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Can Raghuram Rajan

turn around India?


Table of contents

Rockstar Rajan has markets cheering Sensex up, rupee gains: Rajan could be India’s lucky governor Raghuram Rajan hits first-ball sixer; set to bowl markets over ‘Rockstar’ Rajan begins well, but it’s going to be a very long haul From engineering to RBI top job: Who is Raghuram Rajan? First impression: Why Rajan will strike a different chord

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Are we setting Rajan up for a fall? Why Raghuram Rajan is no Amitabh Bachchan Dr Rajan, try convincing us first that rupee is worth holding Market misreading Raghuram Rajan; bankers, industry beware

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The speech that wooed India Inc Here are Raghuram Rajan’s plans as RBI governor Who Said What: Raghuram Rajan has inspired confidence’ Five best quotes from Raghuram Rajan’s first speech as RBI governor Read Full Text: Raghuram Rajan’s first speech as RBI governor Raghuram Rajan has audacious goals for the common man

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Taking over the baton All smiles: Relieved and happy Subbarao hands baton to Rajan Meet the governator: Raghuram Rajan’s Twitter alter ego Raghuram Rajan replaces Subbarao, takes charge as 23rd RBI governor

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What we are expecting from the new RBI governor No magic wand: Raghuram Rajan, welcome to the RBI tightrope walk Will Raghuram Rajan really listen to Raghuram Rajan? Raghuram Rajan and the burden of expectations Raghuram Rajan as RBI chief may have some surprises up his sleeve

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The Chidu factor Will Rajan act on his beliefs or has FM house-trained him? Why Chidu and Rajan may not be walking together just yet Rajan starts with finmin’s blessing but will ultimately have to battle Chidu

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Rockstar Rajan has markets cheering

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Sensex up, rupee gains: Rajan could be India’s lucky governor It is not a pleasant time to take over the reigns of the RBI, but it definitely is a great time to help steer the country out of the woods. Arjun Parthasarathy, September 5, 2013

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world is still living on central bank induced liquidity. It is not a pleasant time to take over the reigns of the RBI, but it definitely is a great time to help steer the country out of the woods.

Rajan takes over the RBI leadership at a time when the country is staring at a deep, dark hole. Economic growth is at decade lows, INR is at record lows, elections are looming and the

Rajan has many things going for him at present. The government knows that it has to accept tough decisions from the RBI and will not in any way try to get political mileage from the central bank. The prospect facing the government is unpalatable, further depreciation of the INR, capital outflows, recession and inflation. The governor has a free hand in running the

arkets seem to have welcomed the new RBI governor, Dr Raghuram Rajan with open arms. Sensex and Nifty are up by over 2 percent, Indian Rupee (INR) is up by over 1 percent against the USD and ten year benchmark bond yield is down by 10bps on the back of a few promising announcements by Rajan.

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RBI and he should make the full use of it. RBI cannot by itself steer the economy on to a sustainable growth path. RBI requires support from many factors including a government keen on reforms and global economic stability. Political chaos at the centre or tensions in the Middle East can easily derail any good intentions of the RBI. Hopefully, things can fall in place with a stable government emerging in 2014, tensions in middle east dies down and the world comes out of the shock that it received five year ago. Rajan is the right person to run the RBI at the right time. Hopefully, luck will also favour him. Indian markets can look forward to better times with Rajan and Luck. Rajan took over the post of RBI governor from Dr D Subbarao (2008-2013). Subbarao has had one of the toughest stints as the RBI governor. He came into the hot seat when the world was reeling under a financial crisis and both India and the world has still not recovered from the 2007-08 crisis. Subbarao has seen deflation and economic collapse, inflation and bubbles and

the complete collapse of the INR, that is trading not very far from record lows of Rs 68.80. Subbarao in his five year term has cut interest rates to record lows, taken up interest rates and has again cut interest rates. No RBI governor has seen such policy see saws. Dr YV Reddy (2003-2008), the governor previous to Subbarao has had to face an overheating economy, liquidity driven bubbles and a government that basked in false glory. Reddy raised interest rates, built up foreign exchange reserves and sterilized liquidity. Dr Bimal Jalan (1997-2003), the governor previous to Dr Reddy, was in the similar position of Rajan when he assumed office. India was reeling under high inflation, banking sector crisis, Asian economic collapse and balance of payment crisis. He left office with interest rates at record lows, low inflation, strengthening economy and stable currency. Arjun Parthasarathy is the Editor of www. investorsareidiots.com a web site for investors.

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Raghuram Rajan hits first-ball sixer; set to bowl markets over Raghuram Rajan has begun with a bold agenda for change in the RBI that is likely to wow the markets on Thursday.

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R. Jagannathan, September 5, 2013

aghuram Rajan has started his innings with a bang. On the very first day after taking over from Duvvuri Subbarao as Governor of the Reserve Bank of India (RBI), he stamped his authority on the institution by announcing several measures to modernise and liberalise the Indian banking system even while clearing the cobwebs of the past.

At the same time, he promised to defend the value of the rupee, both internally and externally. (Read the full text of his speech here) The announcements, if followed up with efficient and quick execution, have the potential

to rejuvenate the system and erase the sense of deafeatism that characterised the last days of Subbarao, which led to unending conflicts between the central bank and the finance ministry. Unveiling his initial agenda for change, Rajan called for steps to internationalise the rupee, liberalise branch banking, open up banking to more entrants, reduce the pre-emption of bank resources for investment in government securities, rethink and, if possible reduce, the scope and target of mandated (or priority sector) lending, allow banks to borrow more from abroad to help reduce the current account deficit, and proCopyright Š 2012 Firstpost


tect the savings of the ordinary bank customer by offering consumer price-linked inflation indexed certificates by November. He emphasised that the changes proposed may be “risky” but “as India develops, not changing is even riskier. We have to keep what is good about our system, of which there is a tremendous amount, even while acting differently where warranted.” In a clear signal that the recent depredations of the rupee have not reduced the central bank to defensive thinking, Rajan said that the RBI will allow exporters and importers more leeway in cancelling and rebooking forward cover, effectively rolling back some of the restrictive measures introduced recently to reduce speculation in the rupee. Given the bitterness recently seen between North Block and Mint Street in the final year of Subbarao’s tenure, Rajan starts with a clear advantage in terms of better relations with the finance ministry, of which he was the Chief Economic Advisor from August last year. His rapport with Chidambaram will help him send a strong message of positivity for the markets. But challenges remain. Here are some of the key implications of what Rajan said, and the tensions that he will have to negotiate in the months ahead as the economy grapples with a slowdown. The rupee: Rajan said: “The primary role of the central bank…is monetary stability, that is, to sustain confidence in the value of the country’s money. Ultimately, this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures.” The implication: If Rajan wants to maintain the purchasing power of the rupee, he will have to bring inflation down. To maintain the rupee’s internal value, he may have to hold rates, if not raise them. Since he said that he will fight for the rupee even if the inflation is the result of demand or supply pressures, the hint is about a strong line on interest rates. Liberalisation of banking: Rajan said: “The

Indian public would benefit from more competition between banks, and banks would benefit from more freedom in decision-making. The RBI will shortly issue the necessary circular to completely free bank branching for domestic scheduled commercial banks in every part of the country.” Implication: The answer will lie in the fine print. While banks may be free to set up branches anywhere everywhere, Rajan also talked about more financial inclusion. One can expect all banks to rush to set up more branches in tier-2 to tier-6 towns, and also in some metros; pushing them to rural areas will be tougher. This policy is good, but the financial inclusion bit will be tough to achieve. Given the government’s commitment to direct cash transfers, some pressures will come from the finance ministry to ensure more rural penetration. New banks and competition: Rajan said: “The RBI will give out new bank licences as soon as consistent with the highest standards of transparency and diligence…We will not stop with these licences. We will pursue creative ideas of the RBI staff and come up with a detailed roadmap of the necessary reforms and regulations for freeing entry and making the licensing process more frequent after we get comments from stakeholders.” Implication: Rajan clearly does not want to issue licences only in dribs and drabs. In this, he will have the full support of the finance ministry even while facing some resistance from his own staff, who are wary about freeing up entry for banks, especially new banks set up by corporates. But Rajan will probably push it through, since he is so convinced about it. Over the next three to four years, competition from banks will bring better services and push banking charges down. Currently banking is a very high margin business, especially for smart private sector banks. Freeing bank resources: Rajan said: “Our banks have a number of obligations that pre-empt lending, and in fact, allow what Dr Rakesh Mohan, an illustrious former deputy-governor, called ‘lazy banking’. One of the mandates for the RBI…is to ensure the flow of credit to the productive sectors of the economy. In this context, we need to reduce the requirement for Copyright © 2012 Firstpost


banks to invest in government securities in a calibrated way, to what is strictly needed from a prudential perspective.” Implication: It is possible for the RBI to cut preemption in the form of minimum investments in government securities (currently 23 percent of liabilities), but he can’t do it too fast given his commitment to fund government deficits and keep rates as low as possible. If banks are free to lend less to government, the latter will pay more for money. But over time companies will find cheaper loans. There will be pressure from the finmin to go slow here.

ers are permitted to rebook cancelled forward exchange contracts to the extent of 25 percent of the value of cancelled contracts. This facility is not available for importers. To enable exporters/importers greater flexibility in their risk management, we will (1) enhance the limit available to exporters to 50 per cent; and (2) allow a similar facility to importers to the extent of 25 percent.” He also announced steps to develop the government bond markets by introducing cash settled 10 year interest rate future contracts; later, the RBI may allow the introduction of interest rate futures on overnight interest rates. Implication: Both measures are signs of confidence that India can handle a certain amount of speculation even while giving both buyers and sellers of dollars a fair playing field to discover the right price. The move may introduce shortterm volatility, but it will build confidence in investors that India is not afraid to let the markets play a larger role in more areas.

Priority sector lending: The new governor said: “We also subject our banks to a variety of priority sector lending requirements. I believe there is a role for such a mandate in a developing country – it is useful to nudge banks into areas they would otherwise not venture into. But that mandate should adjust to the needs of the economy, and should be executed in the most efficient way possible. Let us remember that the goal is greater financial access in all parts of the country, rather than meeting bureaucratic norms.”

Taking the rupee global: The boldest idea Rajan threw on the table was internationalisation of the rupee. He said: “This might be a strange time to talk about rupee internationalisation, but we have to think beyond the next few months. As our trade expands, we will push for more settlement in rupees. This will also mean that we will have to open up our financial markets more for those who receive rupees to invest it back in. We intend to continue the path of steady liberalisation.”

Implication: Banks will jump with joy if this happens. But politicians are unlikely to be happy with this in an election year, especially if money to favoured sectors such as exports, agriculture and small and medium enterprises is curtailed. A committee will look into this, but it will take time to implement.

Implication: Opening up the market for rupee investment is the only way to make foreigners accept payment for imports in rupees. This will call for opening up more areas for foreign investment, and fewer roadblocks. This marks a shift from the old mindset where we favoured dollar investment over rupee; now foreigners can use the rupee they earn on exports to buy Indian products and assets. Great move. But one should not expect easy acceptance for the rupee. Before foreigners accept rupees in payment, the value of the rupee must seem attractive. That is some time away.

Deepening the markets: Rajan surprised everyone by announcing liberalisation in the forward dollar market. He said: “Presently, export-

Funding the CAD: While taking the long view, Rajan also talked of raising loan funds to finance the short-term current account deficit Copyright © 2012 Firstpost


(CAD). He said banks which raise dollar deposits (FCNR-B) with over three-year tenures will be allowed to swap the dollars for rupees at concessional rates of just 3.5 percent. This means banks will be able to raise more resources with lower risk of exchange losses. Banks will also be offered another swap at 1 percent below current market swap rates on dollar borrowings upto 100 percent of their unimpaired tier-1 capital. This is a doubling of the current limit. Implication: If many banks take up this offer, which is open only till 30 November, foreign exchange inflows will increase in the short-run. The finance ministry will be fully behind this initiative. Inflation-indexed bonds: “Households have expressed a desire to be protected against CPI inflation. Together with the government, we will issue Inflation Indexed Savings Certificates linked to the CPI New Index to retail investors by end- November 2013,” Rajan said. Implication: Given the need to cut fiscal deficits by raising diesel and other prices, inflation is bound to rise in the short-term. Rajan, by offering bonds linked to the consumer price index, now ruling close to double-digits, is offering

households a good hedge. If the certificate is well-structured, some of the lure of gold could reduce. But the primary benefit is the restoration of consumer confidence in the long-term value of his savings. Debt recovery: Rajan said: “Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures. Most immediately, we need to accelerate the working of Debt Recovery Tribunals and Asset Reconstruction Companies.” Implication: The RBI will support banks in reclaiming their loans, if needed be by changing managements or selling the collateral. This will ensure that Kingfishers are spotted early and their managements sent packing. However, the political class and even crony capitalists will be unhappy. So far they have been using political clout to ensure banks lend them lots of money, and when loans go bad, they get even more favourable terms of repayment. They have been put on notice. On Thursday, one can expect the markets to open on a happy note, and the rupee should start perking up – at least in the short run.

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‘Rockstar’ Rajan begins well, but

it’s going to be a very long haul Firm, reformist and like a breath of fresh air, the new Reserve Bank governor has made more than the right noises. Now will come the real test, that of execution

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Sourav Majumdar, September 5, 2013

ell begun, they say, is half done. Unfortunately, the phrase may be a tad too optimistic when viewed in the context of the current economic situation in India. But even so, the 50-year-old Raghuram Rajan, who took charge as the 23rd governor of the Reserve Bank of India (RBI) on 4 September, has surprised everyone with his fresh approach to the office.

If one were to draw first signals from Rajan’s statement, it would be a mix of reform, resolve and a firmness to deal with the several problems RBI needs to fix, and that does not only mean the turbulence in the currency markets or the growth-inflation dilemma. Rajan reiterated his earlier stance, talking about financial inclusion as a key tool to spur economic growth and many of the steps he announced can be seen in that context. “Rural areas, especially our villages, as well as small and medium industries across the country, have been important engines of growth even as large company growth has slowed. But access to finance is still hard for the poor, and for rural and small and medium industries. We need faster, broad based, inclusive growth leading to a rapid fall in poverty,” he said. Simply put, inclusive growth will be high on Rajan’s agenda.

His ‘first steps’ – really a slew of moves he plans to put in place in the days ahead – signal an honesty of purpose and a desire to get on with the task at hand in a positive frame of mind, rather than fall prey to the gloom and doom all around. The lengthy statement he made immediately after taking over from his predecessor Duvvuri Subbarao is quite unprecedented and a first for any RBI governor. But then, Rajan has also justified it by saying he wants to ‘underscore communication’ by his statement on his first day in office, a signal that under him, the RBI could be expected to be more transparent and less Kremlin-like.

Rajan’s first steps dwell in detail on both the immediate and the medium-term. While former RBI governor Bimal Jalan, under whose term the banking sector saw some momentous developments, notably the reverse merger of ICICI with ICICI Bank, will head a committee to scrutinize the applications for new banking licenses, Nachiket Mor, a well-known name in the world of banking and financial inclusion, will chair another panel on all aspects of inclusion and suggest a way forward. Equally, Rajan’s RBI will nudge foreign banks to set up local units to enable greater regulatory supervision on their operations. He has also announced significant steps on financial markets, calling them a ‘symbolic down payment’ on RBI’s part to address the current market turmoil. This includes allowing both exporters and importers to cancel and re-book Copyright © 2012 Firstpost


forward exchange contracts, introducing cashsettled 10-year interest rate futures and interest rate futures on overnight interest rates. Steps to internationalize the rupee have also been announced to help banks bring in ‘safe money’ to fund the current account deficit (CAD). Tough talk That Rajan will not hesitate to take tough decisions was also clear. Sample these lines from his statement: “Some of the actions I take will not be popular. The Governorship of the Central Bank is not meant to win one votes or Facebook “likes”. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism..” Non-performing assets (NPAs) of banks will, consequently, be under close scrutiny with debt recovery tribunals and reconstruction/recovery processes on the radar for improvement. The new governor’s first message to India Inc – which has, of course, hailed his appointment as is routine – wasn’t a very soft one. “Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalize their failed ventures,” he said, making clear his intentions.

Several steps on using technology and making mobile payments and access to money easier figure prominently on Rajan’s agenda, with the governor saying RBI was keen to make “payments anywhere anytime” a reality. Big Picture Rajan’s first statement as governor showed he had a bird’s eye view of what RBI needed to do in key areas, but also had the immediate task firmly in mind. His to-do list, therefore, was a mix of both. The big signal the financial market is bound to take away from his words is that he means business and is someone who is already wellapprised of the problems and the tools he has at his command. Significantly, Rajan said nothing about his stance on whether he would go for growth or to tackle inflation, saying he did not want to pre-empt the mid-quarter monetary policy review, the date of which he has shifted from 18 September, when the US Federal Reserve meeting ends, to 20 September. But the very fact that the date has been shifted indicates governor Rajan will be keenly following the developments in the US and taking them on board while formulating his policy review.

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From engineering to RBI top job: Who is Raghuram Rajan? Dr Rajan, a former IMF economist, visiting professor to the World Bank and US Federal Reserve Board and one of the few economists who predicted the 2008 credit crisis will head the RBI. Sourav Majumdar, September 5, 2013

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aghuram Rajan on Wednesday took over as the new Governor of the Reserve Bank of India (RBI).

Rajan, 50, an economics professor who also served as chief economist at the International Monetary Fund, took charge from D Subbarao. Dr Rajan, a former IMF economist, visiting professor to the World Bank and US Federal Reserve Board and is one of the few economists who predicted the 2008 credit crisis.

Who is Raghuram Rajan? Rajan is viewed as a pragmatist on monetary policy likely to stick fairly closely to Subbarao's line on managing inflation. The outgoing governor fought an uphill battle against price pressures for much of his term in an economy plagued by supply-side bottlenecks and legislative and bureaucratic paralysis. Rajan — 'Raghu' to his many friends and colleagues — is rated as one of the most influential economists of his generation. Rajan, 50, will be the second youngest governor after Manmohan Singh, who took charge when he was 10 days short of his 50th birthday. Bhopal-born Rajan has always been a high achiever: A gold medalist at both IIT Delhi and IIM Ahmedabad, he went on to complete his PhD from the Massachusetts Institute of Technology.

Rajan takes over the reins of the central bank at a time when the economy is going downhill, the Indian Rupee (INR) is on a free fall, equity and bond markets are nervous and the government at the centre wants quick fixes before the 2014 general elections. As the 23rd governor of the RBI, Rajan, was chosen for the role ahead of Arvind Mayaram, secretary department of economic affairs and Saumitra Chaudhuri, member, Planning Commission.

He became the Economic Counselor and Director of Research (Chief Economist) of the International Monetary Fund in September 2003— the youngest ever to be appointed to this post. In 2003, he also won the first Fischer Black Prize, which is awarded to the most promising economist under the age of 40, by the American Finance Association. He is also a Professor of Finance at the Chicago University’s Booth School of Business. His most widely-read book, Saving Capitalism from the Capitalist, was co-authored with fellow Chicago GSB professor Luigi Zingales and published in 2004. In 2005, he predicted the financial crisis of Copyright © 2012 Firstpost


2008-09, but was brushed aside by economists such as former US treasury secretary and Harvard University president Lawrence Summers, who called him a "Luddite". What to expect from Rajan: Raghuram Rajan has started his innings with a bang. On the very first day after taking over from Duvvuri Subbarao as Governor of the Reserve Bank of India (RBI), he stamped his authority on the institution by announcing several measures to modernise and liberalise the Indian banking system even while clearing the cobwebs of the past. He also promised to defend the value of the rupee, both internally and externally. But challenges remain. R Jagannathan points out in this article the key implications of what

Rajan said, and the tensions that he will have to negotiate in the months ahead as the economy grapples with a slowdown. In this Firstpost article, Vivek Kaul writes, Rajan is a firm believer in the fact that high government spending in doling out various subsidies has been a major cause behind India’s high inflation. Rajan’s thinking on that front doesn’t seem to be much different from that of his predecessor Subbarao. Rajan believes that Indian households need stronger incentives in the form of lower inflation to increase financial savings, which have been declining for a while. Arjun Parthasarathy writes here that Rajan’s policies will be conservative, as he will not want to create market bubbles. His policies will also surprise to create a shock effect that shakes out excesses in the market.

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First impression: Why Rajan

will strike a different chord At 50, with a global reputation as a top-notch academic, Rajan has an alternate world he can, and will, return to in the future. He doesn’t need to make any messy compromises. He needs to just keep swimming against the tide. Dhiraj Nayyar, September 5, 2013

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irst impressions matter. And Raghuram Rajan made his first press conference, as RBI Governor, count. It helps that Rajan has been a Professor for most of his professional life. He has well honed communication skills and is unafraid to share information and knowledge, precisely the opposite instincts of career bureaucrats who spend a lifetime acquiring power through obfuscation and withholding information. In that, he will strike a different chord from most of his recent predecessors who have either been from the IAS (D.Subbarao,

Y.V. Reddy) or have been economist-bureaucrats (Bimal Jalan, C.Rangarajan). At his press conference, Rajan was crystal clear that he plans to bring transparency and stability to RBI’s monetary policy. Of course, he reserved the right to surprise markets – as he must to be an effective Governor. What he really meant was that he will ensure that the rationale behind every RBI decisions is communicated clearly and consistently to Copyright © 2012 Firstpost


citizens and market players. Transparency is something that has been sorely absent in the RBI’s monetary policy making which puts it out of sync with the best contemporary global practices in central banking. All eyes will now be on September 20, when Rajan unveils the first monetary policy statement of his tenure. The academic in Rajan was also apparent in the careful preparation he has put into his first press statement. His three weeks as OSD in Mint Street have been fruitful. He was able to unveil a gamut of reformist announcements with the express confidence that there is consensus in the vast RBI bureaucracy on these issues. It is no small achievement to forge a consensus on market-friendly measures in any Indian bureaucracy, including RBI. Rajan was able to entirely liberalise from RBI control the setting up of new branches by commercial banks. He was able to liberalise currency buyback norms for exporters and importers. He gave an assurance that new banking licences would be given out in quick time, by January 2014. He even made a strong push for synergy between banks and mobile companies to roll out mobile banking. All this, and more, on his first

day in the new office. Rajan dropped more than one hint that he intended to end business-as-usual at the RBI. He was bold on non-performing assets stating that promoters did not have a ‘divine right’ to run their businesses if they were mismanaging them. That was a strong signal to public sector banks which tend to be lenient, for various reasons including political pressure, with powerful private sector players. Of course, Rajan will need a lot more than virtuoso performances at press conferences to reform India’s moribund financial sector and an old fashioned monetary policy apparatus. That he has chosen not to be cautious at the start is a good sign. In the end, Rajan’s great advantage is that he is not of the system, by the system or for the system. At 50, with a global reputation as a top-notch academic, Rajan has an alternate world he can, and will, return to in the future. He doesn’t need to make any messy compromises. He needs to just keep swimming against the tide.

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Are we setting Rajan up for a fall?

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Why Raghuram Rajan is

no Amitabh Bachchan A lot of the inflation created by the government shows up as food inflation, on which RBI has no control.

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Vivek Kaul, September 5, 2013

aghuram Rajan is currently having what I would like to call an “aaya aaya toofan, bhaga bhaga shaitan” moment. For those who are not as fond of trashy 80s cinema as I am, this needs some explanation. “Aaya aaya toofan, bhaga bhaga shaitan (Here comes Toofan, there runs the devil),” is a song from the Amitabh Bachchan starrer Toofan, which released in 1989.

The film has a character called Toofan (played by Bachchan) who plays a superhero, fighting evil. And the song keeps playing in the background whenever Toofan is out taking on the evil forces. Rajan took over as the twenty third governor of the Reserve Bank of India (RBI), yesterday. He had his first press conference at 5.30pm last evening. In this press conference he outlined a stream of measures that he plans to take over the next few months. Within seconds of his press conference ending, television channels started to go gaga over his performance. The feeling one got while watch-

ing was that all of India's economic problems have/will come to an end because Raghuram Rajan had taken over as the governor of the RBI. This excitement seems to have rubbed off on the newspapers as well. The Economic Times has compared him to James Bond. The Times of India called Rajan's entry “a big bang entry”. Business Standard said that “Rajan hits the ground running” and so did The Indian Express. Firstpost has called Rajan a Rockstar. The impact of Rajan's maiden performance has been seen great. The rupee has risen against the dollar and is currently quoting at 66 to a dollar. The stock market has rallied around 400 points, as I write this. This is in response to a slew of measures that Rajan announced yesterday. Rajan announced plans to internationalize the rupee, several steps to improve the inflow of dollars into India and improve exports. He also said that the RBI would allow 'good' banks to open branches without approaching the RBI for a license. To control the appetite Indians have Copyright © 2012 Firstpost


for gold, he announced that the RBI would soon launch bonds indexed to consumer price inflation. Some of the capital controls introduced sometime back to prevent the rupee from falling have also been done away with. Individuals will be allowed to spend more than $75,000 per year abroad, if the money is being spent on education and medical treatment. Rajan also announced plans for a nation wide bill payment system for payment of utilities like medical bills and school fees. A string of technical measures to shore up the value of the rupee against the dollar, were also announced. All in all, a great first day at work. Having said that, there isn't much that Rajan can do to improve the major ills that are plaguing the Indian economy. Let's start with inflation. As Rajan said yesterday “the RBI takes its mandate from the RBI Act of 1934, which says the Reserve Bank for India was constituted “to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.”” Hence, the primary role of the RBI is to ensure monetary stability. Or as Rajan put it “That is, to sustain confidence in the value of the country’s money. Ultimately, this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures.” There isn't much that the RBI can do to control inflation. The primary reason for the same is that the government of India is the main creator of inflation. The expenditure of the government has jumped considerably over the last few years and this has created inflation. As Ashok Gulati and Shweta Saini write in a research paper titled Taming Food Inflation in India "RBI has indicated time and again that government needs to rein-in the fiscal deficit before it can reduce interest rates,else, too much money in the system will be putting further pressures on prices in general and food prices in particular... The Economist in its February 2013 issue highlights that it was the increased borrowings by the Indian government which fuelled inflation and

a balance-of-payments gap. It categorically puts the responsibility on the government for having launched a pre-election spending spree in 2008, which continued even thereafter.” There is nothing that the RBI can do about this. With many state elections due this year and a Lok Sabha election due towards the middle of next year, the chances are the government is likely to continue spending big money. Several boondogles to influence the voters, might be on their way. Also, a lot of the inflation created by the government shows up as food inflation, on which RBI has no control. As Gulati and Saini write “High food inflation, which has averaged 10 percent during FY 2008-09 to December 2012, has been a major concern for policy makers in India.” Even after December 2012, food inflation continues to be higher than 10%. The RBI has tried to control high inflation by maintaining interest rates at high levels. One school of thought goes that since the RBI cannot do much to control food inflation, so it might as well cut interest rates. The risk here is that low interest rates might fuel other kinds of inflation. So, it remains to be seen whether Rajan is ready to take on that risk or not. High inflation can come in from other areas which Rajan has absolutely no control over. It can come from rising oil prices due to threat of an American attack on Syria. As an international fund manager told me earlier this week “if that happens(i.e. American does attack Syria) we can have oil prices touching even $150 per barrel.” In that scenario, inflation will spike and that will have a huge impact on economic growth, something an RBI governor has no control over. Also, if the Federal Reserve of United States, RBI's American counterpart, decides to go slow on printing money, that will lead to further economic problems in India. The Fed has indicated in the recent past that it plans to go slow on the $85 billion it has been printing and pumping into the American financial system every month, to keep interest rates low. The hope is that at low interest rates Americans will borrow and spend more, and that will help revive the Copyright © 2012 Firstpost


American economy. The danger of course is that all the money being printed and pumped into the financial system can create high inflation. So at some point of time the Federal Reserve needs to start going slow on printing money. If the Federal Reserve decides to go slow on money printing, as it has said in the recent past, interest rates in America will go up. This will lead to foreign investors selling out of India and other emerging markets. This will put further pressure on the rupee against the dollar. As the rupee will lose value, it will mean that our main imports i.e. oil, coal, fertilizer, palm oil etc, will become costlier, leading to a rise in inflation. If this scenario plays out, there is not much that Rajan can do about it. The RBI can sell dollars and buy rupees to stop the rupee from depreciating against the dollar. But it is worth remembering that the RBI does not have an unlimited supply of dollars. Another worrying factor is the slowdown in economic growth and the impact that it will have on government borrowings. The government expects the GDP to grow by 13.4%(in nominal terms) during this financial year (as per the annual budget). This is unlikely to happen. As Dylan Grice, formerly with Societe Generale and now the editor of the Edelweiss Journal wrote in a February 2010 research report titled Government hedonism and the next policy mistake “If I'm a finance minister mulling out how much money I should be borrowing, I want my GDP growth (and therefore my tax revenue growth) to pay coupons (i.e. interest) on any debt that I take on today...If the interest rate is higher than GDP growth, my incremental tax revenue won't cover interest payments. I'll be in

deficit and I'll have to issue more debt to plug the gap and my debt ratio will rise.” What this means is that the tax revenue collected by the government should be rising at a rate which is good enough to pay the interest on the accumulated debt. If that does not happen, the government will have to borrow more money to make its interest payments. And that is not a good sign. The government will either end up with a higher fiscal deficit or it will have to cut its expenditure in other areas to maintain the fiscal deficit. Fiscal deficit is the difference between what a government spends and what it earns. India is in that kind of a situation right now and there is nothing that Rajan can do about it. Also, to repeat a point that is made often, India's economic growth is being hurt by the poor physical infrastructure that we have. The country needs better roads, more ports, better railway infrastructure and so on. These are things the RBI governor cannot do much about, even though as Rajan said the RBI has “additional tools to generate growth”. All this is not to suggest that Rajan is not a good choice for the governor's job. He is an excellent choice given his impeccable credentials, but expecting him to do miracles is unjustified. To conclude, let me quote what Jerry Tsai, a famous American fund manager had to say about the penchant of the media to create heroes. “And I can say this from experience: the trouble with getting a little bit of good publicity is, when something goes wrong they love to kill you on the way down. The media like to build things up so they can tear them down.” (Source: What Goes Up – The Uncensored History of Modern Wall Street by Eric J Weiner). Rajan should keep that in mind as he goes about his business of rescuing the troubled Indian economy.

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Dr Rajan, try convincing us first

that rupee is worth holding Without running a tight monetary and fiscal ship, and without offering real returns on rupee savings, internationalisation of the rupee will be a pipedream for Raghuram Rajan.

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R. Jagannathan, September 5, 2013

f Raghuram Rajan got a rapturous welcome from the media yesterday (4 September) on taking over as Governor of the Reserve Bank of India (RBI), the main reason for it was the perceptible gloom surrounding Duvvuri Subbarao's turbulent five-year tenure. In contrast, Rajan's "century on debut" - as many TV commentators called his forward-looking and optimistic statement - has sent pulses racing. This is evident from the huge spike in the rupee and the markets today (5 September).

Caution is in order. As Rajan himself admitted, while he may have started out with star ratings, he will also have to take many unpopular decisions. "Governorship of the central bank is not to win votes or Facebook likes, but to do what is right." We will know what he really thinks are the right things to do on 20 September when he announces his first monetary policy. His first decision, to shift the date to 20 September, was the right one. Though he did not say it, the new date makes sense because the US Fed meeting two days earlier might announce a timetable for tapering down its bond buying programme. That has huge implications for capital outflows

from India. However, this article is not about Rajan and his likely monetary policy, but to focus on a relatively unnoticed, and perhaps most interesting, part of his statement – on the gradual "internationalisation of the rupee." Rajan said: “This might be a strange time to talk about rupee internationalisation, but we have to think beyond the next few months. As our trade expands, we will push for more settlement in rupees. This will also mean that we will have to open up our financial markets more for those who receive rupees to invest it back in. We intend to continue the path of steady liberalisation.” Internationalisation of the rupee means getting foreigners to accept payments in rupee for their exports to India, and/or getting them to buy/ hold rupee-denominated assets, including rupee deposits, bonds, shares, etc. In a sense, this is already happening through portfolio and FDI flows. But the significance of Rajan’s statement lies in the fact that right now the rupee is in the boondocks, unloved and unwanted. That’s why its value has fallen below Rs 60 to the dollar. He needs to get more people to love the rupee. Internationalisation of the rupee is, in a sense, a reverse form of capital account convertibility (CAC). Instead of allowing Indians to own dollars or euros freely, we entice non-residents (not just NRIs, but also non-Indians) to own rupees. However, the preconditions we need to put in place are almost no different from what we would need to do if we want Indians to freely buy and own dollars, or pounds or euros. According to the second Tarapore Committee Copyright © 2012 Firstpost


on Capital Account Convertibility, which submitted its report in 2006, “The ‘internationalisation’ of a currency is an expression of its external credibility as the economy integrates globally. In practical terms, it would mean the use of the currency for invoicing and settlement of cross-border transactions, freedom for nonresidents to hold financial assets/liabilities in that currency and freedom for non-residents to hold tradable balances in that currency at offshore locations.” Getting non-residents and foreigners to own rupees is thus no different from allowing Indians to own dollars since it calls for "external credibility" - currently in short supply. The fact that the rupee is one of the world's most underowned assets outside India tells its own story on the distance Rajan will have to traverse to make the rupee truly international and credible. Let’s enumerate the hurdles in the path of internationalising the rupee and the preconditions that must be met before Rajan has any chance of success. First, before you internationalise the rupee, you need to get Indians convinced about it. The Indian's preference for gold or real estate is an indication that she would rather own physical assets instead of rupees. If given the option, fewer Indian would own rupees, due to its domestically plumbing value. The real value of the rupee is now less than 1 paisa if valued in 1947 rupees. This is why the abolition of the 25 paise coin in 2011 went unsung, and the 50 paise coin may also soon disappear. That’s more than a 99 percent erosion in value over 66 years of independence and fiscal debauchery. Rajan has indicated that he wants to help Indian households believe in the rupee again by announcing the issue of consumer price indexlinked savings certificates. This is a good move, but belief in the rupee will take years to build. Domestic disbelief in the rupee will not rise in the next few quarters even if the inflation-indexed certificates are a huge success. While the humble Indian opts for gold and real estate, businesspersons are also said to hold illegal assets abroad. If Rajan can convince them to bring their hoards in, selling to rupee to

foreigners would be easier. Second, getting foreigners to accept rupees in payment for their goods and services is even tougher. Three conditions need to be satisfied before they accept rupee settlements: a) the value of the rupee must stabilise, both internally and externally, over the medium term; b) the holder of rupee must have large trade or other interests in India and Indian assets; and c) the holder must be assured that India will be an open economy and remain open. The reason why people are willing to hold dollars is simple: the US is a quarter of the world economy, so everyone needs to trade with the US. Moreover, the US is one of the most open economies in the world. The dollar has also maintained its value for decades, but even the dollar is not going to remain the overwhelming international currency forever (currently, over 60 percent of global reserves are in dollars). If inflation surges in the US due to excess quantitative easing, its value will also drop. Third, it would be easier to internationalise the rupee if we were doing roaring business with our neighbours. The world over, a country’s biggest trade partners are its neighbours – the US with Canada and Mexico, China with Japan. In India’s case, thanks to geopolitical tensions and mutual suspicion, our trade with Pakistan, Bangladesh, Sri Lanka and Nepal is very low. Trade with China is much larger, but here our trade deficit is so skewed in China’s favour, that it is difficult to see China accepting too much payment in rupee. The only way that can happen is if we open up infrastructure investment avenues for the Chinese in the Indian economy, but due to our long-term suspicions about China’s intentions, that is not easy to visualise right now. Fourth, and most important, is macroeconomics. To get people to invest in the rupee, you have to run conservative fiscal and monetary policies for prolonged periods. No one will want to hold rupees if they believe that the country will run loose monetary and fiscal policies that will ultimately destroy the value of their holdings. It is worth recalling that even the Chinese, the world’s largest holders of dollar assets, are Copyright © 2012 Firstpost


seriously concerned about holding $3.2 trillion in dollars, euro and yen – most of it in dollars - when all these countries are busy printing money to get their economies growing. Excess money printing – which is what our government has been doing for the last five years – leads to inflation and reduction in the value of the currency. China is desperately seeking to reduce its dollar reserves, but it has few alternatives. It is worth recalling what the first Tarapore committee on capital account convertibility had to say in 1997 about the pre-conditions that must be met before abolishing capital controls: a gross fiscal deficit of 3.5 percent (by 1999-00), and an inflation rate of 3-5 percent for an average of at least three years, among other things.

These targets were never achieved, and today the fiscal deficit is close to 5 percent and consumer inflation is almost in double-digits. Average inflation of 3-5 percent has never been achieved by either UPA-1 or UPA-2. If we don’t run a tight ship, internationalisation of the rupee will be a pipedream. Before Rajan tries to get foreigners to buy into the rupee, he needs to get Indians to love their rupee as much as they do dollars right now. This means he will have to court unpopularity with North Block the same way his predecessor did: by bringing down inflation and improving real returns on rupee savings.

Copyright © 2012 Firstpost


Market misreading Raghuram

Rajan; bankers, industry beware Though Raghuram did make it explicit that he did not view the job as a popularity contest and that we should be prepared for some hard decisions, the implications of the same has probably not sunk in.

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Shanmuganathan Nagasundaram, September 5, 2013

erhaps for the first time ever, I could sit and listen to a full speech of a RBI Governor – whether current or past – without feeling the need to switch channels. That monetary stability would be his Numero Uno objective came through clearly. Perhaps it is too early to call, but it might well have been Paul Volcker speaking!!

Ofcourse, the market largely missed his key observation and focussed on the other reforms that he initiated. Going by the reaction of the stock markets this morning, especially the gains in the banking index, I think the markets have completely misread his course of action. Though Raghuram did make it explicit that he did not view the job as a popularity contest and that we should be prepared for some hard decisions, the implications of the same has probably not sunk in. Raghuram will liberalize the banking industry and there’s no doubt that it’s going to be good for the industry as well as the consumers. Though in the longer run. But the immediate hard decisions that he referred to – increasing

CRR, interest rates – are going to follow very soon. My guess is that he will push up the CRR from the current level of 4% to 10% and leave it there for good, reduce SLR dramatically if not abolish the same altogether, and increase the Repo rate by around 100 to 150 basis points – all in very short order. The bankers and the industry that is largely praising him today will soon turn against him. His observation that a central banker “starts at the height of their popularity” is likely to be very prescient and I was almost reminded of the opening lines from one of my favourite movies “American Beauty” – where it all goes downhill subsequently. Despite the limited support that he is likely to receive from both within and outside, he needs to plough on. India does not have the time to educate the bureaucrats and the crony capitalists (the CII till date has been clamouring for rate cuts) -- that debasing the currency is a sure shot way to destroy the economy. While the rupee could afford the Reddy’s and the Rao’s over the last 10 years, these are indeed perilous times and showing your disrespect for capital is a guarantee to ensure that it doesn’t come your way. We have seen ample evidence of that in the last few weeks, though our political class and bureaucrats would use the excuse of the supposed Fed tapering to mask their misguided adventures in populism. So the banking index that is witnessing euphoria today is going to be butchered in short order and bonds are going to fare no better. Judging his opening comments, I am hoping he does atleast this much. & if he cannot do it early on, he is going to find it very difficult to do the same later on. But I wish he doesn’t stop at that. Because Copyright © 2012 Firstpost


Raghuram will inevitably, sooner rather than later, be followed by a RBI Governor who thinks running the presses overtime is a solution to our problems – as has pretty much been the case for almost the entire history of the RBI. Just as a Paul Volcker was followed by Greenspan, and when you thought it couldn’t get worse, we get a Bernanke, and when you think how it can get any worse, we get a Janet Yellen/Larry Summers – each step leading to greater and greater debasement of the currency as a solution to economic woes. So the way out is to introduce a free market competing currency system to circulate alongside the Rupee. India is probably the only coun-

try in the world with a huge stock of gold, and that too in private hands rather than with the central banks, and this “barbaric relic dividend” shouldn’t go unutilized. Instead of clamouring for controls on the import and sale of gold, permit gold banking with enough safeguards against confiscation by future governments. It’s perhaps expecting too much. But if Raghuram really does his job well, then the RBI will no longer need to exist in the form it is operating today and monetary policy would soon become a free market function. And therein lies the true test of sustainability – can Raghuram create an orderly decontrol of the very institution he is heading?

Copyright © 2012 Firstpost


The speech that wooed India Inc

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Here are Raghuram Rajan’s

plans as RBI governor Reserve Bank of India Governor, Raghuram Rajan, on Wednesday announced a slew of proposals in his first day of office. Here are the highlights.

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Reuters, September 4, 2013

umbai: Reserve Bank of India Governor, Raghuram Rajan, on Wednesday announced a slew of proposals in his first day of office. Below are some highlights of the proposed action.

open up financial markets for those who receive rupees to invest back in Will offer a special window for swapping foreign currency non-resident (FCNR) deposits with a minimum tenor three of years and more, at a fixed rate of 3.5 percent per year Will raise overseas borrowing limit of 50 percent of unimpaired Tier I capital to 100 per cent for banks Borrowings mobilized under this provision can be swapped with RBI at a concessional rate of 100 basis points below the ongoing swap rate prevailing in the market Above schemes will be open till November 30, 2013 DEBT / BROADER MARKETS

MONETARY POLICY Postpones first monetary policy statement as Governor to September 20 from 16 September. To set up a panel on how to strengthen monetary policy framework, which will submit report in three months RUPEE, CAPITAL INFLOWS To allow exporters to re-book cancelled forward currency contracts up to 50 pct of the value of cancelled contracts and up to 25 percent for importers Will push for more trade settlements in rupees,

Will introduce cash-settled 10-year interest rate future contracts Will examine introduction of interest rate futures on overnight interest rates Will steadily but surely liberalise markets, restrictions on investments and position-taking To issue inflation-indexed savings certificates tied to CPI to retail investors by end November Need to reduce requirement for banks to invest in government securities in a calibrated way BANKING SYSTEM

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To set up external committee to screen bank license applicants Hopes to announce licenses within, or soon after, January 2014 Will push foreign banks to set up wholly-owned subsidiaries Will look at continuous or on-tap bank licensing system for applicants Will issue guidelines to free rules on setting up bank branches for domestic commercial banks To look at rising non-performing assets and restructuring/recovery process

tribunals and asset resconstruction companies Proposes to collect credit data, examine large common exposures among banks Will encourage banks to clean up their balance sheets. Will encourage banks to commit to raising capital when necessary Bad loan problem is not alarming yet, but will fester if unaddressed To set up committee that will access every aspect to financial inclusion

Need to accelerate the working of debt recovery

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Who Said What: Raghuram Rajan has inspired confidence’ Raghuram Rajan will be making his first monetary policy statement on Sept 20, but that did not stop Rajan from announcing some very specific reforms which pleasantly surprised many. Here are some reactions to his speech. FP Staff, September 4, 2013

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ven as Raghuram Rajan took over the reins of the Reserve Bank of India from D. Subbarao, he announced a slew of reforms, which were well received by industry.

is clear. He has inspired confidence and shown confidence. He expects business. I think he has started well and he's moving in the right direction.

He said he will be making his first monetary policy statement on Sept 20, but that did not stop Rajan from announcing some very specific reforms which pleasantly surprised many. Here are some reactions to his speech.

Rajiv Lall, MD & vice chairman, IDFC: He comes at a very opportune time. If he was appointed at a very benign time his ability to change and induce change is much higher. Today he has the advantage. Take advantage and induce change. It takes crisis to force dramatic change. Saumya Kanti Ghosh, Chief Economic Advisor, SBI: Creating repository across bank is a v good idea. Taking some exposure and sharing information will be v good. @sandipsabharwal: Subbarao said RBI' primary responsibility is "Price Stability" , Rajan says it is "Monetary Stability". It's a big difference.

Nirmal Jalan, IIFC: He surprised everyone by being very specific on reforms. His agenda

@gchikermane: Raghuram Rajan is saying right things. But he still seems to be in "advisor" mode. Will he be able to move things, be a "Governor"? We wait.

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Five best quotes from Raghuram Rajan’s first speech as RBI governor Here are the 5 best quotes from Raghuram Rajan’s first speech RBI governor. FP Staff, September 4, 2013

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aghuram Rajan has taken over as Reserve Bank of India's governor. The fifty-year-old, economics professor who also served as chief economist at the International Monetary Fund, took charge from D Subbarao today.

jan's first speech RBI governor: • “Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalize their failed ventures.” • "Aadhar will be a foundation for building individual credit history." • “While the resumption of stalled projects and stronger growth will alleviate some of the banking system difficulties, we will encourage banks to clean up their balance sheets, and commit to a capital raising program where necessary. The bad loan problem is not alarming yet, but it will only fester and grow if left unaddressed.”

The duo shook hands warmly and hugged after Rajan signed papers taking over as the 23rd Governor of the central bank. "Ten minutes ago, I handed over charge to Raghuram Rajan," Subbarao said after stepping out of Mint Road. “The country could not have asked for a more capable person to lead the RBI in these most difficult times.” Here are the 5 best quotes from Raghuram Ra-

• “Any entrant to the central bank governorship probably starts at the height of their popularity. Some of the actions I take will not be popular. The Governorship of the Central Bank is not meant to win one votes or Facebook “likes”. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism.” • "S&P statement of one-third chance of India rating downgrade nothing new, will not read too much into it."

Copyright © 2012 Firstpost


Read Full Text: Raghuram Rajan’s

first speech as RBI governor Read the full text of the new RBI Governor Raghuram Rajan here. FP Staff, September 5, 2013

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ood Evening. I took charge this afternoon as the 23rd Governor of the Reserve Bank of India. These are not easy times, and the economy faces challenges. At the same time, India is a fundamentally sound economy with a bright future. Our task today is to build a bridge to the future, over the stormy waves produced by global financial markets. I have every confidence we will succeed in doing that. Today I want to articulate some first steps, concrete actions we will take, as well as some intentions to take actions based on plans we will formulate.

Before I turn to specifics, let me repeat what I said on the day I was appointed. The Reserve Bank is a great institution with a tradition of integrity, independence, and professionalism. I congratulate Dr. Subba Rao on his leadership in guiding the bank through very difficult times, and I look forward to working with the many dedicated employees of the RBI to further some of the important initiatives he started. I have been touched by the warmth with which the RBI staff have welcomed me. To the existing traditions of the RBI, which will be the bedrock of our work, we will emphasize Copyright Š 2012 Firstpost


two other traditions that become important in these times: transparency and predictability. At a time when financial market are volatile, and there is some domestic political uncertainty because of impending elections, the Reserve Bank of India should be a beacon of stability as to its objectives. That is not to say we will never surprise markets with actions. A central bank should never say “Never”! But the public should have a clear framework as to where we are going, and understand how our policy actions fit into that framework. Key to all this is communication, and I want to underscore communication with this statement on my first day in office. Monetary Policy We will be making the first monetary policy statement of my term on September 20. I have postponed the originally set date a bit so that between now and then, I have enough time to consider all major developments in the required detail. I will leave a detailed explanation of our policy stance till then, but let me emphasize that the RBI takes its mandate from the RBI Act of 1934, which says the Reserve Bank for India was constituted “to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage;” The primary role of the central bank, as the Act suggests, is monetary stability, that is, to sustain confidence in the value of the country’s money. Ultimately, this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures. I have asked Deputy Governor Urjit Patel, together with a panel he will constitute of outside experts and RBI staff, to come up with suggestions in three months on what needs to be done to revise and strengthen our monetary policy framework. A number of past committees, including the FSLRC, have opined on this, and their views will also be considered carefully. Inclusive Development I talked about the primary role of the RBI as

preserving the purchasing power of the rupee, but we have two other important mandates; inclusive growth and development, as well as financial stability. As the central bank of a developing country, we have additional tools to generate growth – we can accelerate financial development and inclusion. Rural areas, especially our villages, as well as small and medium industries across the country, have been important engines of growth even as large company growth has slowed. But access to finance is still hard for the poor, and for rural and small and medium industries. We need faster, broad based, inclusive growth leading to a rapid fall in poverty. The Indian public would benefit from more competition between banks, and banks would benefit from more freedom in decision making. The RBI will shortly issue the necessary circular to completely free bank branching for domestic scheduled commercial banks in every part of the country. No longer will a well-run scheduled domestic commercial bank have to approach the RBI for permission to open a branch. We will, of course, require banks to fulfil certain inclusion criteria in underserved areas in proportion to their expansion in urban areas, and we will restrain improperly managed banks from expanding until they convince supervisors of their stability. But branching will be free for all scheduled domestic commercial banks except the poorly managed. There has been a fair amount of public attention devoted to new bank licenses. The RBI will give out new bank licenses as soon as consistent with the highest standards of transparency and diligence. We are in the process of constituting an external committee. Dr. Bimal Jalan, an illustrious former governor, has agreed to chair it, and the committee will be composed of individuals with impeccable reputations. This committee will screen license applicants after an initial compilation of applications by the RBI staff. The external committee will make recommendations to the RBI governor and deputy governors, and we will propose the final slate to the Committee of the RBI Central Board. I hope to announce the licenses within, or soon after, the term of DG Anand Sinha, who has been shepherding the process. His term expires in January 2014. Copyright © 2012 Firstpost


We will not stop with these licenses. The RBI has put an excellent document on its website exploring the possibility of differentiated licenses for small banks and wholesale banks, the possibility of continuous or “on-tap” licensing, and the possibility of converting large urban cooperative banks into commercial banks. We will pursue these creative ideas of the RBI staff and come up with a detailed road map of the necessary reforms and regulations for freeing entry and making the licensing process more frequent after we get comments from stakeholders.

India has a number of foreign owned banks, many of whom have been with us a long time and helped fuel our growth. They have been in the forefront of innovation, both in terms of improving productivity, as well as in terms of creating new products. We would like them to participate more in our growth, but in exchange we would like more regulatory and supervisory control over local operations so that we are not blindsided by international developments. The RBI will encourage qualifying foreign banks to move to a wholly owned subsidiary structure, where they will enjoy near national treatment on a reciprocal basis. We are in the process of sorting out a few remaining issues so this move can be made. Finally, our banks have a number of obligations that pre-empt lending, and in fact, allow what Dr. Rakesh Mohan, an illustrious former deputy-governor, called “lazy banking”. One of the mandates for the RBI in the Act is to ensure the flow of credit to the productive sectors of the economy. In this context, we need to reduce the requirement for banks to invest in government securities in a calibrated way, to what is strictly

needed from a prudential perspective. This cannot be done overnight, of course. As government finances improve, the scope for such reduction will increase. Furthermore, as the penetration of other financial institutions such as pension funds and insurance companies increases, we can reduce the need for regular commercial banks to invest in government securities. We also subject our banks to a variety of priority sector lending requirements. I believe there is a role for such a mandate in a developing country – it is useful to nudge banks into areas they would otherwise not venture into. But that mandate should adjust to the needs of the economy, and should be executed in the most efficient way possible. Let us remember that the goal is greater financial access in all parts of the country, rather than meeting bureaucratic norms. I am asking Dr Nachiket Mor to head a committee that will assess every aspect of our approach to financial inclusion to suggest the way forward. In these ways, we will further the development mission of the RBI. Financial Markets Some see financial markets as competition to banks. They are that, but they are also complementary. Too many risks in the Indian economy gravitate towards commercial banks even when they should be absorbed by arm’s length financial markets. But for our financial markets to play their necessary roles of providing risk absorbing long term finance, and of generating information about investment opportunities, they have to have depth. We cannot create depth by banning position taking, or mandating trading based only on well-defined “legitimate” needs. Money is fungible so such bans get subverted, but at some level, all investment is an act of faith and of risk taking. Better that investors take positions domestically and provide depth and profits to our economy than they take our markets to foreign shores. Together with the government and regulators such as SEBI, we will steadily but surely liberalize our markets, as well as restrictions on investment and position taking. Given the current market turmoil, our actions will have to be at a measured pace, but as a symbolic down payCopyright © 2012 Firstpost


ment, we will do the following: Presently, exporters are permitted to re-book cancelled forward exchange contracts to the extent of 25 per cent of the value of cancelled contracts. This facility is not available for importers. To enable exporters/importers greater flexibility in their risk management, we will: Enhance the limit available to exporters to 50 per cent; and Allow a similar facility to importers to the extent of 25 per cent. Further to develop the money and G-sec markets, we will introduce cash settled 10 year interest rate future contracts; We will also examine the introduction of interest rate futures on overnight interest rates Rupee internationalization and Capital Inflows This might be a strange time to talk about rupee internationalization, but we have to think beyond the next few months. As our trade expands, we will push for more settlement in rupees. This will also mean that we will have to open up our financial markets more for those who receive rupees to invest it back in. We intend to continue the path of steady liberalization. The RBI wants to help our banks bring in safe money to fund our current account deficit. Reserve Bank of India has been receiving requests from banks to consider a special concessional window for swapping FCNR deposits that will be mobilized following the recent relaxations permitted by the Reserve Bank of India. We will offer such a window to the banks to swap the fresh FCNR (B) dollar funds, mobilized for a minimum tenor of three years and over, at a fixed rate of 3.5 per cent per annum for the tenor of the deposit. Further, based again on requests received from banks, we have decided that the current overseas borrowing limit of 50 per cent of the unimpaired Tier I capital will be raised to 100 per cent and that the borrowings mobilized under this provision can be swapped with Reserve Bank of India at the option of the bank at a

concessional rate of 100 basis points below the ongoing swap rate prevailing in the market. The above schemes will be open up to November 30, 2013, which coincides with when the relaxations on NRI deposits expire. RBI reserves the right to close the scheme earlier with due notice. Financial Infrastructure Finance thrives when financial infrastructure is strong. The RBI has been working hard to improve the financial infrastructure of the country – it has made tremendous advances, for example, in strengthening the payment and settlement systems in the country. Similarly, it has been working on improving information sharing through agencies such as credit bureaus and rating agencies. I propose to carry on such work, which will be extremely important to enhance the safety and speed of flows as well as the quality and quantity of lending in the country. On the retail side, I particularly want to emphasize the use of the unique ID, Aadhaar, in building individual credit histories. This will be the foundation of a revolution in retail credit. For small and medium firms, we intend to facilitate Electronic Bill Factoring Exchanges, whereby MSME bills against large companies can be accepted electronically and auctioned so that MSMEs are paid promptly. This was a proposal in the report of my Committee on Financial Sector reforms in 2008, and I intend to see it carried out. Finance is not just about lending, it is about recovering loans also. We have to improve the efficiency of the recovery system, especially at a time of economic uncertainty like the present. Recovery should be focused on efficiency and fairness – preserving the value of underlying valuable assets and jobs where possible, even while redeploying unviable assets to new uses and compensating employees fairly. All this should be done while ensuring that contractual priorities are met. The system has to be tolerant of genuine difficulty while coming down hard on mismanagement or fraud.

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Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalize their failed ventures.

First, households have expressed a desire to be protected against CPI inflation. Together with the government, we will issue Inflation Indexed Savings Certificates linked to the CPI New Index to retail investors by end- November 2013.

Most immediately, we need to accelerate the working of Debt Recovery Tribunals and Asset Reconstruction Companies. Deputy Governor Anand Sinha and I will be examining the necessary steps.

Second, we will implement a national girobased Indian Bill Payment System such that households will be able to use bank accounts to pay school fees utilities, medical bills, and make person to person transfers electronically. We want to make payments anywhere anytime a reality.

I have asked Deputy Governor Dr. Chakrabarty to take a close look at rising NPAs and the restructuring/recovery process, and we too will be taking next steps shortly. RBI proposes to collect credit data and examine large common exposures across banks. This will enable the creation of a central repository on large credits, which we will share with the banks. This will enable banks themselves to be aware of building leverage and common exposures. While the resumption of stalled projects and stronger growth will alleviate some of the banking system difficulties, we will encourage banks to clean up their balance sheets, and commit to a capital raising program where necessary. The bad loan problem is not alarming yet, but it will only fester and grow if left unaddressed. We will also follow the FSLRC suggestion of setting up an enhanced resolution structure for financial firms. The working group on resolution regimes for financial institutions is looking at this and we will examine its recommendations and take action soon after. Everyone has a right to a safe investment vehicle, to the ability to transfer remittances to loved ones, to insurance, to obtain direct benefits from the government without costly intervening intermediaries, and to raise funding for viable investment opportunities. In addition, access to credit to smooth consumption needs or to tide over emergencies is desirable, especially for households in the lower income deciles, when it does not impose unserviceable debt loads. The Reserve Bank will continue to play its part in making all this possible. In particular, I want to announce a number of specific actions:

Third, only banks are currently allowed to deploy Point-of-Sale terminals, and these are largely set up by a few banks in urban areas. As announced in the Annual Monetary Policy statement, we will facilitate the setting up of “white� POS devices and mini ATMs by non-bank entities to cover the country so as to improve access to financial services in rural and remote areas. Fourth, currently holders of pre-paid instruments issued by non-bank entities are not allowed to withdraw cash from the outstanding balances in their pre-paid cards or electronic wallets. Given the vast potential of such instruments in meeting payments and remittance needs in remote areas, we intend to conduct a pilot enabling cash payments using such instruments and Aadhaar based identification. Finally, there is substantial potential for mobile based payments. We will set up a Technical Committee to examine the feasibility of using encrypted SMS-based funds transfer using an application that can run on any type of handset. We will also work to get banks and mobile companies to cooperate in rolling out mobile payments. Mobile payments can be a game changer both in the financial sector as well as to mobile companies. This is part of my short term time table for the Reserve Bank. It involves considerable change, and change is risky. But as India develops, not changing is even riskier. We have to keep what is good about our system, of which there is a tremendous amount, even while acting differently where warranted. The RBI has always changed when needed, not following the latest fad, but doing what is necessary. I intend to work with my excellent colleagues at the ReCopyright Š 2012 Firstpost


serve Bank, the senior management of which is represented around this table, to achieve the change we need. Finally, a personal note: Any entrant to the central bank governorship probably starts at the height of their popularity. Some of the actions I take will not be popular. The Governorship of the Central Bank is not meant to win one votes or Facebook “likes”. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism – Rudyard Kipling put it better when he mused about the requirements of an ideal central banker in his poem “If”:

If you can trust yourself when all men doubt you, But make allowance for their doubting too: Kipling’s reference to “men” only dates these lines, but his words are clear. We will fill in details of what we have announced shortly, and lay out a broader roadmap of reforms soon after. Appropriate notifications will be issued shortly. As this is underway, we will turn to preparing the mid quarter policy statement.

Copyright © 2012 Firstpost


Raghuram Rajan has audacious

goals for the common man Raghuram Rajan has audacious goals for the country and the business sector, but, he has not left the common man behind. Here are five things Rajan plans to do for you. Bindisha Sarang, September 4, 2013

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umbai: Raghuram Rajan assumed charge as the Reserve Bank of India Governor, today. And, while he has audacious goals for the country and the business sector, he has not left the common man behind. Here are five things Rajan plans to do for you.

To protect the common man from the nasty bite of inflation, RBI proposed to issue Inflation Indexed Savings Certificates by the end of November 2013. These certificates will be linked to CPI unlike the Inflation Index Bonds launched by RBI in May which were linked to WPI and did not work well for retail investors.

The apex bank will bring a national giro-based Indian Bill Payment System with which you can directly use your savings banks account to pay utility bills, medical bills and like, and make person to person transfer a reality, anytime and anywhere. GIRO payment is a credit push transaction initiated by the payer and may involve the presence of three banks (collecting bank, payer bank and the payee bank). Those in rural areas will ab able to avail financial services like cash withdrawal facility even in remote areas, since the apex bank will allow White Point of Sale terminals and Mini- ATMs to be opened by non banking companies pan India. Rajan said, “Currently holders of pre-paid instruments issued by non-bank entities are not allowed to withdraw cash from the outstanding balances in their pre-paid cards or electronic wallets. Given the vast potential of such instruments in meeting payments and remittance needs in remote areas, we intend to conduct a pilot enabling cash payments using such instruments and Aadhaar based identification.� And RBi will also set up a technical committee to see the feasibility of using encrypted SMSbased funds transfer using an application that can run on any type of handset.

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Taking over the baton

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All smiles: Relieved and happy Subbarao hands baton to Rajan

Raghuram Rajan (L), newly appointed governor of Reserve Bank of India (RBI), hugs the outgoing governor Duvvuri Subbarao during the taking over ceremony at the bank's headquarters in Mumbai

Subbarao before handing over the baton to Rajan.Reuters Copyright Š 2012 Firstpost


Raghuram Rajan (L), newly appointed governor of Reserve Bank of India (RBI) receives a bouquet from RBI deputy governor K C Chakrabarty after his arrival at the bank's headquarters in Mumbai. Reuters

Rajan, 50, an economics professor who also served as chief economist at the International Monetary Fund, takes charge from D Subbarao. Copyright Š 2012 Firstpost


Rajan takes oath as 23rd RBI governor. Reuters

The duo shook hands warmly and hugged after Rajan signed papers taking over as the 23rd Governor of the central bank. Reuters Copyright Š 2012 Firstpost


Meet the governator: Raghuram

Rajan’s Twitter alter ego Presenting, ladies and gentleman, @Raghu_Ram_Rajan, aka The Governator.

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Anant Rangaswami, September 4, 2013

or most of us unschooled mortals, there’s nothing as boring as the Reserve Bank of India. The Bank’s statement are peppered with definitions, acronyms and abbreviations that we have no cue about, like ‘sub-prime’ or ‘basis points’ and ‘ECB’ and ‘FCCB’.

“Thats one hell of a way to welcome me! RT “@ ndtv “@NDTVProfit #Rupee recovers sharply against #dollar, rises to 67.58””.

So there isn’t a snowball’s hope in hell that people like us would follow the twitter account of Raghuram Rajan, the new (and hopefully, improved) Governor of the Reserve Bank of India.

And he’s a bit of all right – he doesn’t count Diggy Raja as a friend. “According to unconfirmed reports, the objects fired weren't missiles, just Digvijay Singh shooting off some words into the ocean.”

And he understands punctuation. Note the double close quotes. They’re required.

He likes football. That’s cool. “To people asking me why I didn't predict the rupee crash, I'm the future RBI Governor, not Paul the Octopus!” And he likes music. The loud kind. But as a governator, I wish he wouldn’t shout like this: Unless, of course, it isn’t him. Presenting, ladies and gentleman, @Raghu_ Ram_Rajan, aka The Governator. “RBI Governor. Hottest man in the Delhi-Mumbai bureaucracy corridor. I got the mooooves like Rajan ,” is how he describes himself (I’m sure it’s a he). In addition, he warns the suspecting public that it’s a parody account. Of course it is. You could tell that in a second if you saw his latest tweet. “Got hugged by Subbarao before I took over. Must be an emotional moment for him. Now to get his access card deactivated because YOLO!” Decent sense of humour.

“THE NH7 WEBSITE IS NOT WORKING AND YOU GUYS ARE WORRIED ABOUT THE RUPEE??” And Bollywood. Hmmm. “I think my first policy statement should be a Chennai Express review”. So what do we have? A Governator who doesn’t make typos, who knows his punctuation, has a sense of humour, likes NH7 kind of music, likes football and Bollywood. I’m going to follow him. As a diversion till our economy gets back on track. Hopefully, the Governor (the real one) will deal with that.

Copyright © 2012 Firstpost


Raghuram Rajan replaces Subbarao,

takes charge as 23rd RBI governor The Reserve Bank of India said Raghuram Rajan, the former chief economist at the International Monetary Fund, will take charge as governor of the central bank on Wednesday, replacing Duvvuri Subbarao. Reuters, September 4, 2013

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he Reserve Bank of India said Raghuram Rajan, the former chief economist at the International Monetary Fund, todat took oath as the 23rd governor of the central bank, replacing Duvvuri Subbarao. Handing over the baton to Rajan, Subbarao said

The government’s piecemeal efforts to stabilise the rupee have done little to halt its steep slide. It has tumbled about 10 percent alone since Rajan’s appointment on 6 August. Rajan has few policy options to revive the rupee but one thing he can do immediately is explain to financial markets more clearly what steps the central bank is taking and the thinking behind them. Investors and economists have complained that the bank has caused unnecessary confusion with some pronouncements. Another pressing concern for markets is whether Rajan plans to dismantle any of the mishmash of measures, including a hike in short-term interest rates, the central bank has unveiled since mid-July to prop up the rupee. Economists have expressed concern the steps could further damage the ailing economy.

there is no person more capable than Rajan to lead the economy right now. Rajan, who has most recently been an adviser at India's finance ministry, will step into the eye of the storm roiling the country's economy and become the new chief defender of a nose-diving rupee. The currency has plunged nearly 20 percent since May as Asia’s third-largest economy confronts its worst crisis since 1990-1991.

Rajan, aware markets are scrutinising everything he says for clues about his intentions, has been circumspect in public, revealing little about whether he will pursue the policies of his predecessor, Duvvuri Subbarao, or change tack. Either way, economists expect him to hold fire with any major measures until after the US Federal Reserve meets on 17-18 Sept, when it might announce a pivotal shift in its stimulus programme.

Copyright © 2012 Firstpost


What we are expecting from the new RBI governor

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No magic wand: Raghuram Rajan, welcome to the RBI tightrope walk How Rajan takes his first steps as governor could go a long way in deciding how India will tackle what is quickly turning out to be the most challenging period the country has witnessed in a long time. Sourav Majumdar, September 4, 2013

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imal Jalan, an astute policymaker and former Reserve Bank of India (RBI) governor, had a way of putting things. He used to say one of the key tasks for the RBI was to ‘manage expectations’. Raghuram Rajan, the 50-year-old star economist who takes over as the next RBI governor from Duvvuri Subbarao on 5 September, seems to be doing that already.

tously for some time now, and breached the 68 to the dollar mark once again during trades on 3 September. Both the currency and capital markets are in fresh turmoil over fears of war in Syria, while concerns over the exact timing and intensity of the US Federal Reserve’s tapering of its stimulus program continues to keep the markets and the currency on edge. At this juncture, perhaps the smartest thing the new RBI governor, a former IMF chief economist, can do is to carefully manage expectations and keep his eyes firmly on the immediate task at hand: calming the frayed nerves of market players and policymakers and making the best possible assessment of the situation under the circumstances. He can, however, do little about the burden of expectations he carries, particularly in view of his formidable reputation as an economist of international standing.

On the eve of his taking charge of the country’s monetary authority, Rajan made it clear that there was ‘no magic wand’ and the challenges which were facing the economy were not going to be overcome overnight. One step at a time, making progress every day is the way Rajan, widely regarded as the man who correctly predicted the 2008 financial crisis, wants to do it. And Rajan is probably right. He takes charge of the top job at Mint Road at a time when the RBI is caught in a cleft-stick on the growth-inflation dynamic, with growth slowing down to a modest 4.4 percent in the first quarter, and wholesale price inflation back to somewhat uncomfortable levels, touching 5.79 percent in July. More importantly, the rupee has been falling precipi-

The growth-inflation dynamic, and the policy trilemma which Rajan’s predecessor Subbarao eloquently spoke about, will keep Rajan and his colleagues at Mint Road busy. With the current account deficit (CAD) and its impact on the currency posing a major threat to financial stability, Rajan will have to find ways to ensure the rupee stabilizes, while keeping in mind the pressing need to restart the growth engine as much as RBI, on its own part, possibly can. As Subbarao will testify, that task itself is a massive one, and can keep Rajan very busy. In his last public address before demitting office, Subbarao made the RBI’s policy dilemma amply clear. “Yes, growth has moderated, but to attribute all of that moderation to tight monetary policy would be inaccurate, unfair, and importantly, misleading as a policy lesson. Copyright © 2012 Firstpost


India’s economic activity slowed owing to a host of supply side constraints and governance issues, clearly beyond the purview of the Reserve Bank,” he said, underscoring RBI’s limited role in pushing growth in the absence of support from the government’s end. “Indeed, low and steady inflation is a necessary precondition for sustained growth. Any growth sacrifice in the short term would be more than offset by sustained medium term growth. I want to reiterate once again that the Reserve Bank had run a tight monetary policy not because it does not care for growth, but because it does care for growth,” Subbarao said in the clearest possible manner. Since that 29 August speech, very little has changed. In fact, the looming fear of war has made markets more jittery. This is likely to pose fresh challenges for RBI in its effort to keep the rupee stable. Tackling North Block Another brilliant former RBI governor, Yaga Venugopal Reddy was often known to say in his inimitable manner that just as the RBI could not be expected to agree with the government simply because it was the government’s view, equally, the central bank would not be right in not listening to a particular point of view merely because it was the government saying so. It is this delicate balance which Reddy and Subbarao

after him had sought to strike at all times: when does one go along with the government’s view and when does RBI ensure it does what is best for the financial system, reinforcing its autonomy. There will be no clear answers to this for Rajan, but the choice will get tougher with the headwinds growing stronger. How Rajan tackles the pulls and pressures of North Block will be one of the key standards on which he will be judged. By all accounts, Subbarao’s 5-year tenure was marked by heightened crises, first the Lehman crisis and then the Eurozone problem. Even as he demits office, another challenge – managing the impact of the Fed’s tapering plan – looms. Rajan takes over at an equally difficult time, with India’s growth story in serious jeopardy and the international community keenly watching how policymakers get it back on track. It would not be fair to judge Raghuram Rajan on the basis of his first few decisions as RBI governor. But these are times when every action emanating from Mint Road will be discussed, debated and dissected threadbare. The first such occasion will come just days after Rajan takes over, with the 18 September review of the RBI Annual Policy. How Rajan takes his first steps as governor could go a long way in deciding how India will tackle what is quickly turning out to be the most challenging period the country has witnessed in a long time.

Copyright © 2012 Firstpost


Will Raghuram Rajan really listen

to Raghuram Rajan? Next RBI Governor Raghuram Rajan has called for “zero regulation” in some areas. This could mean deregulating interest rates, but he needs to go much further if we are not to have another crisis Shanmuganathan Nagasundaram, August 19, 2013

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t’s indeed a rare event these days for politicians or bureaucrats to state something that makes economic sense. Over the last few years, we have been reduced to hearing what could well be tape-recorded observations, of how the economy will turn the corner and the investment cycle will pick-up over the next couple of quarters and how consumer price increases will moderate in the foreseeable future.

usually thrown up as solutions – banning gold imports, reduction of interest rates, increased government subsidisation/stimulus to/bailout of troubled sectors, etc – will only make the problems worse. So when Raghuram spoke about the need for “zero regulation”, I couldn’t have been more delighted. Here, at last, we had somebody from within the system advocating the supremacy of free markets, competition and market regulation as a means to growth and poverty reduction. Not many from the media picked up on this thread, but Raghuram Rajan really needs to be patted on the back for making such a bold observation. It’s rare to see this kind of intellectual honesty and courage within the state. In a system that is used to hand-picking advisors who will tell the government what they already believe in. Such an observation goes against deeply ingrained beliefs and is a very welcome change.

For the record, I have been saying since last year that these statements represent mere propaganda with no economic rationale whatsoever, and barring a dramatic reversal of economic policies, we could be stuck to sub-5 percent growth and double-digit consumer price increases for the rest of this decade. We could see near stagflationary conditions for businesses and consumers, though one could technically debate the phrase. What I meant by a reversal of economic policies is a transition to a system of “limited government and sound money”. Whereas what is

What Raghuram “probably” implies by “zero regulation” is that commercial transactions are voluntary exchanges that happen between consenting individuals and that there’s no need for a state to regulate these exchanges. In most commercial activities, the only part where the state has a role is in the defence of property rights and in resolving contract violations - i.e. the police/army and court/justice system. We have not had an advocate of free markets within the country for a long time, and I wouldn’t be surprised even if the people considered the “most reformist” within the country disagree with him. At least, we have not Copyright © 2012 Firstpost


witnessed any movement of reforms in that direction – barring the occasional deregulation of FDI that could be attributed to the currency crisis rather than any genuine belief in deregulation. Therefore, a very welcome change indeed – even if at the current point in time we are yet to see the translation of the talk into a walk. But as I wrote in my previous piece, the part of our economy that is in dire need of “zero regulation” is the monetary system. Raghuram Rajan can start with deregulating interest rates. After all, the interest rate is the price of money - the point at which the quantity demanded from borrowers is equal to the quantity supplied by savers. Much as you do not want governments to set the price of cars or movie tickets, you do not want governments setting the price of money also. Not only am I talking about shortterm interest rates, but also the ongoing and blatant manipulation of long-term interest rates through our own version of quantitative easing. Interest rates serve a very important function of coordinating investment and consumption decisions and any manipulation of the same has unwelcome consequences. Of course, freeing interest rates is only the first step in a “zero regulatory monetary system”. Much more needs to be done – eliminating the cash reserve ratio (CRR) as a monetary policy tool, removing the support for fractional reserve banking, and, of course, the introduction of alternate and private monies. Of course, I have very little doubt that if private money is allowed, the RBI would soon be bankrupted by barbaric relics like gold. But then, as Nietzsche would say, “That which is about to fall deserves to be pushed”. So will Raghuram Rajan move in the direction of zero regulation for the monetary system? I very much doubt it. Not because of the con-

straints of the Indian political system, which are immense to say the least, but more so because of the constraints of his Chicago background. To his credit, he did see the housing bubble, unlike much of his Chicago Booth School colleagues, but his analysis of the underlying causative factors was quite misplaced. For readers who are interested in a more accurate description of what caused the crisis, and more importantly on what lies ahead, I would recommend books by any of the Austrian economists on this topic. To name a few for the benefit of readers - Peter Schiff, Bud Conrad, and Tom Woods. Some of these gentlemen published their books even before Raghuram did. So the problem that we will face in the years ahead would not be because of the reforms that Rajan could introduce – as he undoubtedly will – but because his reforms may not go far enough. Quite unfortunately, he is likely to be seen as an advocate of capitalism, and hence the monetary crisis that lies ahead would be blamed on capitalism. Never mind that the capital out of capitalism has been corrupted out of existence by central banks. I have very little doubt that we are headed for tumultuous times in the months and years ahead. If Raghuram Rajan is to achieve anything meaningful, he has to only listen to his own advice. So the question to ask is: Will Raghuram listen to Raghuram? I wouldn’t bet my rupee, let alone my gold, on it. Shanmuganathan “Shan” Nagasundaram is the founding director of Benchmark Advisory Services – an economic consulting firm. He is also the India Economist for the World Money Analyst. He can be contacted at shanmuganathan.sundaram@gmail.com

Copyright © 2012 Firstpost


Raghuram Rajan

and the burden of expectations The great expectations that are preceding his appointment as RBI Governor can act as a burden on Raghuram Rajan Rajesh Pandathil, August 7, 2013

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ever before has the appointment of an RBI governor got so much coverage in the media.

Numerous articles have already been published in the newspapers and electronic media analysing threadbare incoming governor Raghuram Rajan’s earlier comments and how they may throw some light on his future actions as the head of the central bank. A Times of India report hails a world-class economist becoming the governor of the RBI. There were also reports that said the rupee, which was on a bottomless fall yesterday, actually managed to pullback a little as the news of Rajan’s appointment flashed in the media.

But just how much do we expect from Rajan, who is credited with foreseeing the 2008 financial crisis in 2005? This is not to doubt his credentials at all for we do not have many economists with his acumen. But definitely, there is a burden of expectation. It is keeping this in mind that Rajan said in yesterday’s media briefing that there was no magic wand to resurrect the economy. And rightly so. As a manager of the monetary policy, there is very little that the central bank can do to revive a sagging economy. At the most, it can nudge the government to take corrective action on the fiscal side, as present Governor D Subbarao did many a time. Copyright © 2012 Firstpost


But still, there are expectations that Rajan may have an unconventional approach towards the central bank and its functions. For one, he has good understanding of the vagaries of global economy, which will come in handy for him to deal with the expected large outflows once the US starts tapering off its stimulus. “Rajan’s work as chair of the financial sector reforms panel and expertise in global financial markets five him a unique perspective,” Chanda Kochar, MD and CEO, ICICI Bank, has been quoted as saying in The Times of India. Clearly, he has the calibre and also the boldness, as many commentators have said. Among his much-discussed feat is the speech he made in 2005, which warned the financial development may have actually made the world riskier. Significantly, he was delivering his speech at a conference of economists where Alan Greenspan, the strong proponent of financial deregulation, was being facilitated. “To take a public stand while in a top official position, as Rajan did, took remarkable courage,” Christopher Swann a Reuters BreakingViews columnist points out. He says other economists, who had predicted the impending doom, including Nouriel Roubini, “cast stones from the sidelines”.

“Rajan has continued to be brave, although his often expressed doubts about the effectiveness of extreme monetary policy are no longer totally unconventional,” the column says. (Read here) The pertinent question to ask is that will this bravery also prove to be his Achilles’ heel in India? One has to remember that the RBI has been perceived as an institution with some level of independence, unlike many other Indian regulators which just toe the line of the political bosses. At least, the RBI heads have enjoyed freedom to the extent that they could push the government to bring about fiscal reforms. A case in point is Subbarao, during whose tenure the RBI held back rate cuts until the government pushed through fuel price reforms. However, Subbarao’s actions had not gone down well with the finance ministry and had to finally move on as he did not get a job extension – a proof that boldness may not be a virtue to hold on to for an RBI Governor. In this backdrop, the great expectations that are preceding his appointment as RBI Governor can act as a burden on Rajan. After all, as he said, there are no magic wands to fix the economy. It is the government who has the final say, not the central bank.

Copyright © 2012 Firstpost


Raghuram Rajan as RBI chief may have some surprises up his sleeve He takes over the reins of the central bank at a time when the economy is going downhill, the Indian Rupee (INR) is on a free fall, equity and bond markets are nervous and the government at the centre wants quick fixes before the 2014 general elections. Arjun Parthasarathy, August 7, 2013

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r Raghuram Rajan, a former IMF economist, visiting professor to the World Bank and US Federal Reserve Board and one of the few economists who predicted the 2008 credit crisis will head the Reserve Bank of India. He takes over from Dr D Subbarao on the 4th of September.

What can one expect from the new RBI governor. He takes over the reins of the central bank at a time when the economy is going downhill, the Indian Rupee (INR) is on a free fall, equity and bond markets are nervous and the government at the centre wants quick fixes before the 2014 general elections. Dr D Subbarao came into office in the middle of the 2008 financial market crisis. He is one governor who in his term cut rates drastically and raised rates at the same pace. The repo rate under his term fell to levels of 4.75% from 9% and rose to levels of 8.5% from 4.75%. All in a period of five years. Needless to say the economy, markets and the currency has been on a

roller coaster ride over the last five years due to various reasons both domestic and global. Rajan comes to the RBI governor post with a lot of expectations thrust on him by both the government and the markets. The government will want him to wave a magic wand to bring down deficits, strengthen INR and help the economy grow. The markets will want from him a calm, well thought out approach to handling both the economy and the government. A tough task by any means, as will be vouched by both Dr YV Reddy and Dr Subbarao, the former RBI governors. The immediate focus of the RBI is to curb INR volatility and Rajan has been involved in this process since the time he came into the post of the Chief Economic Advisor to the Indian government in August 2012. The government and the RBI has not succeeded in curbing the volatility in the INR that touched all time lows of Rs 61.80 to the USD on the 6th of August, which is also the day of Rajan’s appointment to the RBI governor post. Rajan will be hard pressed to stem the INR fall unless luck in the form of global markets behaving well comes in his way. Rajan’s past record shows that he can equate economics to markets and this is extremely important for a central bank governor. Whether one likes it or not markets determine the fate of economies as seen by the way indebted Eurozone economies are suffering due to austerity. India too is seeing the effect of the markets view on the INR as growth is suffering due to policies that are aimed to reducing INR volatility. Rajan will focus on a longer term approach to Copyright Š 2012 Firstpost


the economy and market stability. He did predict the 2008 bubble burst, but he first predicted it in 2005. Similarly if he can focus on long term goals of the central bank that is price stability, growth and curbing systemic imbalances in the markets, he can bring about a change in the country’s prospects. The government may not have the patience for long term goals of RBI. Rajan should stand off short term political pressures for longer term goals.

Rajan’s policies will be conservative, as he will not want to create market bubbles. His policies will also surprise to create a shock effect that shakes out excesses in the market. Markets can expect direction from the RBI going forward but that will not be cast in stone. Here’s wishing him all the best in troubled time. Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors.

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The Chidu factor

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Will Rajan act on his beliefs or

has FM house-trained him? The next RBI Governor’s views are quite different from that of the government. Will he be able to advocate them or has his stint in North Block tamed him

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George Albert, August 10, 2013

he new Reserve Bank of India Governor, Raghuram Rajan, mostly gets it right. His views on capitalism, supply side economics and the 2008 financial crisis are on the mark. He stands on the opposite side of the noted Keynesian Paul Krugman and that is enough for free market folks to breathe a sigh on relief.

A few of Rajan's ideas are, however, worrisome. Rajan, in an article in Foreign Affairs magazine, advocated structural or supply-side reforms to improve the competitiveness of the workforce to better adapt to globalisation, while also supporting fiscal austerity measures. He advocated cutting government spending and raising taxes. Supply siders welcome a reduction in government spending but prefer lower taxes and giving the money back to the people. Private citizens then invest the extra cash which leads to growth. Higher growth leads to higher tax revenues even at a lower rate and this quickly balances the government's budget deficits.

It is a policy adopted by former US President Ronald Reagan. The policy led to long-term growth in the US and the global economy. Reagan also unshackled the economy of multiple regulations that Rajan seems to favour. A freer private economy led to a lot of new products and services being launched, especially in technology. Supply siders would love Rajan if he changed his views on taxation. There are other views on social policy that worry free market advocates But Rajan does not decide taxation or social policies as the Governor of Reserve Bank. His focus will be on monetary policy and the problem he faces now is high inflation and a weakening rupee. Based on Rajan's views in the past, he seems to be the right person to tackle the issue. That is, if he still holds the same views and has not been house-trained by the profligate finance ministry. In case Rajan still holds his former views on credit and the role of government, he can pull India out of its quagmire of high inflation and weakening rupee, assuming New Delhi listens. The root of the problem is the large scale fiscal deficits that the government of India runs. Unless that is reined in inflation will continue to hurt the weakest in society. Reined in does not mean reducing the growth in deficits, it means cutting deficits and balancing the budget. Let us take a look at what Rajan had to say about government using easy money as a political palliative. Here he is close to former Federal Reserve Chairman Paul Volcker, who tightened money supply to lick inflation when Reagan was

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the US President. In 2010, Rajan was asked by Time magazine: Is there historical precedent for using cheap credit as a political palliative, as you call it? Absolutely. Both across countries and within the United States. In many ways, farmers, toward the end of the 19th century, were falling behind the rest of the population. A big piece of the populist platform was to push for more credit. The result was a tremendous expansion of banks in the early 20th century. Some would argue that the immense extension of credit to the farm sector in the 1910s and '20s was a precursor to the Great Depression. Based on this answer one can infer that he would prefer a tighter monetary policy when India's fiscal deficit continues to grow and push up inflation and weaken the rupee. The great thing about free markets is that taking on the correct risk is rewarded and wrong risk punished. If governments allow the private sector to bear the consequences of its failure, excess risk taking will be automatically reduced.

Rajan's views are similar. In the same interview, when talking about new regulations following the financial crisis, he said, "I would ask a more fundamental question than is being asked, which is, why were markets so oblivious of the risks being taken? I would argue a big reason was because they believed the markets would be bailed out by the government, and that expectation has been confirmed, with the government intervention in the housing markets and the credit markets and the Fed pushing enormous amounts of liquidity. The primary thrust of reform has to be to convince the private sector you will never do it again." This is music to the ears of supply siders or for that matter anyone with common sense. But the fundamental problems that Rajan faces are fiscal and a lack of independence to do anything about it. He does not have the power to stop funding the government's fiscal deficits. So unless New Delhi behaves there is not much Rajan can do. But one can at least expect monetary policy to continue on its current tight path.

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Why Chidu and Rajan may not

be walking together just yet With global imperatives looming large and the rupee still very volatile, it’s unlikely that the next RBI governor will be in a position to push the growth agenda Sourav Majumdar, August 12, 2013

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hat the outgoing Reserve Bank of India (RBI) governor Duvvuri Subbarao managed to ruffle finance minister Palaniappan Chidambaram by his stout refusal to toe the New Delhi line on interest rates is well known by now. The Subbarao perspective on the growth-inflation dynamic, made stronger by a rupee which was on free fall till recently, meant that the government’s hopes that RBI will also bat for growth and push more monetary easing measures through were dashed quickly.

to forecast the inherent risks in the global financial system way back in 2005 in his 2005 paper “Has Financial Development Made the World Riskier?”, will obviously know that executing monetary policy is a very different task from analyzing the global economic system. Given the precarious policy ‘trilemma’ that RBI now finds itself in – low growth, sticky inflation and a precariously placed rupee – the task for the next governor, who takes over on 5 September – is to ensure financial stability by doggedly attacking the inherent risks to the system. Topmost among them now is what RBI has itself called the biggest threat – the current account deficit (CAD), made worse by a rupee which seems to do very little to give confidence to policymakers that RBI’s tough currency stabilization measures can soon be withdrawn. RBI’s currency stabilization moves have been seen as a blow to growth, though the central bank has said these were temporary and would be rolled back once the situation improved.

Now, with the announcement that 50-year-old economist and celebrated academic Raghuram Rajan will be the next RBI boss, there seems to be new hope in government and policymaking circles that a fresh round of thinking on growth and inflation will come about under Rajan. Most, however, agree that Rajan’s job will be very tough, given the current global economic conditions and seriously sputtering growth within the country. Rajan, widely known as the man who was able

The trillion dollar question, however, is: when will this be possible? Is Raghuram Rajan going to be able to do his bit to push the government’s growth agenda or will he have to, willy nilly, continue with what Subbarao started, and keep a hawk’s eye on the currency and the concomitant risks it carried for the system? The answer, for now, seems to overwhelmingly be in the direction of a continuation of the currency stabilization measures and, by default, against going for growth. The astute economist that Rajan is known to be, despite his stint in government he will have Copyright © 2012 Firstpost


to weigh the pros and cons and opt for the option which most guarantees financial stability for now. Simply put, his first monetary policy statement, which will be articulated on 18 September, just days after he takes over, will likely be one which may once again not make finance ministry mandarins too happy. Experts see Rajan as continuing with RBI’s policy of independence in policymaking, particularly given the present situation. In a note titled “Will RBI resolve the trilemma”, HSBC chief economist for India and ASEAN Leif Eskesen seems to go with the view that Rajan will keep RBI independent and that the liquidity-tightening steps would need to be continued for longer to prevent further depreciation of the rupee. “In turn, this suggests that a bigger growth sacrifice could prove necessary,” Eskesen says. The RBI’s trilemma was laid bare by Subbarao in his last policy statement on 30 July, when he said: “The current situation – moderating wholesale price inflation, prospects of softening of food inflation consequent on a robust monsoon, and decelerating growth – would have provided a reasonable case for continuing on the easing stance. However, India is currently caught in a classic ‘impossible trinity’ trilemma whereby we are having to forfeit some monetary policy discretion to address external sector concerns.” Clear enough indication of the fact that RBI has no easy solutions in sight. Besides, RBI has also said it’s not yet fully clear whether fi-

nancial markets have factored in the full impact of a prospective tapering of the Quantitative Easing (QE) program of the US Fed or whether more reactions will follow future announcements. In his note, HSBC’s Eskesen puts forth three scenarios – near-term stabilization, delayed stabilization and no stabilization – on how RBI and the currency markets may behave, but opts for the ‘delayed stabilization probability’ as the most likely. In this, pressures on the currency would continue beyond September because markets may not be seeing the CAD-reduction measures as sufficient to plug the hole. This, together with the difficulty in pushing through further reforms with a hostile political opposition and the prospects of QE tapering beginning in September, will pose a further challenge for RBI under Rajan. The result? The currency stabilization measures continue and monetary easing is virtually off the table this year, “if not completely for now.” Whatever be the exact scenario at the time, the possibility that Rajan would be able to help Chidambaram in his growth push is remote for now. The FM will need to ‘walk alone’ and use all the resources at his command to instead ease the supply and infrastructure bottlenecks which have continued to threaten financial stability and prevented the RBI from giving the government that much-needed helping hand.

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Rajan starts with finmin’s blessing but

will ultimately have to battle Chidu Raghuram Rajan starts with the finance ministry’s blessings, but he could soon find his true economic beliefs in conflict with the political compulsions of his boss R. Jagannathan, August 9, 2013

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he appointment of Raghuram Rajan as the next boss of the Reserve Bank of India (RBI) has been widely welcomed, in part because of his credentials as a globallyacclaimed, first-rate economist. However, having IIT, IIM and MIT on your CV does not necessarily equip you to become a great central bank governor. It is more than likely that he will find himself in the same corner as current incumbent Duvvuri Subbarao - in conflict with the finance ministry.

Three reasons why. First, central bankers, even if they are first-rate economists, have to operate in the reality of a political economy. Their first job is not to reread old economics textbooks or even their own academic (or journalistic) work on the subjects of inflation, growth, exchange rates, macroeconomics or fiscal math, but to make a realistic assessment of where politics is dragging the economy and offer a counter (or support) to it. Copyright Š 2012 Firstpost


In short, the primary job of a central banker is that of a risk-manager. He has to assess the risks faced by the economy due to the policy trajectory taken by government and then step in to correct imbalances. Knowledge of economics is useful, but commonsense is paramount. Second, in a globalised economy run by many central bankers and economic policymakers, not to speak of thousands of big market players, nobody can predict the ultimate direction of any economy with any degree of certainty. The impact of one measure may be completely different from what is intended. The US Fed under Ben Bernanke, for example, has kept interest rates very low to boost the domestic economy and jobs. But the excess money from quantitative easing went to inflate asset prices and boost commodity inflation everywhere else. So much of monetary easing should have deflated and debased the US dollar; but we have seen the exact opposite. And despite his overwhelming efforts to rescue the economy by following easy money, Barack Obama was happy to see the back of Ben Bernanke. Our own RBI has been behind the curve on both raising and lowering interest rates during the 2008-13 period, but it has no significant success to show for its exertions. It is now universally reviled by both politicians and businessmen, not to speak of economists who pretend to know more than Subbarao. We now have both untamed consumer inflation and falling growth. And P Chidambaram is happy to see him go. Third, even with clear-sighted policy, the monetary authority cannot completely compensate for serious fiscal mismanagement. This is really the India story from 2008-13 - and continues to remain so. In theory, the RBI could have raised interest rates to 12-15 percent in 2010-12, but it would have been roundly condemned for the resultant fall in growth which was actually the result of policy paralysis, a lax fiscal policy and the evaporation of business confidence. No RBI Governor wants to be held responsible for the destruction of growth and jobs - especially when the real reasons lie elsewhere. Moreover, India’s inflation is the result of consistently high minimum support prices for foodgrain, excess spending on non-merit sub-

sidies (fuel, fertiliser), and the government’s inability to boost supplies of protein foods, including milk, fruit, eggs and meat, pulses, and veggies. No rate hike can deal with this kind of inflation. On the plus side, Raghuram Rajan starts out with the blessings of the finance minister, and two highly rated former RBI Governors and economists: Manmohan Singh and C Rangarajan. But this is clearly not enough for it is not the job of the central banker to be chummy with his political and economic bosses. It helps to have the blessings of the high and mighty, but this is an asset all Indian central bankers have had at the outset. Remember, Subbarao was P Chidambaram's finance secretary during UPA-1 and this was probably his prime qualification for the job even though Montek Singh Ahluwalia and Raghuram Rajan were both available for the job in 2008. Subbarao won by being close to Chidambaram. In fact, it was Subbarao’s presumed closeness to Chidambaram and his successor (Pranab Mukherjee) that may have made him ineffective. He was too late to raise interest rates in 2010-11, and too quick to lower them (in 2012) merely on the basis of the finance minister’s promise to lower the fiscal deficit and raise fuel prices. Neither of these delays can be explained by anything other than Subbarao’s willingness to listen to North Block. It is only when he found the finance ministry reneging on its promises that Subbarao decided to be his own man and take a line different from what the finance ministry under Mukherjee and later Chidambaram wanted. This soured relationships. Coming back to Raghuram Rajan, it is thus clear that he will be as much beholden to North Block as Subbarao initially, but if he wants to do a good job as Governor, he cannot bend over backwards to please his boss. Can he really do it? Swaminathan S Anklesaria Aiyar, writing in The Economic Times today, is pessimistic on this. In an article titled “New Governor won’t get to be his own man”, Aiyar Copyright © 2012 Firstpost


referred to Rajan’s own opinion on the RBI Governor’s role and how he may not be able practice what he preached. Noting that historically the RBI sometimes targeted inflation, sometimes the exchange rate, and sometimes economic growth, Rajan had said that “by trying to do too many things at once, RBI risks doing none of them well.” Aiyar is betting that Rajan won’t be able to follow his own advice. “Will Rajan put this vision into practice as RBI governor? Not a chance. Indian politics will not permit an inflation-only focus for RBI. After his spell in the finance ministry, Rajan must be well aware of the limits to the independence of any RBI Governor.” Chidambaram himself went out of his way to debunk Rajan's thesis - though his target was Subbarao - last week when he said: "All over the world, the thinking is changing. The mandate of a central bank must not only be price stability. The mandate of a central bank must be seen as part of larger mandate which includes price stability, growth and maximising employment."

It is worth noting that the current efforts to stem the rupee’s fall are more a finance ministry obsession than the RBI’s, but Subbarao has had to willy-nilly do what it was earlier preaching against: that the RBI does not have a target for the rupee. Unfortunately, the market suspects that the finance ministry does have a target – which is probably Rs 59-60 to the rupee. The reason for this is the political time-table and his fiscal deficit: if the rupee goes into free fall, it means fuel prices will have to be raised quicker or subsidies cut urgently. This he does not want to do. Chidambaram cannot finance the fiscally ruinous Food Security Bill if oil subsidies careen out of control. The finance ministry and Rajan are likely to be on different sides in the battle of the rupee. Rajan has to either accept the reality of doing the opposite of what he believes in or he has to take on North Block’s political aims as his own. He can’t ultimately be any different from Subbarao.

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