The normally hyperactive Indian media went into turbo hyper-drive this week as they welcomed Raghuram Rajan as the new Governor of the Reserve Bank of India. Keith Bradsher of the New York Times acknowledged this gushing in the opening paragraph of his own article:
- “Indian newspapers have been gushing about the new governor of the
central bank, Raghuram Rajan, in terms usually reserved for Bollywood
film stars: his trim physique, his long-distance running, even his
“rather photogenic appeal,” as The Mumbai Mirror tabloid wrote this
Of course, Mumbai Mirror did not stop there. After describing Rajan’s looks, they gushed about Rajan’s stamina:
- “a marathon runner, a strong swimmer and an extraordinarily competitive squash and tennis player… He is extremely energetic, he can go on and on. And he is not just brilliant, I have never seen anybody slog as much as he can either.”
An article attributed to Reuters wrote “the media portrayed him as James Bond“.
The last time we saw such hyberbolic coverage was when Hira Rabbani Khar visited India as the new foreign minister of NonPak-i-Stan** in July 2011.
- “newly-appointed foreign minister of Pakistan, Hina Rabbani Khar dazzled
with her well-coiffed look. Hundreds of media columns were spent on the
style and the cost of her Birkin bag. There were rapturous accounts too
about the Mikimoto pearls around her neck and the silk sheen of her
clothes … “
- “a media frenzy erupted around her style: the pearl necklaces, elegant
costumes, Cavalli sunglasses and a stylish Hermes-made Birkin bag worth
at least $9,000 (£5,500).Khar’s glamorous turn triggered a media
swoon and became the buzz of the subcontinental chattering class.
“Pakistan puts on its best face,” read the Times of India headline;
“Pakistan bomb lands in India,” quipped the Mumbai Mirror”
The comparison between Khar’s “well-coiffed look” & pearl necklaces and Rajan’s “rather photogenic appeal” may seem a bit flippant. But keep in mind that, as foreign minister, Hira Rabbani Khar seriously outranks Raghuram Rajan who is not even a minister.
Think back to July 2011. Indian society and Indian media were hoping against hope of hints of a rapproachment from NonPak-i-Stan. They were tired to seeing grumpy middle-aged NPak** men expressing the same tired old invective. In to that gloomy atmosphere flowed a breath of fresh fragrant air in the glamorous form of Hira Rabbani Khar and Indian media went nuts.
The scene was not that different last week. Indian society and Indian media were mired in deep gloom about the utter rejection of their economy and currency by American and European investors. Their confidence was shattered. In to that deep gloom entered the western-accepted, IMF & Chicago anointed Raghuram Rajan and Indian media went nuts.
The comparison between Khar and Rajan goes deeper than looks, appeal and style. Remember the big question about Khar? As Declan Walsh (now with the New York Times?) asked in the Guardian in July 2011,
- “The bigger question about Khar – and every foreign minister in Pakistan –
is whether she is really in charge. The army is acknowledged to control
the main levers of policy…”
Keith Bradsher of the New York Times, asked a similar question this week:
- “In contrast with the political independence of the Federal Reserve or the European Central Bank, the Reserve Bank of India, … is required by law to consult closely and take direction from the government in New Delhi. Sometimes the government is unusually open, at least by Western standards, in pushing around the Reserve Bank.”
As Bradsher points out, the man who pressured the previous governor of the Reserve Bank was Rajan himself. He was at that time chief economic adviser to the Indian Government. The question is whether Governor Rajan will now be able to withstand the kind of pressure from the Government that Adviser Rajan himself put on the previous RBI Governor.
And Finance Minister Chidambaram is known to be arrogant and intolerant of those who disagree with him. Dr. Y.Y.R. Reddy was a widely respected RBI Governor, the man who single-handedly protected India from the 2006-2007 credit bubble by banning Indian banks from making real estate loans in 2006.
Chidambaram was reportedly furious and he replaced Dr. Reddy with Dr. Subbarao, a man deemed less independent at that time. To his credit, Governor Subbarao acted as he saw fit and so Rajan was deputed to put pressure on him.
But we do expect Chidambaram to give greater freedom to Rajan. After all, inflows from US & European investors are the critical need of the moment and Rajan is expected to use his contacts and stature to reel them in.
And Rajan has bigger problems than Chidambaram. Read what ex-IMF economist & Cornell professor Eswar Prasad wrote this week about the Indian economy:
- “there is a limit to how much the central bank can do if other policies
don’t play their part. Without disciplined fiscal policy, the central
bank will find it much harder to manage inflation and to avoid banks
being seen as a source of government debt financing and subject to
And everyone knows who is responsible for fiscal policy indiscipline in India, the woman who is really the de facto Owner of the ruling Congress Party. And Sonia Gandhi is facing a truly existential crisis, a crisis that can make her work over decades come to naught if she can’t win the next election for her son. She is the immovable object that stands against any cut in social spending. And nothing, in our opinion, will move her from her budget-busting path of delivering money and food to buy the votes of about 800 million people in India.
This narrows Rajan’s options to machinations in monetary policy. But as Eswar Prasad wrote this week,
- “Decisive action is needed on a number of fronts to revive growth and
rebuild the confidence of domestic and foreign investors. Monetary
policy can play an important role but not if it remains hamstrung by
other policies that are working at cross-purposes”.
Unfortunately India & RBI have had to suffer from another problem – the irresistible force in global monetary policy, otherwise known as Ben Bernanke, the world’s most
powerful Central Bank Chairman. His taper talk has been an irresistible tsunami that has caused carnage in all emerging market economies, especially in countries like India with high current account deficits.
For the past few months, the Indian economy and the Reserve Bank of India have been caught between the immovable object of Sonia’s fiscal spending and the irresistible force of Bernanke’s taper. Both of these are forces far beyond the capability of the Reserve Bank of India and even beyond that of the Indian Government. So what can Rajan do?
Well, he can get lucky. Again, this is not a flippant statement. Remember Napolean preferred his generals to be lucky rather than smart. And Rajan could get very lucky, at least for the short term. After all, he has inherited an extremely oversold Rupee and expectations about the Indian economy are at rock bottom. So the faintest whiff of good news can lead to a rally in both the Rupee and the Indian stock market. Such a rally can alleviate short pressures that have pushed RBI and Indian Government to their knees.
As we wrote last week, technical trend exhaustion indicators suggested an oversold rally in both the Rupee and in the Indian stock market. And the indicators proved to be correct. The India ETFs have rallied by 10%-14% since the signal* on Wednesday, August 28, a mere 8 trading days ago and the Rupee has rallied to about 69 to about 65.
And India, RBI, and Rajan got very lucky on Friday, September 6. The dreaded employment report came in much weaker than expected with downward revisions to both July and June. That should reduce the pressure off of all emerging markets and allow the rally in all EM stock markets and currency markets to continue.
The next obstacle is the meeting of the U.S. Federal Reserve on September 18. If that meeting turns out to be benign then the pressure on EM currencies and EM bond markets would get reduced substantially for the intermediate term.
In the interests of full disclosure, we believe that interest rates in the U.S. have reached an intermediate term top and should decline from current levels. That, if it happens, would provide a sweet tail wind to EM currencies and bond markets. And that will be very positive for India.
Let us be clear. We are only talking about reduction in global forces that have buffeted India for the past few months. The real problem in India is the immovable Sonia and the subservient Indian Government. Will the Indian
Government learn from the past few months or will it again go back to
enjoying its final months in office in a drunken orgy of uncontrolled
spending and rampant corruption? Will the global rating agencies downgrade India before the next election? Will the next
election bring in a government dedicated to greater fiscal discipline
and structural reform regardless of which party wins?
That brings us to back to Raghuram Rajan. Right now, he has the stature to demand & force more rational behavior from the Indian Government. He has the tailwind now to introduce reforms and to begin establishing deep liquid government & corporate bond markets in India. But does he have the backbone, the mental courage for this hard task? Or will he prove to be just another trim pretty figure like Hira Rabbani Khar?
Today, no one talks about Hira Rabbani Khar because her tenure as foreign minister has been lackluster at best. No one will miss her when she leaves office. Raghuram Rajan may have come in like Hira Rabbni Khar but we sincerely hope he fares much better in his tenure than Khar has.
* Last week, we describe the purchase of 1.125 million shares of EPI at $13.10 by a major investor on Wednesday, August 28. On Friday, EPI closed at $14.92 giving the investor a return of 14% in 8 trading days and a profit of $2 million. As they say, Lady Luck favors the brave.
readers are aware that we don’t use the word Pak-i-Stan. We all
remember what happened when a regime called itself the Master Race. Soon
that led to the term Lebensraum. The rest is history. No one of
European descent calls that regime by its Third Reich name. The word
Pak-i-Stan is even more heinous than the Master Race word. Because it
means the land/regime of Pak or people pure enough for heaven. So by
definition that regime cannot allow itself to be stripped of its purity
by the presence of impure people. Hence their religious cleansing of
Buddhists, Hindus, Ahemadiya Muslims and now Shiya Muslims. Yet American
& Europeans keep using that given name Pak-i-Stan. We will not. So
we correct it by adding the neutral “non” and calling it NonPak-i-Stan or NPak for short. Note we do not use the insulting or negative term NaaPak
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