jun 29, 2016

It is being made like it is "RBI" that runs the country and Rajan, the Guv, was a God came from heavens. The author ignores that when the big loans were given to crony capitalists so liberally, it was Mr Rajan the Economic advisor to UPA-2 Gov during 2008-2013. And during this period CPI rose to 16% and WPI 12%. After Modi Govt came inflation started coming down , CPI came down to 5%, and WPI went negative. Now understand both cases and decide who brought down inflation - Rajan or Modi Govt. To embarrass Modi Govt, Rajan took CPI as a measure of inflation. This means rate cuts were too little as per the need of the economy, and this led to suppression of Growth. Jobs dried up and Country had jobless growth. And Mr Rajan is being called the best ever RBI Governor. He is being given credit for all that the Govt did, and the Govt is being blamed for all the wrong things Rajan did.


Prashant Manohar

Jun 27, 2016

I believe in past also RBI Governors were replaced after their term was over. There is a lot of noise as if he has been removed before his over. This is unfair criticism of the government


Prashant Manohar

Jun 27, 2016

I believe in past also RBI Governors were replaced after their term was over. There is a lot of noise as if he has been removed before his over. This is unfair criticism of the government


Vishwas Kadam

Jun 25, 2016

Quite realistic & good article.We will miss most respected RBI Governor Mr.Raghuram Rajan immensely that is what I feel.


Suresh Kumar

Jun 23, 2016

Raghuram Rajan was far too intelligent for the at-maximum average intelligent politician. His achievements include stabilization of rupee, bringing down inflation (CPI-based), giving licenses to new banks including payment banks, and initiating measures to clean up NPAs of PSU banks. This was unexpected as PSU Banks routinely support crony capitalism at the behest of political masters and show NPAs as "performing loans". Thus, they draw huge bonuses. Poor public could always be forced to pay for crony capitalists like Mallya. The whole PSU banking system and other PSUs Air India are meant to sink public money in an endless pit. While Rajan was World's best economist, he was not good enough for India. Brain-drain is better than a brain in drain. Modi has hugely dissapointed me as a visionary and in the process lost my vote.


Balepur S

Jun 23, 2016

Ajit Dayal, I did not expect you to join the bandwagon of crony's of different kind(you know the type) and start writing a kind of obituary piece for Rajan / or Modi Govt for that matter. I expected you to wait out nonsense written about by journos and write on it - but lesser mortals @ your mumbai offices seem to be influencing your recent writings. Is it time for a week long introspection and tete-a-tete at the quiet Ranch in western Argentinian mountains for you ?



Jun 23, 2016

I agree with Mr Ajit Dayal--Dr Rajan called a spade a spade. Thank you Mr Dayal for talking positively about the governor; I share your views.
I heard a popular TV anchor saying that Dr Rajan helped foreigners by keeping the interest rates high in India. That the interest rate in the US is near zero and negative in some other countries. And foreign capital earns nearly 8% when it is deployed in India's debt market, all because of Dr Rajan. By saying this, does the TV anchor mean that the next governor is going to maintain the interest rate below zero so that foreigners cannot make money from a strong rupee?! The argument defies logic! I never understood.

The fact is that we had (have) a governor who knew his job well, and he set out to do things that would benefit India in the long-term. And he did not bother to listen to any pundits or cronies, as he was focused on the job, and knew exactly what he was doing. But generally, our political bosses are not happy with people who know their job. Rather they look for some other important qualities--
Yes sir...
Yes sir, yes sir...
Gee sir...
(I will not speak on any (important) matters sir...)
(You will not know my existence sir...)
(Gee sir, as you say sir...) etc.

I still remember how fast rupee depreciated from 45-to-a-dollar to 70 levels in September 2013. (If I remember correct, Mr Dayal arranged for an emergency webinar.) More than anything else, September 2013 saw the ouster of UPA-II. Any monetary mismanagement will bring in disaster to our economy. A low interest rate is not a magic wand. If we want to further increase the distance between the rich, and middle-class and poor, it is a great idea. Politicians and the rich will be on one side, because they do not have to worry about money and inflation.
Some time back I used to scratch my head to know why so many people start political parties. Then suddenly, as eureka, it struck me--a political entity can collect money, and they do not have to pay any tax (and attract black money). What could be better than that?

And before saying thank-you to Dr Rajan:
I did not know much about election commission or CEC, till Mr T N Seshan took over as CEC. Neither did I know much about CAG till Mr Vinod Rai took over as the chief. In a similar way, Dr Rajan had a profound impact on me as RBI governor. When the whole country was chanting "make in India", Dr Rajan told it won't work. I was amazed, mesmerized and hooked. An outspoken RBI governor! I later learned that his teaching profession helps here. On any given day, if I am given a choice to listen to Dr Rajan or anyone else, I am certain to listen to Dr Rajan.

The governor is not the looser here. Our country has missed out on the service of a professional who knows his job well.
Thank you Dr Rajan, for putting up with all the rubbishes around and still doing a fine job!



Jun 22, 2016

Also, wanted to say that I strongly agree with Ajit Dayal with his views on Raghuram Rajan, India's BEST EVER RBI Guv. Thanks, Ajit, keep up the fabulous work.



Jun 22, 2016

I have said this before and I will say it again. VIVEK KAUL has raised the standard of EQUITY MASTER tremendously in my eyes. He writes eminent sense and fearlessly too.

Kudos Vivek, Kudos Equity Master.

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Dr. K. S. Ananda Kumar

Jun 22, 2016

When we know that Mr. Rajan is put to shame by force, why should not we force our PM to change his views and call back Mr. Rajan for a 2nd term? It will be surely a lesson for the crony capitalists, and a boon for India. Does it mean that the Indian Public is not powerful enough to make the PM understand the facts? Does it mean that our PM relies on a few 'Yes' men, or those loyal to him in his view, and does not know what is really happening or that he does not care the public view or that he is not aware of what is really happening? I don't like experiment. I want our PM to be like Abraham Lincoln, who judged everything carefully, and did not care those who criticized him. Why should our top politicians make our PM understand that our Modi loses his stand if he simply follows one Mr. Swamy or one Mr. Panagaria. We lose a lot for our country. Praying God is different. We have to send our criticism to our Modi in the suggestions to our PM in innumerable numbers. This is the only way for the present.

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