YOU DECIDE
==========
Raghuram Rajan's exit as RBI Guv is creating more soundwaves than even Dadri or Kanhaiya!! All along, he has been hailed as a rockstar Governor. And his "resignation letter" to RBI employees has apparently signalled Armageddon. The media and a few learned men are calling the end of the Indian Economy, already! The Indian media is now breaking into a dirge, something not seen even when Sachin Tendulkar retired! And even (!) Western media houses like CNBC are carrying this as their weekend headline news. The market pundits are already seeing daggers being pulled out from the sheaths, in anticipation of a bloodbath in Dalal Street.
So, how much of this is truth? How much is hype? Is it as black-and-white as it appears to be? Let us look at a few aspects. And then YOU DECIDE.
First things first. RR took over the helm of RBI at a time when the Indian Economy was in doldrums. Everything that had to go wrong, had indeed gone wrong. Every economic parameter was out of range. Inflation, credit, current account deficit, moribund Public Sector Banks(PSB)- you name them all. Let us look at RR's performance in these three years on some of these key parameters.
Inflation: Undoubtedly, a feather in the cap of RR for taming the official inflation figures. Some pundits argue that during a good part of his tenure, global oil prices had crashed, and that made it very easy for them. Partly true. Global oil prices indeed helped. But then, dont forget the fact that India has gone through two consecutive years of drought. Inflation management, against a backdrop of parched lands, farmer suicides and hoarding by middlemen was never going to be easy. But RR stuck to his task like a missionary, and delivered on inflation.
There are enough naysayers who scoff at this and say " oh, BS!! Look at the prices of tomatoes and pulses in my street-corner kirana store. What low inflation?". This missive is usually directed at Modi, not on RR!! So, you give the credits to RR, and make Modi the punchbag!! Great, keep it, naysayers! For, you were the ones who complained the same, when previous governments occasionally reported low inflation figures occasionally.
But what these naysayers do not realize is the importance of official inflation figures. If you are a student of macro-economics, you will realize that inflation is one of the key parameters that go into deciding the credit rating of a country. A stable rating is only possible with low inflation figures. And a good credit rating means that the government and companies can borrow at much better interest rates in the international financial markets, than otherwise. So, what RR has achieved is the maintaining of the platform of lower borrowing rates, inspite of the adverse economic situation. This will definitely help over the longer term, as long as his successor does not end up with a U-turn.
The other area that RR has achieved big is forcing the banks to declare their doubtful debts, and getting them to provide for non-performing assets (NPAs). For those of us novices, a Vijay Mallya borrowing from a consortium of banks without proper collateral ( during the previous regimes), and not returning the money borrowed, would lead to NPA in the balance sheets of these banks. Jaitley and RR have worked together to provide for a corpus for recapitalization of the PSBs ( more money may be needed for this in the next budget), and, along with provisions for NPAs that would ultimately clean up the balance sheets of these PSBs ( and some private bank like ICICI Bank, Axis Bank etc) have paved the way for better health of the banks, and the economy in future. Contrast this will the trillions of dollars of unrecoverable debts in the balance sheets of Chinese Banks, and the time bomb they are sitting on due to this, and you will appreciate the profound effect of this aspect of banking reform.
In addition, current account deficit is down to less than 1% and if it continues, perhaps for the first ever time in India's history, we may end up having a current account surplus.
So, is RR all goodness and with no misses? Let us see.
RR reformed banks' balance sheets alright. He ultimately reduced interest rates ( after much haggling between the govt and the RBI) , but RR has failed to pressurize the banks to pass on the benefits of lower Repo rates ( the rate at which banks can borrow form RBI), to the consumer - retail as well as institutional. Top marginal borrowing rates of Corporate has hardly moved. And if you, as individual have an EMI obligation for a home loan, you would have observed that inspite of the repo rates going down by as much as 1.5% over the last year, your home EMI rates have dropped only by 0.5% on an average. The banks have been pocketing the delta, and you are left wondering " where is the Acche Din?" ;)
Secondly, lending by banks has hardly gone up. Credit growth is one of the key drivers of economic growth in Keynesian Economics that all capitalist countries follow, and sadly, credit off-take has failed to take off. Yes, part of the reason is the excess capacity that was created in the previous cycle of economic boom, and needs time to get absorbed before more investments can follow, coupled with rapidly slowing global economy. But then RR's hawkish stance on inflation control has made sure that banks are now loathe to lend more. This has ensured that the economy is not growing as fast as it is really capable of.
Thirdly, in spite of RR's rockstar status, the FDI inflows, though growing, have not been as big as expected - at least not as yet. Maybe they will pick up as the global economy picks up. And this will be the joint responsibility of RBI's policies and the government's ability to provide an investor-friendly environment. Maybe those vested interests from abroad, who were rooting for his second innings, had been waiting for even more sops.
So, should RR have continued, or is this the right decision to let somebody else take over? I am basing my arguments purely on his performance s RBI governor, and am choosing to ignore all his unwarranted rantings of " intolerance", " India is a one-eyed wonder" etc... nor his alleged soft corner to P Chidambaram leading to a lot of bad blood on the Kathik Chidambaram saga. I will not venture into them, but will evaluate RR purely based the government's priorities and his performance thus far.
Let us take the big picture. Remember, Modi had come to power on the promise of Governance, creation of jobs, and laying the platform for a strong and sustainable economy that will ultimately make India a Global economic leader. It is amply evident that, notwithstanding his track record on Inflation and other achievements, RR's strategy of low inflation at the cost of muted economic growth, is clearly at loggerheads with the very mandate of the people on which Modi had rode to power - namely, a clear mandate for better economic growth and job creation. To me, it is clear that RR is not going to help this cause, even in his second term. Hence, the government is now forced move on, and try out someone else who can turn things around on the growth front. The message thus to RR clearly is - you did a great job, now time for India to move on.
Now, I am assuming that RR's "resignation" is with the explicit approval of the government. So far, I have not seen any response from Jaitley or any other government official, and things may yet pan out in favour of a return of RR. But I see very slim chances of that.
So then, will his successor make it any better for the Government's economic priorities? Only time will tell, but, to me, the time has come to make a move-on. To shift gears to a faster growth, even if inflation climbs back a bit. For, Modi surely would not want to be in a situation in 2 years' time before the next election, where he has to sheepishly defend a low growth rate, just because the RBI guv had ordained so. Modi's stakes, and the nation's stakes are higher than the rockstar cult that RR has managed to create.
So, what does this "REXIT" mean to you? If you are a stock trader or investor, then this week, will see dips due to the emotional factor. Use that to BUY BUY BUY - at least for short term gains. I am dead sure that beyond a few empty noises, nothing is going to change on the ground, and next week it may well back back to business. After all, the Indian Economy is not as fickle as it is being made out to be, as if it depends solely on the charisma of this rockstar Governmor of the RBI.
In the meanwhile, that million dollar question - should he, or should he not?
YOU DECIDE. :)
==========
Raghuram Rajan's exit as RBI Guv is creating more soundwaves than even Dadri or Kanhaiya!! All along, he has been hailed as a rockstar Governor. And his "resignation letter" to RBI employees has apparently signalled Armageddon. The media and a few learned men are calling the end of the Indian Economy, already! The Indian media is now breaking into a dirge, something not seen even when Sachin Tendulkar retired! And even (!) Western media houses like CNBC are carrying this as their weekend headline news. The market pundits are already seeing daggers being pulled out from the sheaths, in anticipation of a bloodbath in Dalal Street.
So, how much of this is truth? How much is hype? Is it as black-and-white as it appears to be? Let us look at a few aspects. And then YOU DECIDE.
First things first. RR took over the helm of RBI at a time when the Indian Economy was in doldrums. Everything that had to go wrong, had indeed gone wrong. Every economic parameter was out of range. Inflation, credit, current account deficit, moribund Public Sector Banks(PSB)- you name them all. Let us look at RR's performance in these three years on some of these key parameters.
Inflation: Undoubtedly, a feather in the cap of RR for taming the official inflation figures. Some pundits argue that during a good part of his tenure, global oil prices had crashed, and that made it very easy for them. Partly true. Global oil prices indeed helped. But then, dont forget the fact that India has gone through two consecutive years of drought. Inflation management, against a backdrop of parched lands, farmer suicides and hoarding by middlemen was never going to be easy. But RR stuck to his task like a missionary, and delivered on inflation.
There are enough naysayers who scoff at this and say " oh, BS!! Look at the prices of tomatoes and pulses in my street-corner kirana store. What low inflation?". This missive is usually directed at Modi, not on RR!! So, you give the credits to RR, and make Modi the punchbag!! Great, keep it, naysayers! For, you were the ones who complained the same, when previous governments occasionally reported low inflation figures occasionally.
But what these naysayers do not realize is the importance of official inflation figures. If you are a student of macro-economics, you will realize that inflation is one of the key parameters that go into deciding the credit rating of a country. A stable rating is only possible with low inflation figures. And a good credit rating means that the government and companies can borrow at much better interest rates in the international financial markets, than otherwise. So, what RR has achieved is the maintaining of the platform of lower borrowing rates, inspite of the adverse economic situation. This will definitely help over the longer term, as long as his successor does not end up with a U-turn.
The other area that RR has achieved big is forcing the banks to declare their doubtful debts, and getting them to provide for non-performing assets (NPAs). For those of us novices, a Vijay Mallya borrowing from a consortium of banks without proper collateral ( during the previous regimes), and not returning the money borrowed, would lead to NPA in the balance sheets of these banks. Jaitley and RR have worked together to provide for a corpus for recapitalization of the PSBs ( more money may be needed for this in the next budget), and, along with provisions for NPAs that would ultimately clean up the balance sheets of these PSBs ( and some private bank like ICICI Bank, Axis Bank etc) have paved the way for better health of the banks, and the economy in future. Contrast this will the trillions of dollars of unrecoverable debts in the balance sheets of Chinese Banks, and the time bomb they are sitting on due to this, and you will appreciate the profound effect of this aspect of banking reform.
In addition, current account deficit is down to less than 1% and if it continues, perhaps for the first ever time in India's history, we may end up having a current account surplus.
So, is RR all goodness and with no misses? Let us see.
RR reformed banks' balance sheets alright. He ultimately reduced interest rates ( after much haggling between the govt and the RBI) , but RR has failed to pressurize the banks to pass on the benefits of lower Repo rates ( the rate at which banks can borrow form RBI), to the consumer - retail as well as institutional. Top marginal borrowing rates of Corporate has hardly moved. And if you, as individual have an EMI obligation for a home loan, you would have observed that inspite of the repo rates going down by as much as 1.5% over the last year, your home EMI rates have dropped only by 0.5% on an average. The banks have been pocketing the delta, and you are left wondering " where is the Acche Din?" ;)
Secondly, lending by banks has hardly gone up. Credit growth is one of the key drivers of economic growth in Keynesian Economics that all capitalist countries follow, and sadly, credit off-take has failed to take off. Yes, part of the reason is the excess capacity that was created in the previous cycle of economic boom, and needs time to get absorbed before more investments can follow, coupled with rapidly slowing global economy. But then RR's hawkish stance on inflation control has made sure that banks are now loathe to lend more. This has ensured that the economy is not growing as fast as it is really capable of.
Thirdly, in spite of RR's rockstar status, the FDI inflows, though growing, have not been as big as expected - at least not as yet. Maybe they will pick up as the global economy picks up. And this will be the joint responsibility of RBI's policies and the government's ability to provide an investor-friendly environment. Maybe those vested interests from abroad, who were rooting for his second innings, had been waiting for even more sops.
So, should RR have continued, or is this the right decision to let somebody else take over? I am basing my arguments purely on his performance s RBI governor, and am choosing to ignore all his unwarranted rantings of " intolerance", " India is a one-eyed wonder" etc... nor his alleged soft corner to P Chidambaram leading to a lot of bad blood on the Kathik Chidambaram saga. I will not venture into them, but will evaluate RR purely based the government's priorities and his performance thus far.
Let us take the big picture. Remember, Modi had come to power on the promise of Governance, creation of jobs, and laying the platform for a strong and sustainable economy that will ultimately make India a Global economic leader. It is amply evident that, notwithstanding his track record on Inflation and other achievements, RR's strategy of low inflation at the cost of muted economic growth, is clearly at loggerheads with the very mandate of the people on which Modi had rode to power - namely, a clear mandate for better economic growth and job creation. To me, it is clear that RR is not going to help this cause, even in his second term. Hence, the government is now forced move on, and try out someone else who can turn things around on the growth front. The message thus to RR clearly is - you did a great job, now time for India to move on.
Now, I am assuming that RR's "resignation" is with the explicit approval of the government. So far, I have not seen any response from Jaitley or any other government official, and things may yet pan out in favour of a return of RR. But I see very slim chances of that.
So then, will his successor make it any better for the Government's economic priorities? Only time will tell, but, to me, the time has come to make a move-on. To shift gears to a faster growth, even if inflation climbs back a bit. For, Modi surely would not want to be in a situation in 2 years' time before the next election, where he has to sheepishly defend a low growth rate, just because the RBI guv had ordained so. Modi's stakes, and the nation's stakes are higher than the rockstar cult that RR has managed to create.
So, what does this "REXIT" mean to you? If you are a stock trader or investor, then this week, will see dips due to the emotional factor. Use that to BUY BUY BUY - at least for short term gains. I am dead sure that beyond a few empty noises, nothing is going to change on the ground, and next week it may well back back to business. After all, the Indian Economy is not as fickle as it is being made out to be, as if it depends solely on the charisma of this rockstar Governmor of the RBI.
In the meanwhile, that million dollar question - should he, or should he not?
YOU DECIDE. :)
