The hoopla about our RBI Governor's non-extension of his term!!!

Most of us are aware of the disappointment expressed by the Media and certain sections of the Society (especially those who do not understand the economics at play or the functioning of the RBI) about Dr, Raghuram Rajan's so called premature departure from the post of the RBI Governor.

I would like to set 2 facts straight here! First, Dr. Rajan is not leaving prematurely as it has been wrongly publicised. He simply chose not to apply for another term/extension of his present term and Second, he decided to go back to teaching in Chicago!!! But many uninformed/poorly informed folks believe that the there was some uneasy relationship between the Finance Ministry and the RBI governor but as is the case in this universe, we, the common people, will never know the actual truth L.  Hmmm!! So, I keep wondering what was the Government's role in all this??

In fact, if this Govt was as vindictive as it is being portrayed, it would have removed Raghuram Rajan from the post as soon as it came to power since he was appointed by the previous Corrupt Congress government!! But they did not meddle with RBI or Rajan nor its functioning. All this Govt did was not placate Raghuram to stay back for another term. And why should it?? If this great RBI Governor was truly patriotic as he claims to be (or is claimed to be), then he would have clearly stayed back for another term before shooting off a letter of homecoming to Chicago L.

Let us assume for argument sake that the relationship between the Govt and RBI was a bit uneasy (which has always been the case since the 1970s barring the 5 years when the Narasimha Rao Govt was in power from 1991-96)! Even with this uneasy kind of relationship there has never been an instance (since the end of the Indira Gandhi regime) that any Govt was able to meddle with the internal functioning of the RBI simply because it is a very strong independent body just like how the office of the CAG has been functioning in our country since the end of the emergency rule!!!

So even in cases of serious disagreements between the Govt and the RBI, the RBI has always come out on top. A case in point was when Dr. Subba Rao (the previous RBI governor) took on the UPA govt on poor and corrupt lending practices being followed by that govt. But the govt could not touch him with a barge-pole!! And Dr. Subba Rao succeeded in not only completing the terms given to him but he went on to become one of India's best RBI Governors especially for the way he handled the 2008 world financial crisis!!!  And while Dr. Subba Rao never budged on the steps he took! He made sure that he gave enough impetus to growth without infringing on the inflation target. This is precisely what is expected from a balanced RBI governor!!

The worst injury that any Govermnent could inflict on this Great Institution of RBI was when it chose not to re-elect 3 deputy governors of the highest repute i.e. Smt. Shyamala Gopinath, Smt. Usha Torat & Dr. Subir Gokran!!! All these three wonderful and competent deputies were recommended for their second term by Dr. Subba Rao to be part of his team but he was sidestepped and snubbed by the Corrupt Chidambaram since Dr. Subba Rao was not obliging the then most incompetent and corrupt Congress led Government during his tenure.

The above incidents compare nothing to what the present Govt has done. The only discord that lies between the present Govt and RBI is that they don’t seem to agree on how much and fast the interest rates should go down so that the manufacturing activity could pick up fast!!  That’s about it!!! All this negative rumours being circulated by vested interests in the Media have absolutely no iota of truth!!!

While there is no doubt that Dr. Rajan is/was an impressive Governor, it does not mean that he is above the country or the institution.  In a nutshell, Dr. Raghuram Rajan was one of the many good governors that the RBI had but is/was surely not the best that we have had !!!

In fact, Dr. Rajan being a pure “Academician” was actually constrained from taking pragmatic vis-a-vis monetary policies. For instance, his obsession with a weak INR and inflation led him to frame monetary policies that were resulting in economic growth being sacrificed. And as a economic student, I have always learnt (and been learning) that a prudent monetary policy is one that guides both inflation and growth equally.

Granted that its never an easy ask/task to balance both Inflation and Growth but this is something that needs to be done/balanced for the good of the country and was successfully achieved by many a wonderful governor before such as the likes of Bimal Jalan, Manmohan Singh, YV Reddy and Dr. Subba Rao. And I need to add here that “None” of these stalwarts were academicians. They were all either bureaucrats or technocrats!!!

Unfortunately, Dr. Rajan could not achieve this balancing act. While he was definitely successful in reducing inflation (which is no mean task in itself and also helped in starting the long awaited clean-up process of our failed public sector banking system in conjunction with the govt), he failed to kick start the growth engine of our economy which our country so badly needs. Low employment is what has been plaguing our economy for a decade or so and by not supporting growth oriented policy, Dr. Rajan failed in ensuring adequate pick up in manufacturing activity that would have generated lakhs of jobs for our youth who are on the cusp of entering the employment arena. 

One more drawback with Dr. Rajan's policies was his bias towards a weak INR and that surely does not help India in achieving its Current Account Deficit. Being a good economist himself, it was shocking to see him publicly favour a weaker INR knowing fully well that India is a 80% domestic driven economy which imports 2-3 times more than what it exports. This policy of his is what has made the Indian Rupee very un-competitive in the world currency markets. This is been one of his biggest failures since he took over as the RBI Governor.

Unfortunately, most of our media as well as some of our educated class (who are not familiar with economics or the functioning/history of the great institution of RBI) just formed an opinion/judgement on Dr. Rajan based on how he looked/spoke or conducted himself in public rather than appreciate his work or what exactly he achieved as our Governor. A simple case in Point. When Raghuram took over as the Governor of RBI, the INR was quoting at Rs 68/1 US $ and as he is leaving office, it is pretty much where it was then ie hovering around 67-67.5/1 US $. I rest my case here as it does not take a genius to figure how where our country lost out :-(

It is sad to see our people still under the grips of slavery especially when it comes to how they tend to look at or treat overseas folks including our own NRIs. The bias towards good looks and accent speaking personalities is not a yardstick for achieving high quality/all round economic growth :-(  Wonder when we as people of this proud country will be able to get rid of this serious aliment???

What people forget is that Raghuram, who now teaches in Chicago, was a product of our own great IIM (A)!! So, it is this country that has made him what he is and let not anyone forget this fact. Also, if he was as patriotic as he is being portrayed, he would be teaching in one of our own Universities where we could use people of his caliber rather than him running away to teaching in the US and using the cliched rhetoric that he will always be there for the country whenever she needs him. If he truly believed he is always there for the country, then he would have taken up some assignment in India rather than fly back hurriedly from where ever he came from :-(

In conclusion, the greatest strength of our RBI has been its independence from Govt and the quality of great Governors that have occupied its top post for decades. Seeing the list of potential candidates (Arvind Subramanian, Urjit Patel, Subir Gokran, et al) that are likely to take over the Governor's post next, gives me great hope for our country as each of these candidates are phenomenal achievers in their own right. Cannot wait to see the next leader in the RBI saddle soon who will take our Great Nation's economic and monetary policies to even greater heights!!!!

Jai Hind!!!!!

The US Federal Reserve’s Conundrum

The United States Federal Reserve seems to be caught between the Rock and a Hard place!!! Before the start of Calendar Year 2016, the Fed was on course to raising rates at least 3-4 times by December 2016 and they started their intent with a small raise of 25 basis points i.e 0.25%.  The next increase was supposed to have happened in this month of March 2016 but they developed cold feet due to extraneous developments outside of their realm.  And now Federal Reserve Governer Janet Yellen comes out in public and calls for prudence and caution in raising rates.  Which means, the Fed may raise rates just once instead of the normally envisaged 3-4 times before this year ends L

Now what has changed drastically in the past 2 months is anybody’s guess because the world is pretty much in status quo mode as far as economic recovery and inflation goes.  If anything a few positive developments have happened across the globe i.e 1) The oil prices which had collapsed to a record low of US $ 26/barrel 2-3 months back have since recovered to a more realistic $ 40/barrel, 2) The worst in China seems to be over now and most of Asia (barring Japan) are showing roboust growth and moderate inflation.  Now these are surely not negative developments and that’s why I am unable to fathom Janet Yellen’s reaction L

And to add insult to injury, the equity and currency markets are having the last laugh at the Federal Reserve’s postponement of increasing rates, for they tend to gain the most as long as the interest rates remain either at 0%-0.25% so that they can continue to have cheap access to money for their horrendous vagaries L specifically for speculation in stocks, currencies, commodities, et al thereby creating utter chaos & mayhem in the global markets. 

In the past 25 years of my understanding of the Central Banks across the world, I have never come across such pressure being exerted by various segments of the financial markets on the US federal reserve.  This is truly very sad and disturbing L L.  The reason the markets are exerting so much pressure is due to the fact that for the past 12 years, they have got used to almost 0% rates of borrowing and hence they are now running scared that once the borrowing costs increase, they would not be able to speculate and make hot money in the markets that they have so gotten used to for the past decade or so.

While the Fed needs to be a bit cautious given the fragile nature of the World economy, its primary focus should be on what’s happening in the US. For the past 18 months, the US economy has been quite steady and growing at a reasonable pace as compared to its peers. The unemployment rate too has been quite low for the past 4-5 years though the quality of the employment seems to be now in question J. 

I have been a Economics student all my life and I have never seen people question the quality of the employment as much as they have started doing so in the recent past (4-5 yrs) just to make sure that they put enough pressure on the Fed not to increase interest rates. Talk about a cunning strategy J. 

The main focus of any Central Bank in the world is to focus on Inflation which hurts the common person followed by Growth, etc.  As long as Inflation is under control, the Federal Reserve will be under no pressure to increase rates but once the inflation starts moving up, that’s when it needs to act by increasing the rates.  But sadly instead of focusing on its main issues, the Federal reserve seems to be succumbing to factors that are not in its control eg China Crisis, Oil Crisis, Brexit (Possible exit of Britain from the European Union), et al. 

Probably the Fed can take a leaf out of its Indian Counterpart i.e. RBI which has been steadfast in its goal of focusing on inflation first and then the GDP growth and has been doing a fantastic job since it was founded.  It is this kind of matured functioning of the RBI is what has saved India from the Asian Currency Crisis in 1997 and the latest global turmoil that has been engulfing the entire world since the Lehman Brothers collapse in 2008. 

It is high time that the Federal Reserve starts acting in the best interests of its people rather than listen to vested interests in the market place and create a situation which would not only endanger the US economy but also the world economy at large but might even create chaos across the global markets!!  A steadfast & strong Federal Reserve is what the US and the world needs now!!

Cheers

Sriram