Indian Economy News & Discussion - Aug 26 2015

TSJones · Post by **TSJones** » 20 Jun 2016 23:50

I didn't know that he was also in charge of things other than monetary policy.......

Ananth · Post by **Ananth** » 21 Jun 2016 01:34

I feel Dr. Rajiv Kumar's opinion captures the feeling on Dr. Rajan's exit. By giving opinions on political topics Rajan exposed himself to political response. Unfortunately he is not a politician.

http://indianexpress.com/article/opinio ... i-2865294/

That said, here is an interesting opposite perspective on good things Rajan was doing regarding NPAs and why he was able to do it.
https://promarket.org/raghuram-rajan-stanley-fischer/

NRao · Post by **NRao** » 21 Jun 2016 01:57

Would that include the likes of Walmart?

vina · Post by **vina** » 21 Jun 2016 05:52

Rajan resigned on his own terms 3 months ahead of the end of his term. What more dignity does he need or deserve ? None. All other RBI heads whose term ended, ended more or less the same way.

I cant in living memory think of any RBI Guv who was accused of being not 100% Indian (whatever that means, I dont think that mean), and slandered for supposedly writing letters on pending investigations to accused, basically politics of throwing muck and hoping something sticks.

And look at the people who did it. First was YASHWANT Sinha, who questioned Rajan's citizenship status ,when he came out and said that he was a green card holder and an Indian citizen! . Now Yashwant Sinha's son, Jayant Sinha is a minister in the Govt, and he and his wife Puneeta Sinha are green card holders, and i am sure their children are natural born americans. So, sauce for the goose must be sauce for gander as well no ? If Raghuram Rajan wasnt "wholly" Indian, what about Jayant Sinha and his wife?

And how long will it take for someone to come up with ridiculous insinuations linking Jayant's position and office and his wife's professional life . How about on the lines of "Jayant made these changes in law to benefit his wife's former firm which has huge investments in India, including in real estate " . The guy throwing muck need to think on how it can boomerang on them. I wish Rajan had answered given it back to Yashwant Sinha on the lines of " My citizenship status is exactly the same as your son the Honbl'e MoS of Finance" . That would have left him gob smacked, but no Rajan is too polished to indulge in mud wrestling.

When Rajan accepts a political appointment, he better get used to the idea that he'll get political responses to his actions. If thats too hard for him (or for you) to countenance, then he should stay in academia.

The RBI Guv is NOT a political post, nor it is a political appointment. Though in law, the RBI is not fully independent like in other democracies, as an insitutition, it MUST be largely independent and it is. The Finance Minister, CAN order in writing the RBI to cut rates . So, why didnt the Goverment do it ? All it required was a letter, the rates would have cut and Rajan would have immediatley put in his papers after that . The Govt doesnt have the gonads to act on it , the market reaction would have been rightfully vicious, but thinks that by appoiniting a pliant "chamcha", it will carry any credibility, good luck!

Kakkaji · Post by **Kakkaji** » 21 Jun 2016 05:57

Modi, Jaitley to decide Rajan's successor

The successor to Reserve Bank of India (RBI) Governor Raghuram Rajan would be chosen by Prime Minister Narendra Modi and Finance Minister Arun Jaitley and not by a search panel headed by the Cabinet secretary, government sources said on Monday.

They also said the announcement of the next RBI governor would be made well in advance to avoid market speculation. They added the selection process was on.

Sources said the names in contention include former RBI Deputy Governors Rakesh Mohan and Subir Gokarn, RBI Deputy Governor Urjit Patel, Economic Affairs Secretary Shaktikanta Das and Chief Economic Advisor Arvind Subramanian.

Sources also said State Bank of India Chairperson Arundhati Bhattacharya, Banks Board Bureau chief Vinod Rai, and NITI Aayog Vice-Chairman Arvind Panagariya were not in the running. They said a bureaucrat would be the last option for the government and appointing a former Comptroller and Auditor General would lead to constitutional issues.

A source said while Swamy's attacks were ignored, the government sought views from a number of stakeholders, before offering Rajan another term, but he was not able to commit himself for three more years.

"This is a responsible government and decisions are taken keeping the national interest in mind. All the outside noise is not even considered," said a source, referring to Swamy's attacks. "There were discussions and it was a personal decision by Rajan," the source added.

The last two paragraphs above should answer those who are whining that Rajan was hounded out.

Manish_Sharma · Post by **Manish_Sharma** » 21 Jun 2016 06:16

+1 Kakkaji !

^ Also this news:

Rajan praises Modi govt for adopting CPI-based inflation targeting, MPC

Two days after announcing decision to leave RBI after completing term in September, its governor Raghuram Rajan heaped praise on the Modi government for setting a Consumer Price Index-based inflation objective and setting up an independent monetary policy committee (MPC).

A new monetary policy framework will help attract reliable foreign capital in long-term maturity buckets. It will also expand the pool of capital available for our banks and corporations.

“The government will be able to borrow at low rates, and will be able to extend the maturity of its debt”, Rajan said in his the Foundation Day Lecture at the Tata Institute of Fundamental Research here.

Rajan in his speech, The fight against inflation: a measure of our institutional development, said RBI intends to ensure these frameworks and institutions work as they should in producing a low inflation future for India.

Rajan in letter addressed to RBI staff on Saturday had said he would go back to academia after finishing three year term as Governor in September 2016.

While initially open to continue with RBI to complete “unfinished agenda”, governor after consulting the government opted to move back to academic life.

Citing the rewards of adopting the new monetary policy framework, the Governor said, “Our currency has been stable as investors have gained confidence in our monetary policy goals, and this stability will only improve as we meet our inflation goals.

The poor will not suffer disproportionately due to bouts of sharp inflation, and the middle class will not see its savings eroded. All this awaits us as we stay the course.”

India experienced average of more than nine percent inflation experienced between 2006 and 2013. “We had gotten used to decades of moderate to high inflation, with industrialists and governments paying negative real interest rates and the burden of the hidden inflation tax falling on the middle class saver and the poor”, he said.

“As we move towards embedding institutions that result in sustained low inflation and positive real interest rates, this requires all constituencies to make adjustments.”

An inflation-focused framework means better coordination between the government and the central bank as they go towards the common goal of macro stability.

Further, a central bank serves the economy and the cause of growth best by keeping inflation low and stable around the target it is given by the government.

Read below full text of Raghuram Rajan's speech at TIFR, Mumbai

I thank the Tata Institute of Fundamental Research for inviting me to give this Foundation Day lecture. I have always seen TIFR with awe from afar. Some explanation is in order. My roommate in my first year at MIT was Dr. Renganathan Iyer, who is one of the smartest mathematicians I know – he used to help me understand my tutorials in real analysis. And he never missed an occasion to tell me how much smarter everyone else at TIFR was. Perhaps Renga was being modest, but I half expected on coming here today to see everyone with gigantic heads housing enormous brains. It is a relief to find that, outwardly, you all look normal. Seriously, however, I think the continuing success of TIFR suggests to us that when India wants to set up world class institutions, it can. While the Institute was fortunate to have a visionary like Dr. Homi Bhabha as its founding director, the institution has been built by the collective efforts of dedicated researchers like you all. Congratulations on a job well done!

In my speech today, I thought I would describe our efforts to build a different kind of institution, not one that delves into the deepest realms of outer space or into the tiniest constituents of an atom, but one that attempts to control something that affects your daily life; inflation. There are parallels between the institution building you have done, and what we are setting up to control inflation, though clearly our efforts are much less tied to investigating the very fabric of the universe and more towards influencing human behavior. Ultimately, both require a fundamental change in mindset.

The Costs of Inflation

High inflation has been with us in India for the last four decades. Most recently, we have experienced an average of more than 9 percent inflation between 2006 and 2013.

What are the costs of having high inflation? Clearly, everyone understands the costs of hyper-inflation, when prices are rising every minute. Money is then a hot potato that no one wants to hold, with people rushing straight from the bank to the shops to buy goods in case their money loses value along the way. As people lose faith in money, barter of goods for goods or services becomes the norm, making transacting significantly more difficult; How much of a physics lecture would you have to pay a taxi driver to drive you to Bandra; moreover would the taxi driver accept a physics lecture in payment; perhaps you would have to lecture a student, and get the student to sing to the taxi driver…you get the point, transacting becomes difficult as hyperinflation renders money worthless.

Hyperinflation also has redistributive effects, destroying the middle class’ savings held in bonds and deposits. The horrors of hyperinflation in Austria and Germany in the 1920s still make scary reading.

So clearly, no one wants hyperinflation. But what if inflation were only 15 percent per year? Haven’t countries grown fast over a period of time despite high inflation? The answer is yes, but perhaps they could have grown faster with low inflation.2 After all, the variability of inflation increases with its level, as does the dispersion of prices from their fundamental value in the economy. This makes price signals more confusing – is the price of my widget going up because of high demand or because of high generalized inflation? In the former case, I can sell more if I produce more, in the latter case I will be left with unsold inventory. Production and investment therefore become more risky.

Moreover, high and variable inflation causes lenders to demand a higher fixed interest rate to compensate for the risk that inflation will move around (the so-called inflation risk premium), thus raising the cost of finance. The long term nominal (and real) interest rates savers require rises, thus making some long-duration projects prohibitively costly.

These effects kick in only when inflation is noticeably high. So it is legitimate to ask, “At what threshold level of inflation does it start hurting growth?” Unfortunately, this question is hard to answer – developing countries typically have higher inflation, and developing countries also have higher growth. So one might well find a positive correlation between inflation and growth, though this does not mean more inflation causes more growth. For this reason, the literature on estimating threshold effects beyond which inflation hurts growth is both vast as well as inconclusive. Most studies find that double digit inflation is harmful for growth but are fuzzier about where in the single digits the precise threshold lies.3

The Inflation Target

Nevertheless, given the limited evidence, why do most countries set their inflation goal in the low single digits – 2 to 5 percent rather than 7 to 10 percent? Three reasons come to mind. First, even if inflation is at a moderate level that does not hurt overall growth, the consequences of inflation are not evenly distributed. While higher inflation might help a rich, highly indebted, industrialist because his debt comes down relative to sales revenues, it hurts the poor daily wage worker, whose wage is not indexed to inflation.4 Second, higher inflation is more variable. This raises the chance of breaching any given range around the target if it is set at a higher level. To the extent that a higher target is closer to the threshold, this makes it more likely the country will exceed the threshold and experience lower growth. Third, inflation could feed on itself at higher levels – the higher the target, the more chances of entering regions where inflation spirals upwards.

The received wisdom in monetary economics today is therefore that a central bank serves the economy and the cause of growth best by keeping inflation low and stable around the target it is given by the government. This contrasts with the earlier prevailing view in economics that by pumping up demand through dramatic interest rate cuts, the central bank could generate sustained growth, albeit with some inflation. That view proved hopelessly optimistic about the powers of the central bank.

There is indeed a short run trade-off between inflation and growth. In layman’s terms, if the central bank cuts the interest rate by 100 basis points today, and banks pass it on, then demand will pick up and we could get stronger growth for a while, especially if economic players are surprised. The stock market may shoot up for a few days. But you can fool all of the people only some of the time. If the economy is producing at potential, we would quickly see shortages and a sharp rise in inflation. People will also start expecting the central bank to disregard inflation (that is, be hopelessly dovish according to the bird analogies that abound) and embed high inflationary expectations into their decisions, including their demand for higher wages. If contrary to expectations, the central bank is committed to keeping inflation under control, it may then be forced to raise interest rates substantially to offset that temporary growth. The boom and bust will not be good for the economy, and average growth may be lower than if the cut had not taken place. This is why modern economics also says there is no long run trade-off between growth and inflation – the best way for a central bank to ensure sustainable growth is to keep demand close to potential supply so that inflation remains moderate, and the other factors that drive growth, such as good governance, can take center stage.5

Put differently, when people say “Inflation is low, you can now turn to stimulating growth”, they really do not understand that these are two sides of the same coin. The RBI always sets the policy rate as low as it can, consistent with meeting its inflation objective. Indeed, the fact that inflation is fairly close to the upper bound of our target zone today suggests we have not been overly hawkish, and were wise to disregard advice in the past to cut more deeply. If a critic believes interest rates are excessively high, he either has to argue the government-set inflation target should be higher than it is today, or that the RBI is excessively pessimistic about the path of future inflation. He cannot have it both ways, want lower inflation as well as lower policy rates.

At the same time, the RBI does not focus on inflation to the exclusion of growth. If inflation rises sharply, for instance, because of a sharp rise in the price of oil, it would not be sensible for a central bank to bring inflation within its target band immediately by raising interest rates so high as to kill all economic activity. Instead, it makes sense to bring inflation back under control over the medium term, that is, the next two years or so, by raising rates steadily to the point where the bank thinks it would be enough to bring inflation back within the target range. Let me emphasize that this is not a prediction of either the path of oil prices or a forecast of our monetary actions, lest I read in the paper tomorrow “RBI to raise rates”. More generally, the extended glide path over which we are bringing inflation in check appropriately balances inflation and the need for reasonable growth.

Arguments against what we are doing

There are many who believe we are totally misguided in our actions. Let me focus on four criticisms. First, we focus on the wrong index of inflation. Second, we have killed private investment by keeping rates too high. Somewhat contradictorily, we are also hurting the pensioner by cutting rates too sharply. Third, monetary policy has no effects on inflation when the economy is supply constrained, so we should abandon our attempt to control it. Fourth, the central bank has little control over inflation when government spending dominates (what in the jargon is called “fiscal dominance”).

The Wrong Index

Historically, the RBI targeted a variety of indicators, putting a lot of weight on the Wholesale Price Inflation (WPI). Theoretically, reliance on WPI has two problems. First, what the common citizen experiences is retail inflation, that is, Consumer Price Inflation (CPI). Since monetary policy “works” by containing the public’s inflation expectations and thus wage demands, Consumer Price Inflation is what matters. Second, WPI contains a lot of traded manufactured goods and commodity inputs in the basket, whose price is determined internationally. A low WPI could result from low international inflation, while domestic components of inflation such as education and healthcare services as well as retail margins and non-traded food are inflating merrily to push up CPI. By focusing on WPI, we could be deluded into thinking we control inflation, even though it stems largely from actions of central banks elsewhere. In doing so we neglect CPI which is what matters to our common man, and is more the consequence of domestic monetary policy.

The Effective Real Interest Rate, Investments, and Savings

Of course, one reason critics may advocate a focus on WPI is because it is low today, and thus would mean low policy rates. This is short-sighted reasoning for when commodity prices and global inflation picks up, WPI could well exceed CPI. There is, however, a more subtle argument; the real interest rate is the difference between the interest rate a borrower pays and inflation – it is the true cost of borrowing in terms of goods like widgets or dosas. If policy interest rates are set to control CPI, they may be too high for manufacturers who see their product prices appreciating only at the WPI rate. I am sympathetic to the argument, but I also think the concern is overblown. Even if manufacturers do not have much pricing power because of global competition, their commodity suppliers have even less. So a metal producer benefits from the fall in coal and ore prices, even though they may not get as high a realization on metal sales as in the past. The true measure of inflation for them is the inflation in their profits, which is likely significantly greater than suggested by WPI.

A second error that is made is to attribute all components of the interest rate paid by the borrower to monetary policy. For heavily indebted borrowers, however, a large component of the interest rate they pay is the credit risk premium banks charge for the risk they may not get repaid. This credit risk premium is largely independent of where the RBI sets its policy rate.

So when someone berates us because heavily indebted industrialists borrow at 14% interest with WPI at 0.5%, they make two important errors in saying the real interest rate is 13.5%. First, 7.5% is the credit spread, and would not be significantly lower if we cut the policy rate (at 6.5% today) by another 100 basis points. Second, the inflation that matters to the industrialist is not the 0.5% at which their output prices are inflating, but the 4% at which their profits are inflating (because costs are falling at 5% annually). The real risk free interest rate they experience is 2.5%, a little higher than elsewhere in the world, but not the most significant factor standing in the way of investment. Far more useful in lowering borrowing rates is to improve lending institutions and borrower behavior to bring down the credit risk premium, than to try and push the RBI to lower rates unduly.

The policy rate in effect plays a balancing act. As important as real borrowing rates for the manufacturer are real deposit rates for the saver. In the last decade, savers have experienced negative real rates over extended periods as CPI has exceeded deposit interest rates. This means that whatever interest they get has been more than wiped out by the erosion in their principal’s purchasing power due to inflation. Savers intuitively understand this, and had been shifting to investing in real assets like gold and real estate, and away from financial assets like deposits. This meant that India needed to borrow from abroad to fund investment, which led to a growing unsustainable current account deficit.

In recent years, our fight against inflation also meant the policy rate came down only when we thought depositors could expect a reasonable positive real return on their financial savings. This has helped increase household financial savings relative to their savings in real assets, and helped bring down the current account deficit. At the same time, I do get a lot of heart-rending letters from pensioners complaining about the cut in deposit rates. The truth is they are better off now than in the past, as I tried to explain in a previous lecture, but I can understand why they are upset when they see their interest income diminishing.

The bottom line is that in controlling inflation, monetary policy makers effectively end up balancing the interests of both investors and savers over the business cycle. At one of my talks, an industrialist clamored for a 4% rate on his borrowing. When I asked him if he would deposit at that rate in a safe bank, leave alone invest in one of his risky friends, he said “No!” Nevertheless, he insisted on our cutting rates significantly. Unfortunately, policy makers do not have the luxury of inconsistency.

Supply Constraints

Food inflation has contributed significantly to CPI inflation, but so has inflation in services like education and healthcare. Some argue, rightly, that it is hard for RBI to directly control food demand through monetary policy. Then they proceed, incorrectly, to say we should not bother about controlling CPI inflation. The reality is that while it is hard for us to control food demand, especially of essential foods, and only the government can influence food supply through effective management, we can control demand for other, more discretionary, items in the consumption basket through tighter monetary policy. To prevent sustained food inflation from becoming generalized inflation through higher wage increases, we have to reduce inflation in other items. Indeed, overall headline inflation may have stayed below 6 percent recently even in periods of high food inflation, precisely because other components of the CPI basket such as “clothing and footwear” are inflating more slowly.

Fiscal Dominance

Finally, one reason the RBI was historically reluctant to lock itself into an inflation-focused framework is because it feared government over-spending would make its task impossible. The possibility of fiscal dominance, however, only means that given the inflation objective set by the government, both the government and the RBI have a role to play. If the government overspends, the central bank has to compensate with tighter policy to achieve the inflation objective. So long as this is commonly understood, an inflation-focused framework means better coordination between the government and the central bank as they go towards the common goal of macro stability. I certainly believe that the responsible recent budget did create room for the RBI to ease in April.

Pragmatic Inflation Focus

As you will understand from all that I have been saying, monetary policy under an inflation focused framework tries to balance various interests as we bring inflation under control. In doing so, we have to have a pragmatic rather than doctrinaire mindset. For example, emerging markets can experience significant capital inflows that can affect exchange rate volatility as well as financial stability. A doctrinaire mindset would adopt a hands-off approach, while the pragmatic mindset would permit intervention to reduce volatility and instability. Nevertheless, the pragmatic mind would also recognize that the best way to obtain exchange rate stability is to bring inflation down to a level commensurate with global inflation.

Similarly, while financial stability considerations are not explicitly in the RBI’s objectives, they make their way in because the RBI has to keep growth in mind while controlling inflation. So if the RBI’s monetary policies are contributing to a credit or asset price bubble that could lead to a systemic meltdown and growth collapse, the RBI will have to resort to corrective monetary policy if macro-prudential policy alternatives are likely to prove ineffective.

The Transition to Low Inflation

The period when a high inflation economy moves to low inflation is never an easy one. After years of high inflation, the public’s expectations of inflation have been slow to adjust downwards. As a result, they have been less willing to adjust their interest expectations downwards. Household financial savings are increasing rapidly as a fraction of overall household savings, but not yet significantly as a fraction of GDP.6 Some frictions in the interest rate setting market do not also help. Even while policy rates are down, the rates paid by the government on small savings are significantly higher than bank deposit rates, as are the effective rates on tax free bonds. I am glad the government has decided to link the rates on small savings to government bond rates, but these rates will continuously have to be examined to ensure they do not form a high floor below which banks cannot cut deposit rates. All in all, bank lending rates have moved down, but not commensurate with policy rate cuts.

The wrong thing to do at such times is to change course. As soon as economic policy becomes painful, clever economists always suggest new unorthodox painless pathways. This is not a problem specific to emerging markets, but becomes especially acute since every emerging market thinks it is unique, and the laws of economics operate differently here. In India, at least we have been consistent. Flipping through a book of cartoons by that great economist, RK Laxman, I found one that indicated the solution for every ill in 1997 when the cartoon was published, as now, is for the RBI to cut interest rates by a hundred basis points. Arguments change, but clever solutions do not.

Decades of studying macroeconomic policy tells me to be very wary of economists who say you can have it all if only you try something out of the box. Argentina, Brazil, and Venezuela tried unorthodox policies with depressingly orthodox consequences. Rather than experiment with macro-policy, which brings macro risks that our unprotected poor can ill afford, better to be unorthodox on microeconomic policy such as those that define the business and banking environment. Not only do we have less chance of doing damage if we go wrong, but innovative policy may open new paths around old bottlenecks. Specifically, on its part the RBI has been adopting more liberal attitudes towards bank licensing, towards financial inclusion, and towards payment technologies and institutions in order to foster growth.

Institution Building

Let me return to institution building. We had gotten used to decades of moderate to high inflation, with industrialists and governments paying negative real interest rates and the burden of the hidden inflation tax falling on the middle class saver and the poor. What is happening today is truly revolutionary – we are abandoning the ways of the past that benefited the few at the expense of the many. As we move towards embedding institutions that result in sustained low inflation and positive real interest rates, this requires all constituencies to make adjustments. For example, if industrialists want significantly lower rates, they have to support efforts to improve loan recovery so that banks and bond markets feel comfortable with low credit spreads. The central and state governments have to continue on the path of fiscal consolidation so that they borrow less and thus spend less on interest payments. Households will have to adjust to lower nominal rates, but must recognize that higher real rates make their savings more productive. They will find it worthwhile to save more to finance the enormous investment needs of the country.

Adjustment is difficult and painful in the short run. We must not get diverted as we build the institutions necessary to secure a low inflation future, especially because we seem to be making headway. The Government has taken the momentous step of both setting a CPI based inflation objective for the RBI as well as a framework for setting up an independent monetary policy committee. In the days ahead, a new governor, as well as the members of the committee will be picked. I am sure they will internalize the frameworks and institutions that have been set up, and should produce a low inflation future for India.

The rewards will be many. Our currency has been stable as investors have gained confidence in our monetary policy goals, and this stability will only improve as we meet our inflation goals. Foreign capital inflows will be more reliable and increase in the longer maturity buckets, including in rupee investments. This will expand the pool of capital available for our banks and corporations. The government will be able to borrow at low rates, and will be able to extend the maturity of its debt. The poor will not suffer disproportionately due to bouts of sharp inflation, and the middle class will not see its savings eroded. All this awaits us as we stay the course. Thank you very much for your patience in listening to me.

http://bit.ly/28MTYwH

Gus · Post by **Gus** » 21 Jun 2016 06:29

Isn't controlling inflation by increasing production of goods, better? So that means reducing rates to fuel economic activity? And Rajan was not doing this fast enough in fear that this will not increase manufacturing activity but only drives up prices?

Yagnasri · Post by **Yagnasri** » 21 Jun 2016 06:36

There is clearly a disconnect from the some of the major requirements of the nation and R3 ideas. Jobs, infrastructure, Local manufacturing, exports are all needed to grow, and some inflation is to be risked by RBI for this. NPA mess could have been better handled and going to MSM and making stupid statements is also not warranted.

In short R3 seems to live in his world and India lives in its world most of the time.

Hari Seldon · Post by **Hari Seldon** » 21 Jun 2016 07:14

TSJones wrote:I didn't know that he was also in charge of things other than monetary policy.......

Yup, RBi is both the de facto and the de jure banking regulator in India. And much of the mess in the banking sector happened before the present govt came in. Bur Rajan was around, an appointee of the prev govt, you see ...

ldev · Post by **ldev** » 21 Jun 2016 08:21

Hari Seldon wrote:
TSJones wrote:I didn't know that he was also in charge of things other than monetary policy.......
Yup, RBi is both the de facto and the de jure banking regulator in India. And much of the mess in the banking sector happened before the present govt came in. Bur Rajan was around, an appointee of the prev govt, you see ...

Yes Rajan was around for precisely the last 8 months of the 10 years that the previous Government was in power, hardly enough time for him to create any mess if that is what is being suggested here. As for the previous Government, that is another story.

Additionally in an economy with an inflation rate of ~5.00-5.5%, can an RBI repo rate of 6.75%, an SBI base rate of ~9%, a max deposit rate of ~7.5% be considered high in real terms? I think not. At least India is living in the sane world, unlike the ZIRP and negative interest rate environment of the US and Japan which has destroyed savers and retirees. And what good have those policies done in terms of igniting real growth in those economies?

Virupaksha · Post by **Virupaksha** » 21 Jun 2016 09:23

Why are we still discussing about this nonsense?? This whole discussion should be deleted from this thread by the mods.

A MMS pasand guy was airlifted from US as a political babu in 2012 and then appointed to a high profile position. His regime had no new policies nor innovative solutions. He couldnt keep his trap shut poking his nose into where it doesnt belong. He was allowed to fulfil his full term by the next govt. End of story.

vina · Post by **vina** » 21 Jun 2016 09:24

Hmm. Lets look at the names of guys doing the rounds as Rajan's replacement.

1. Credible names.. - Arvind Subramanian, Urjit Patel, Rakesh Mohan, Subir Gokarna and Parthasarathy Shome.

Parth Shome, I think outside chance, he was Chidambaram's advisor. Doubt the current dispensation would like that. Arvind Subramanian I think will be the favourite, the other three are good and credible as well.

2. I can't believe I am hearing it names -- .. Two persons, close to RSS, one from Chennai and another from Bangalore. If one of those two come in, guys, just sell everything and head for the hills. Those two are nuttier than fruitcakes. Someone I know had a run in with one of those two in a committee . Basically a misogynistic crank , a troglodyte.

Patni · Post by **Patni** » 21 Jun 2016 09:39

YouTube link to Dr. Rajan's public lecture at TIFR yesterday.

Suraj · Post by **Suraj** » 21 Jun 2016 10:20

vina wrote:I cant in living memory think of any RBI Guv who was accused of being not 100% Indian (whatever that means, I dont think that mean), and slandered for supposedly writing letters on pending investigations to accused, basically politics of throwing muck and hoping something sticks.

On the flip side, there has never been a previous RBI governor who saw it as his business to tell the government what to do policywise, in a public setting or in the press. Rajan chose to get entangled in political economy, and as such, he better be willing to have mud thrown at him.

There is a direct causal relationship between how publicity oriented the current RBI governor is, and the political bile he gets. He chose to get involved in the mess, and the mess ultimately swallowed him, ensuring he would not be re-appointed. As an RBI governor, his public utterances should have been strictly restricted to rate policy and nothing more.

vina wrote:The RBI Guv is NOT a political post, nor it is a political appointment.

Don't kid yourself with utopian ideas. The RBI governor is and has always been a political appointment. Who do you think Rajan was waiting for an extension from ? The government. Who do you think he wrote his resignation to ? The government. It doesn't get more 'political appointment' than that.

Rajan was treated as best as he could hope to have been treated. He got to stay out a full term and GoI worked with him all that while. He's not entitled to an extension. That's for GoI to decide. If anything, Rajan showed his pique by announcing his resignation independently of GoI's timeline to find a successor. Any responsible person would wait and hand over the baton properly.

Austin · Post by **Austin** » 21 Jun 2016 11:50

Rajan did the most respectable thing by resigning and was a good governor perhaps the best we had in my recent memory and had great respect among the business class and economist and held GOI accountable to its deed and did not bow under pressure ....He did what an upright and honest Governor, should do within its mandate.

May be we might get a better RBI chief and who can do a better job with the present GOI's liking but that is something time will tell , Rajan has left his mark where few did in the past.

chetak · Post by **chetak** » 21 Jun 2016 12:12

vina wrote:Hmm. Lets look at the names of guys doing the rounds as Rajan's replacement.

1. Credible names.. - Arvind Subramanian, Urjit Patel, Rakesh Mohan, Subir Gokarna and Parthasarathy Shome.

Parth Shome, I think outside chance, he was Chidambaram's advisor. Doubt the current dispensation would like that. Arvind Subramanian I think will be the favourite, the other three are good and credible as well.

2. I can't believe I am hearing it names -- .. Two persons, close to RSS, one from Chennai and another from Bangalore. If one of those two come in, guys, just sell everything and head for the hills. Those two are nuttier than fruitcakes. Someone I know had a run in with one of those two in a committee . Basically a misogynistic crank , a troglodyte.

If you are hinting at gurumurthy, he has already said that he will not accept.

S Gurumurthy‏@sgurumurthy

My name is being mentioned for RBI governor's position knowing well I will never accept any position n later say this fellow wanted it but..

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11:30 PM - 19 Jun 2016

edit: added later

Hari Seldon · Post by **Hari Seldon** » 21 Jun 2016 12:15

Doorknob on timesNow y'day revealed that Rajan displayed the utmost professionalism in emailing his "I'm leaving" letter to all RBI staff at 5 pm on a Saturday. Cute.

vina · Post by **vina** » 21 Jun 2016 12:24

Suraj wrote:Rajan was treated as best as he could hope to have been treated. He got to stay out a full term and GoI worked with him all that while. He's not entitled to an extension.

Compare Rajan's exit with Subba Rao's. Subba Rao had a running battle with Chidambaram and the Finance Ministry who wanted him to cut rates aggressively to get "growth" (yeah, when they were running 10% inflation!, just like the current govt, who has inflation at close to 6% and want more loose money) , but he held firm. Chidambaram even said, if the RBI wont walk with us, we will walk alone!.

Subba Rao in his farewell speech, rebuked Chidambaram with a version of what Chancellor Gerhard Schroeder made about the Bundesbank.

“I do hope finance minister Chidambaram will one day say, ‘I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists,’”

Despite that kind of relationship, Subba Rao got a respectful exit and the Congress to it's credit, did not let loose an "attack dog" on him and there was none of this puerile mudslinging and wild insinuations like what Rajan endured.

As far as "criticism" that Rajan's tight money impacted growth, I would quote Subb Rao's farewell speech and highlight the relevant parts.

“Had the fiscal consolidation been faster, it is possible that monetary policy calibration could have been less tight,” he said. “The economy would have been better served if our monetary tightening had started sooner and had been faster and stronger.”

“Had we used the breathing time that this gave us to address the structural factors and brought the current account deficit down to its sustainable level, we would have been able to withstand the taper. In the event, we did not,” said Subbarao, adding, “We had made ourselves vulnerable to sudden stop and exit of capital flows driven by global sentiment.”

Referring to criticism that RBI’s tightening impacted growth, he said if such was the case, growth should have responded to the rate cuts of 125 bps between April 2012 and May 2013, cash reserve ratio cut of 200 bps and open market operations of Rs 1.5 lakh crore last year. 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.

He said the RBI’s “baby steps” were actually a balancing act between preserving growth on one hand and restraining inflation on the other. “I’ll be known as the baby-steps Governor!” he said.

Now trouble is , if Modi Govt appoints any of the "credible" names that I mentioned, they will NOT be "Yes Men" and in the true traditions of a good central banker will be independent minded.

So the Govt needs a hatchet man there. So expect names like the Chief Economic Baboon , who frankly is better off being in the tree top canopy from he gets to grab the bananas from people try to save for a rainy day, or the other two whack jobs from Bangalore and Chennai to actually be the kind of types who fill the post at the RBI. That will be akin to the appointment of Chetan Chauhan to the NIFT and the govt would have done a brilliant encore.

chetak · Post by **chetak** » 21 Jun 2016 12:32

ldev wrote:

Hari Seldon wrote:

{quote="TSJones"}I didn't know that he was also in charge of things other than monetary policy....... {/quote}

Yup, RBi is both the de facto and the de jure banking regulator in India. And much of the mess in the banking sector happened before the present govt came in. Bur Rajan was around, an appointee of the prev govt, you see ...
Yes Rajan was around for precisely the last 8 months of the 10 years that the previous Government was in power, hardly enough time for him to create any mess if that is what is being suggested here. As for the previous Government, that is another story.

Additionally in an economy with an inflation rate of ~5.00-5.5%, can an RBI repo rate of 6.75%, an SBI base rate of ~9%, a max deposit rate of ~7.5% be considered high in real terms? I think not. At least India is living in the sane world, unlike the ZIRP and negative interest rate environment of the US and Japan which has destroyed savers and retirees. And what good have those policies done in terms of igniting real growth in those economies?

Idevji,

R3 has been around much longer than that, but he did not see fit to open his mouth then. His sense of self preservation seems to be highly developed.

I have a very strong feeling that he knew very much ahead of time that he would not be given a second term and hence the hit jobs on the Modi govt by his political statements.

http://www.dailypioneer.com/columnists/ ... -exit.html

While we do give marks to Rajan for tackling the NPA mess by changing NPA recognition norms, again, it was too little, too late. Also, do not forget that while Rajan became RBI Governor only in 2013, he had enough clout as the economic advisor to the UPA Government between 2007-2008 and 2013. The crux of the NPA problem actually started in 2007-2008 wherein NPAs burgeoned from 53,000 crore in 2008 to 2.4 lakh crore in 2013, a massive jump of 352 per cent! Will Rajan as the economic advisor to then UPA Government, not take any blame for the genesis of the NPA mess, which unfolded right in front of him? Stressed assets were a huge problem in 2008 itself. We fail to fathom why Rajan waited till 2012-2013 before he decided to tackle the problem head-on? By 2013, stressed assets were already 9.2 per cent of the total outstanding loans in the banking system.

Virupaksha · Post by **Virupaksha** » 21 Jun 2016 12:44

Hari Seldon wrote:Doorknob on timesNow y'day revealed that Rajan displayed the utmost professionalism in emailing his "I'm leaving" letter to all RBI staff at 5 pm on a Saturday. Cute.

You leave such a message on your last day. It was most unprofessional from Rajan to do this as long as it is not his last day or his replacement has been officially announced. What that message shows is that he doesnt respect the RBI Governor's position.

He has just lost any respect for being RBI gov. Who will listen to this lame duck, nonsense spouting - nose poker in the rbi halls now?

The next guy has to regenerate the loss of prestige which Rajan's unprofessional conduct has done. I see so many similarities between Rahul Yadav conduct in housing.com and R3.

There is a saying in telugu "kanakapu simhasanamuna sunakamunu kurchurda petti" - when a dog is made to sit on golden throne.

Yagnasri · Post by **Yagnasri** » 21 Jun 2016 12:53

As I posted before no one need to "let lose" any attack dog. When you describe your nation as one-eyed king them, people will take offence and hit back. He enjoyed being a darling of the presstitutes and can not have complaints now. Soon we hear him coming to India from time to time just like Amartya Sen and giving us lectures on how we, the dirty Indians shall behave. With full MSM sound bites of course.

Why this drama when the term is there until September? That is the question. What is the interest and whose interest this entire extension scene was enacted?

kmkraoind · Post by **kmkraoind** » 21 Jun 2016 12:58

vina wrote:
Suraj wrote:Rajan was treated as best as he could hope to have been treated. He got to stay out a full term and GoI worked with him all that while. He's not entitled to an extension.
Compare Rajan's exit with Subba Rao's. Subba Rao had a running battle with Chidambaram and the Finance Ministry who wanted him to cut rates aggressively to get "growth" (yeah, when they were running 10% inflation!, just like the current govt, who has inflation at close to 6% and want more loose money) , but he held firm. Chidambaram even said, if the RBI wont walk with us, we will walk alone!.

Subba Rao in his farewell speech, rebuked Chidambaram with a version of what Chancellor Gerhard Schroeder made about the Bundesbank.

“I do hope finance minister Chidambaram will one day say, ‘I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists,’”
Despite that kind of relationship, Subba Rao got a respectful exit and the Congress to it's credit, did not let loose an "attack dog" on him and there was none of this puerile mudslinging and wild insinuations like what Rajan endured.

There is a contradiction here. In case of Subba Rao, instead of "attack dog" its "Beta Dog" that attacked the guv. (Alpha being Sonia/MMS). Yet at the time, no OpEds criticizing PC-MMS duo and sympathizing Subbarao.

Lastly, if anybody thinks somebody can tame Subbu Swamy and can be used as "attack dog," they are too naive.

By the way UPA era inflation rose mainly from unthoughtful doleouts, that created huge demand, while supply is stagnated. Now despite drought (supply constraint), NDA govt managed to bring inflation down to 6%.

chetak · Post by **chetak** » 21 Jun 2016 12:59

Yagnasri wrote:As I posted before no one need to "let lose" any attack dog. When you describe your nation as one-eyed king them, people will take offence and hit back. He enjoyed being a darling of the presstitutes and can not have complaints now. Soon we hear him coming to India from time to time just like Amartya Sen and giving us lectures on how we, the dirty Indians shall behave. With full MSM sound bites of course.

Why this drama when the term is there until September? That is the question. What is the interest and whose interest this entire extension scene was enacted?

he knew full well and very much in advance that he would not get a second term.

This is his way of damaging the credibility of the Modi govt and it benefits only non Indian entities to whom he continues to be beholden.

His precious high profile CV has also been blotted in a way that he did not want, as he will not be around just when the India growth story may just be taking off for real.

vina · Post by **vina** » 21 Jun 2016 13:03

You leave such a message on your last day. It was most unprofessional from Rajan to do this as long as it is not his last day or his replacement has been officially announced. What that message shows is that he doesnt respect the RBI Governor's position.

It is the Govt which devalued the position of the RBI Guv's office, when the constituted a "committee" under the Chief Cabinet Baboon to appoint the next RBI Guv, and we came to know of this via newspaper reports a week ago! Traditionally the RBI Guv was an appointment by the Finance Minister and the Prime Minister. The RBI Guv, enjoys a rank equivalent to the Cabinet Secretary! . Now they wanted Rajan to "apply for his own job again" with a similarly ranked Cabinet Baboon!

Now in the news paper today, we are "assured" that Rajan's replacement will be appointed by the FM and the PM. Talk about shooting yourself in the foot and then trying to pedal back from your own idiocy.

Gus · Post by **Gus** » 21 Jun 2016 13:05

I guess swamy sensed Rajan leaving and claimed credit for it. Many a rowdy in chennai claim somebody else's kills as their murders for street cred.

Manish_Sharma · Post by **Manish_Sharma** » 21 Jun 2016 13:07

Everybody knows:
1. How ugly was behaviour of conparty when it was Time for second term of President Abdul Kalam ji. How they let of mad ugly dogs like lalu prasad upon him. We saw no criticism of congis threatenig character assasination of him.
2. If Subba Rao was good then why was he let off after all he was also wanting same thing as r3 na?

3. Criminal conParty and there supporters made General Shri V.K.Singh retire before his time. On a piece of paer filled by teacher mistake. While army hospital records, birth certificate said otherwise. On top of that let loose their dog shekhar gupta upon patriotic son.

Imagine a rbi guv saying hitler during mafia lady regime. Or when christians killed swami Laxmanand , rbi guv says this is intolerance crusade.

Rajan was a behaving as if certain powerful people were watching how he handles publically, so next time hero rbi president can be PM mms 2.0

NaMo was too gradual should have fired him as soon as his oath.

chetak · Post by **chetak** » 21 Jun 2016 13:13

vina wrote:
You leave such a message on your last day. It was most unprofessional from Rajan to do this as long as it is not his last day or his replacement has been officially announced. What that message shows is that he doesnt respect the RBI Governor's position.
It is the Govt which devalued the position of the RBI Guv's office, when the constituted a "committee" under the Chief Cabinet Baboon to appoint the next RBI Guv, and we came to know of this via newspaper reports a week ago! Traditionally the RBI Guv was an appointment by the Finance Minister and the Prime Minister. The RBI Guv, enjoys a rank equivalent to the Cabinet Secretary! . Now they wanted Rajan to "apply for his own job again" with a similarly ranked Cabinet Baboon!

Now in the news paper today, we are "assured" that Rajan's replacement will be appointed by the FM and the PM. Talk about shooting yourself in the foot and then trying to pedal back from your own idiocy.

when the GOI

constituted a "committee" under the Chief Cabinet Baboon to appoint the next RBI Guv

, that means that everyone concerned knew very much in advance that R3 would not be getting a second term ( including R3, for sure )

His (R3) not gelling with the Fin Min was too well known to hide, despite pious and polite pronouncements to the contrary.

Jetlee had been openly disagreeing with R3, for a long long time, about the rate cuts and their quantum. R3 managed to prevail. Looks like he finally paid the price.

chandrasekaran · Post by **chandrasekaran** » 21 Jun 2016 15:02

What was RRR doing when the ED sent a letter asking for specific information on Nov 2014 ? If you sit tight no wonder "attack dog" pounce on you

vina · Post by **vina** » 21 Jun 2016 15:05

Excellent OpEd in today's Business Standard by Omkar Goswami on the RRexit. Basically he says that despite all the war by proxy (via Subramaniam Swamy) that the govt and the RSS launched on Raghuram Rajan, the RBI has in practice operational autonomy and tradition of independence thanks to MMS as the FM and C. Rangarajan as the RBI guy and which was further strengthen and institutionalised by YV Reddy.

Bottomline, if the RSS thinks that they will have a pliant RBI, it wont happen , unless they put in some random Yin-Yang there , and which is exactly what will happen. Watch the space for "Can You Believe It" names making it to that office.

Yagnasri · Post by **Yagnasri** » 21 Jun 2016 15:16

Independent RBI regulated banking sector very well. See the NPA figures and tell me what steps R3 and others in RBI did on that? Four schemes in the last few years CDR, JLM, SDR, 5/20 and one more thing called sustainable blah blah blah (seems some UPA era NGOs were brought in name the scheme). The fact of the matter is RBI as a regulator failed and failed badly.

Please do not show us to Evil RSS like Pappu for everything.

Gus · Post by **Gus** » 21 Jun 2016 15:31

Riiiiight...because poor impotent Modi has just no other way to get rid of Rajan because Rajan is the boss of Modi or something like that...

Yagnasri · Post by **Yagnasri** » 21 Jun 2016 15:33

Read this:

http://www.firstpost.com/politics/the-n ... ATEST_NEWS

ldev · Post by **ldev** » 21 Jun 2016 16:13

kmkraoind wrote:
By the way UPA era inflation rose mainly from unthoughtful doleouts, that created huge demand, while supply is stagnated. Now despite drought (supply constraint), NDA govt managed to bring inflation down to 6%.

A very large part of the CPI decrease is due to the fall in the wholesale price index which is a direct result of the global fall in commodity and oil prices. Since about January 2015 the WPI has been negative and is only now at about the 0%-1% level. Absent that fall in global commodity prices I doubt whether the CPI would have budged much below the late UPA era 10%. While any fall in the CPI is welcome, to base future interest rate policy on uncertain and uncontrollable global events in my opinion is extremely unwise. All commodity and oil importing nations have won a lottery in the last 18 months. Can you plan your future on another lottery win? Rajan's policy prescription was based on that reality. In the meantime the wide gap between the CPI and WPI is an indication of structural inefficiencies in the Indian economy. Now that is something that GOI should be tackling head first instead of creating a Rajan controversy.

Supratik · Post by **Supratik** » 21 Jun 2016 17:52

Now RSS is also appointing RBI governor. The moment you bring it in you loose credibility. i don't think Rajan did a bad job. Maybe a tad conservative. I don't understand how people here are claiming that interest rates should be aggressively reduced which basically allows banks to lend more without solving the massive NPA issue. And NPA solution will need the govt as well as the RBI. Both have been slow in implementing a road map. I think what led Rajan to his exit is his constant trolling of the govt. You won't go far if you constantly troll your employer. The govt sucked it in during his term and then let Swamy give him a piece of their mind. It is time to move on.

nirav · Post by **nirav** » 21 Jun 2016 18:03

R cubed dug a hole for himself.

It wasnt RSS which advised him to speak about growing intolerance or call the economy andho me kana raja.
He did later apologize, to the blind.

Quite a bit is being spoken about the govt demeaning the RBI Guv's post.
Think the Guv should have kept the importance of his post in mind before shooting from the mouth.

The hitler example was totally below the belt. RSS didnt advise R cubed on that either.

kapilrdave · Post by **kapilrdave** » 21 Jun 2016 18:46

^^ What do you know? Vina is a top level RSS cadre who always knows what RSS wants. If he says that RSS appoints the guv, you better accept it as he even has the entire list of the "RSS nominees" with him - oh sorry, they are called "Can You Believe It" guys. Don't even ask him to list these "Can You Believe It" guys' names lest you come back after 3 months and question. Just remember the simple rule...

Govt == Modi == RSS

So anyone who gets appointed at that position is a RSS buffoon. Modi is also a RSS buffoon. Even if he manages to deliver far better than the earlier superheros humbly posturing as PMs, that doesn't mean he is not a buffoon. Modi, RSS and Hindus, all are buffoons. Which means majority of India is buffoon. We are a country of buffoons.

disha · Post by **disha** » 21 Jun 2016 19:31

RR holding up the rates for a while was a good thing to get the speculators out. But from the second year itself he should have started bringing the rates down., what RR was aiming for was a state with low inflation and high growth (the dream of all bankers). But for that to come, India has to come to a state where there are several entrepreneurs taking out all inefficiencies using technology. India is not in that state yet (it will require another year or so). Hence RR holding up the rates was incongruent. He should have aimed for the next best thing, high growth with moderate inflation.

Of course his political interference was totally uncalled for. If he concentrated only on the economy and its aspect and guided the banks., he would have become a legend. Now he is just another has been.

The last straw for me in this debate of RExit was when finnish banks started to advice Indian PMO on how good RR is for RBI. At that stage, RR had to go. In fact Modi government gave him a fig leaf., ideally RR should have been fired.

Suraj · Post by **Suraj** » 21 Jun 2016 19:44

vina wrote:Compare Rajan's exit with Subba Rao's. Subba Rao had a running battle with Chidambaram and the Finance Ministry who wanted him to cut rates aggressively to get "growth" (yeah, when they were running 10% inflation!, just like the current govt, who has inflation at close to 6% and want more loose money) , but he held firm. Chidambaram even said, if the RBI wont walk with us, we will walk alone!.

Thanks for making *my* point. You can't find a single instance where Subba Rao talked about anything analogous to intolerance or other issues entirely within the domain of politics, can you ? No, that was entirely a Rajan thing. Subba Rao, on the other hand, was all about monetary policy and monetary policy alone. Most of Rajan's major news stories had little to do with his core responsibility. The different response he faced is a result of what he ventured to get himself into.

Rajan stuck his nose in business that a professional RBI governor like Subba Rao or YV Reddy would never have ventured into. He gets absolutely no sympathy for the politics directed at him. He displayed a lack of professionalism here, all the way down to his very last action of dropping in his resignation without consulting GoI and coordinating a press release, but instead showing pique by sending the letter out on a weekend.

vina wrote:It is the Govt which devalued the position of the RBI Guv's office, when the constituted a "committee" under the Chief Cabinet Baboon to appoint the next RBI Guv, and we came to know of this via newspaper reports a week ago!

You don't seem to know how to use 'devalue' here. GoI picks the RBI governor. Every single time. How they do so is their business. The RBI governor implements a policy action for the government. Not the other way around. Don't get yourself lost in 'independence' on paper. Every last RBI head ever got appointed or not appointed because the government liked him (or didn't). The RBI is like a teenager with nominal independence but very much still within GoI's purview still. It's not a good idea to mistake idealism about independence, for reality.

What's more, Rajan had his independent rate setting authority diluted because the deputy governors complained Rajan does not arrive at rate decisions within RBI meetings by consensus. That's really bad form.

When an RBI governor and govt do not see eye to eye, the best the RBI gov can expect is being allowed to complete his current term. In fact, Rajan was allowed to complete it unhindered, even though, as ldev argues, he was only 8 months into his term when Modi came to power. That means GoI could have dumped him right then without much risk of loss of continuity since he wasn't even a third into his term. But they didn't. They worked with him through an entire term, and for all his political utterances, Rajan learned he doesn't get to lecture from ivory towers when it comes to politics.

nirav · Post by **nirav** » 21 Jun 2016 20:02

@ "rockstar"

http://www.anirudhsethireport.com/janet-yellens-humor/

I think she's way more of a "rockstar" than Sh. R cubed.

Picklu · Post by **Picklu** » 21 Jun 2016 22:08

R3 got more dignified exit than Avinash Chander for sure. The govt did learn and improve, so I am happy.

No disrespect to Rajan but we have a large enough talent pool to choose from and due to that, the next one would be as good or as bad as R3 just by luck.