The #fakeu and the #dhoku - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
The #fakeu and the #dhoku A  A  A

Narendra Modi, the official candidate of the BJP for the role of Prime Minister, may "own" the tag line of "#fakeu" in the virtual world of tweets but, in the big and bad world of finance, that title belongs to Ben Bernanke, Chairman of the Federal Reserve - the US central bank.

Similarly, current Prime Minister Manmohan Singh, the alleged official real world puppet of a Congress dynasty, may own the tag line "#dhoku" amongst India's couch potato intelligentsia but, in the greasy world of India's captains of industry, this title belongs squarely to RBI Governor Raghuram Rajan.

Ben does a flip-flop

On May 22, Ben the #fakeu had promised the world that, subject to economic data, the US would print less money. That caused a decline in the price of the supposedly riskless 10-year US government bond and resulted in an increase in interest rates and the expected rate of return for holding any asset anywhere in the world. A higher interest rate in the "safe" US bonds, resulted in a sharp decline in the "riskier" asset classes of emerging market currencies, bonds, and stocks. True to form most analysts and market watchers applied the "drag the xl sheet to the right" principle and warned of the impending end of the Indian currency and the Indian stock markets.

Well, his much-awaited speech on September 18 - watched with bated breath by millions - ended up as a damp squib. The US central bank, Bernanke announced, would keep printing the money. Well, for now - there will be another review in October. Bernanke's false promises and U-turn have confused the jittery markets. The prices of most emerging market assets surged to regain much of the lost market erosion caused by the earlier "tapering" statement of May 22. Faced with an unpredictable, unclear, and unknown interest rate policy, the anti-climax of the September 18 talk by Bernanke earns him the honorary title of #fakeu. The Congress social media machinery will need to invent another tag line for Modi.

Closer to home, the recently appointed Governor of the Reserve Bank of India was expected to follow in the footsteps of Bernanke and follow his cue: print more money and lower the rate of interest for borrowers. After a few dismal quarters of GDP growth - and a few dismal years of being unable to bribe their way through to even more obscene levels of wealth - the chieftains of India were hoping for a cut in interest rates to boost demand for their products. The young, tall, dark, handsome Raghuram Rajan - seen as a sex symbol by some socially anointed economists - may have led the ladies to the dance floor. But, just as they began to drool, he went back to being a boring 65-year old central banker in a grey suit.

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Much to the disgust of every expectant teenage Indian industrialist, Governor Rajan, took steps to raise interest rates. The exact opposite of what the market expected. The act of a "#dhoku"

The S&P BSE-30 Index - having surged by +685 points on September 19 (after the Bernanke #fakeu episode) - has lost a cumulative 746 points in the 2 trading days between the closing of September 19 and the closing of September 23. And all of this because of #dhoku Rajan.

No easy job

The challenge for any sensible central banker is to bring the level of inflation down to levels that allow the economy to grow - without heating up. While there is no threat of any overheating in the prices of manufactured products, there is a real and persistent increase in food prices. This, critics argue, cannot be controlled by interest rates. Raising interest rates may not force the hoarders of onions to open up their warehouses and reduce prices. So, why raise interest rates to control inflation when most of it is of the food type?

Well, the answer could be that if interest rates are increased, the politicians who fund the agricultural trade may decide to sell their hoarded onions, raise a lot of cash, and use the cash to invest in SBI fixed deposits. The act of more onions entering the market rather than staying in some underground warehouse would allow Governor Rajan to see food prices declining - and we would eat a cheaper pau bhaji. This would then allow the RBI to reduce interest rates further. As any good cook knows, if you peel the onion correctly, the higher interest rates should not make the industrialists cry, but should make them happy - interest rates will be cut once food inflation is down.

The problem is that there has to be a general election by May 2014 and the pro-Congress lobby wants to see growth. Their thesis is that growth will make everyone feel good and the Congress will be handed out another 5-year term to do more mischief. Lower growth will result in the BJP coming in to power to and giving them a chance to do some mischief.

As you can gather, central bank governors are very powerful people. They can make or break election results. They can make or break industrial fortunes. Whatever one may think of Governor Rajan, his decision verifies the independence of the RBI. That itself is an achievement in a country where Indira Gandhi - and successive leaders since her times - have undermined the institutional framework so carefully built by the founding father of India. But mere independence does not guarantee a good decision. The RBI has made - and will make - errors of judgement. But we should be thankful it is willing to take on the role of being a #dhoku and trying to do what it believes its right - with an ability to change direction if they have made a wrong judgement. Name me one politically inspired social policy that has been shut down because someone in government felt it was wrong. These grumpy men in grey suits are far more reliable than the cacophony of crispy khadi clothed politicians that dot the Indian landscape.

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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. To write to Ajit, please click here.

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7 Responses to "The #fakeu and the #dhoku"


Sep 26, 2013

excellently written....witty , sattirical n very much true.



Sep 25, 2013

Actually the article (or seems collabaration) written by Bill Bonner..., The style ,accent,language,tone above all the subtle Humour etc., Am I correct ? who is that?


jasmina parekh

Sep 25, 2013

Superb article. I fully agree to your views ajit..



Sep 25, 2013

Mr Ajit,

Had being reading your news letter regularly for some time and from other writers like you. But what I don't understand is every one is complaining that the Government is not doing anything required to revive the economy.

I would appreciate if you can list the whole 9 yards on what need to be done in terms of legislative changes and policy changes to be brought in each areas like Price control , import control , labour law changes , mining.. etc.

Like (1)


Sep 25, 2013

Sample some of Uncle Ben's gems:

“The Federal Reserve will not monetize the debt,” which he said on June 3, 2009.

“One myth that’s out there is that what we’re doing is printing money. We’re not printing money.”which he said on December 5,2010.

Honesty is certainly not a virtue with this man.

Like (1)

Prrakash Basrur

Sep 24, 2013

A free,frank and forthright analysis of the overall malaise, be it social or economic, that we Indians are facing after the 50 odd years' iron grip over both by the Congress Party thru the Nehru family !! Our so called "enterprising" industrialists have all along been hand-in-gloves with the Nehru family in bringing about this collossal downfall! Their contribution of so called "wealth creation" has all along been in transferring most of their huge incessant "tax free " profits to Switzerland and/or becoming world rated dollar billionaires by sharing the "booty" with Congress politicians ( or for that matter any "suitable" politician) ! GOD SAVE INDIA from these criminals on both sides and GOD SAVE RAJAN from their wrath !

Like (1)


Sep 24, 2013

Dear Eq.Master Team,
With utmost humility fortified with abundant ignorance(of both men and matters:pertaining to both economics and politics) i observe as under:

Having read the article in full , I am prompted to observe that you have painted an
Exact replica of the situation prevalent at present (how I wish a photograph had been snapped (with many photogenic ones worthy??) showing the situation or better still a cartoon caricature
Of the cacophony KHADI CLAD CLANs KCCs) dotting the country ??(in their
# faeku splendour??
I hasten to conclude with humble Kudos for such an eloquent piece brimming with erudite wisdom emitted to ordinary common(AAM AADMIS) folks / " masses" in the KCCs pejorative parlance??)

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