Raghuram Rajan; I love you; I love you not;…………………

Raghuram Rajan; I love you; I love you not;…………………

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Published LinkedIn on 22nd June, 2016

“Policies are more important than personalities” says Fitch, India’s ratings will not get impacted by the RBI Governor Raghuram Rajan’s (RR) “expected” departure in early September.

This pretty much summarises the truth.

India is not a banana republic however much the current political opposition would like to portray it to be. On the other hand, I am appalled at the extraordinary attention everything about RR especially his exit has received in the national and international media. They even coined RRexit to rhyme with Brexit!

I have never seen the RBI Governor’s job in so much limelight. It started off with RR being mentioned as an ageing beauty queen’s crush and ended with calling him a “rock star”. Everyone from my granny to nanny was commenting on his good looks. For God’s sake it’s an economist after all not a Bollywood star!

Before readers decide that I am a RR baiter, let me hasten to add that, I have been an ardent admirer of his policies and ability to communicate concepts in an incredibly simple manner for all of to understand. He undoubtedly brought to the job intellectual depth and credibility.

More importantly, he is possibly the first RBI Guv who has had the courage to blow the lid off the “economically repressive interest rate policies” so blatantly practiced by earlier governments.

I greatly admire him for his perseverance in pushing through what is now known as RR’s Real Interest Rate Doctrine which in simple terms means that

  • Interest rates impact depositors as much as they do borrowers.
  • Inflation is a cruel tax on the poor and ‘negative real rates ‘are a stealth tax on household savers (most of them tax payers & senior citizens)
  • It is critical to pay depositors a rate of interest which exceeds the rate of inflation and RR set a target to hold this premium at at least 1.5%.
  • He changed the benchmark for inflation for this purpose to CPI (Consumer Price Index which impacts the household savers) from the earlier used WPI (Wholesale Price Index which is more relevant to business inputs).

In doing so RR actually saved the middle class from economic repression most hypocritically practiced by the earlier government to serve their crony industrialists. Because, negative real rates basically subsidise their bank loans.

The demand for decreasing interest rates never ceases. The Euro nations, Japan, etc. are case in point where the rates are negative i.e. below zero and depositors suffer – but that’s another story.

His admirably consistent communication and execution imparted an element of transparency to the hitherto opaque monetary policy process. I believe he has been extremely successful in educating many of us in the relevance of nominal & real interest rates and their impact on household savings mainly

  • Money shifting out of financial assets into physical assets leading to unbridled escalation in demand for gold and real estate.
  • Decline in bank deposits and added pressure through gold imports on our balance of payments.

RR was also able to bring to the surface the rot in the Govt. banks as result of bad debts mostly given out before he took the job. He also imparted a high level of thought leadership in shoring up our foreign exchange reserves.

To RR’s credit he was professional enough to introduce the international best practice of constituting a Rate Committee and establishing the ‘inflation target agreement with the government”. In doing so greatly strengthened the formal process around this tickly area which has been subject of many disagreements between RR’s predecessor and earlier government.

All said RR made a substantial contribution to strengthening India’s macro-economic indicators inherited from the previous regime.

Needless to say there already is an emerging camp of naysayers who point to his neglect of customer service or the small & medium sector, etc. Hey! no one is perfect especially not us armchair commentators.

At this stage, however, I cannot but resist bringing up a few questions around the RR saga which I have been struggling with.

  • Why could RR not do the same when he was an economic advisor to the UPA government?
  • Was he unable to prevail on the then FM to accept these policies when it was evident that the middle classes which pay most of the taxes saw their savings depleting in value due to persistent negative real interest rates?
  • Are we to assume that, the interests of the borrowers were more important to the earlier government than those of the poor and household savers?

Or could it be even remotely possible that, he found strong support in the Modi government and was given a free hand to execute his ideas?

RR was already the “celebrity economist” when he came to the RBI after calling the financial crisis almost 3 years before it brought down the world. He was also on the prestigious US economic think tank.

However, what was possibly less apparent then was that he also nurtured an academic’s ego which made him headstrong and maybe even a tad arrogant – not in his body language though but in his intellectual attitude (“My name is Rajan and I do what I do “a quote famously attributed to him, best gives him away). Also like most celebrated academics he too felt entitled to having a say on all matters related or unrelated to his jurisdiction and to fully indulging in his right to free speech.

Most of us who have been business managers will surely appreciate that, whilst a shortfall in one’s emotional intelligence may be considered a virtue in the idealistic world of academia, media and creativity; it turns to be a severe handicap in the real world of business and more so in politics. One is strongly encouraged to watch what one says, how and when!

RR embarrassed the government which he worked for more than once. Surely he would not expect a pat on the back for the remarks on “intolerance” and about India being an “one eyed economy”. RR also fell prey to the glory bug following the unprecedented media exposure he got following his appointment to the job and ended up completely overshadowing the FM at Davos. Surely that’s not the way to becoming a “good team player” management lingo for “stay in line”.

However, I have often wondered if RR was burdened by his obligations to the earlier government.

He was an advisor to Chidambaram and appointed to RBI in the most unbecoming manner by the outgoing government. Why could they not have appointed him earlier instead of giving a second term to his predecessor? What was the motive behind such a hasty appointment was it to reward him for past loyalty; in a manner that his RBI term ends in time before his leave from Chicago Univ. ends? I fail to understand why did a person of such repute, credibility as RR lend himself to being used for such seemingly blatant politicking?

I am not sure of the impact of his (reported) membership of the US economic think tank but should confess at being somewhat puzzled at him continuing to retain it even after being appointed as the RBI Governor.

I therefore, don’t believe RR ever wanted a second term based on his interview published almost a month ago wherein he said ” he belonged to the realm of ideas”. Of course, the irrepressible Swamy did make the situation all the more and unforgivingly embarrassing for all concerned. But then, anyone like RR who enjoys being in media limelight and builds a public profile has to also develop the attitude of a rock star or a politician.

Then you had the Opposition pronouncing that the Modi government did not deserve RR. This was soon followed by their meeting with the FII, details of which have never been disclosed.

Finally, RR not being able to bear the political heat tendered his “shock & awe” resignation and I cannot help suspecting if it was all part of a well drafted act played out to damage the Modi Government’s reputation especially in the eyes of the western media.

RR’s well cultivated rock star image seemed to position him almost at par with the FM, taking credit for the improvement in the country’s macro-economic indicators. When on the other hand, the Modi government’s success gets attributed to luck and reduced oil prices.

When the world over Central Bankers are lamenting the inadequacies of monetary policy and giving primary importance to fiscal policy; here we are in India crediting all the good happening in the Indian economy to RR’s monetary policies!

The RBI Governor’s role has clearly laid out boundaries. Hopefully, his successor will be an equally credible, competent and assertive monetarist. More importantly comes with the learned wisdom in staying apolitical, being discreet and focused on delivering the constitutional mandate given to the RBI.

As Raghuram Rajan has himself said the RBI is a sound institution, a result of efforts put in many eminent governors (some even better than him) and that the institution is greater than any individual. One cannot agree more.I have no doubts that, the RBI will continue to serve the country as well as it has always done in the past.

Interestingly, despite the melodrama being played out in the media; the markets once again showed that, they know best. The SENSEX ended higher after having shrugged off “RRexit” even after all players including the foreign institutions had 2 days to digest the impact of RR’s resignation. Even the Foreign exchange rate stabilised by the day’s end. All eyes they say shifted on the real event Brexit!

I should confess even at the risk of sounding conspiratorial, all this ruckus about a RBI Governor’s exit makes me wonder what is it that is / was at stake here and where are the vested interests.

The Modi government today has announced big FDI reforms which will go to benefit our economy in the next year.

The India Growth Story stays robust and un-impacted.

**********


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One Reply to “Raghuram Rajan; I love you; I love you not;…………………”

  1. A very well played Innings overall by RR but by not disclosing names and details of large deafaulting borrowers who are classified as NPAs is incorrect in my view because :
    Small individual borrowers who are classified as NPAs by their bankers due to their defaults see their names / photographs / mortgaged assets in prominent dailies which has negative effects on them which have to be borne due to the circumstances but the large big boy defaulters are shielded and nothing is disclosed about them.
    This to my mind is unfair and requires to be addressed at the earliest.

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