Economy
The biggest threat to 'acche din': Raghuram Rajan
The truth is that these bold calls are 'black swan' events themselves! Very rarely do other predictions from these notable market commentators come true
 
We all love bold economic forecasts, especially contrarian ones. And every once in a while, they turn out to be correct. Economists who correctly called great market booms and busts, global recessions, identified green shoots before sharp cyclical recoveries and predicted black swan events correctly are given legendary status. Of course, to some extent, they deserve it.
 
But the truth is that these bold calls are 'black swan' events themselves! Very rarely do other predictions from these notable market commentators come true. 
 
Marc Faber is famous for calling the market crash of 1987. But every year since 2008, he has been predicting a bear market in US equities. Nobel laureate Robert Shiller is famous for calling the US housing bubble and the following crash of 2007-08. He too has been bearish on US stocks for the last three years. Market guru Jim Rogers who correctly called the commodity bull run from the late 1990s has been predicting a bull market in agri-commodities and the demise of the US dollar since the past many years. Peter Schiff, who predicted the financial crisis has been predicting gold to hit $3,000/oz since a long time. All these calls have been wrong.
 
Raghuram Rajan is famous for correctly pointing out the prevailing risks in the global financial system back in the mid 2000s and warned leading policymakers at a Jackson Hole conference about a potential financial armageddon. He has been famous since then. 
 
I have the greatest of respect for Mr. Rajan. Nobody questions his prowess. He is as qualified as any globally renowned economist to be leading our central bank. But the fact that he correctly predicted the great financial crisis leads many to believe that he can see potential danger signals to the economy which apparently others cannot. Not only has he misread our domestic inflation prospects, his perception of the on the ground reality is also absurd. India desperately needs to see a large and a sharp fall in cost of capital. The transmission effect with the petty rate cuts so far has not worked as there is hardly any confidence within our financial sector of a sustained cyclical recovery in the investment cycle. Telling real estate developers that property prices must fall is not something he should be concerned about at this moment. He should rather aggressively cut interest rates so that home loans become cheaper and the housing market will find its equilibrium as they do in any free market. Similarly, it is not his job to be commenting on how there should be globally coordinated exit strategy from quantitative easing. Monetary divergence is the global macro theme right now. 
 
Rajan has got many themes and trends absolutely wrong.
 
Firstly, Rajan has failed to understand the trend in global commodities, especially oil. Crude oil had rebounded about $10 from its March low of $45/barrel in May/June when he said that a rebound in energy prices is a key risk to growth and inflation. Rajan should note that the dynamics of the energy market have changed. Every pullback will only be temporary and will be sold into. As CLSA noted in a research note last week, "a break below $40 in the oil price is just a matter of time even if there is undoubtedly scope for a short-term bounce. This is because shale production is becoming ever more efficient which is why the marginal cost of production keeps falling, which is also why it cannot be assumed that Saudi Arabia will ultimately win the battle for market share. Saudi Arabia allowed America’s oil fracking boom to go on too long before reacting to seek to preserve its market share." Even if oil prices do not fall further, India is in a sweet spot. But where are we seeing the benefits of a commodity bear market in India? Nowhere yet.
 
Secondly, being a lonely hawk within a global deflationary environment himself, my guess is that he expected the US Fed to increase interest rates much earlier. He wanted to keep ammunition in his bag in terms of domestic rate cuts in case global markets witnessed turmoil. But clearly, that all has been wrong. The RBI's counterparts at the Fed are smart enough to realise that a strong labour market recovery is not sufficient for monetary tightening and are waiting to see an uptick in wage pressures and overall inflation. If only Rajan had been paying close attention to the movement of US 10 year bond yields, he would have easily concluded that the Fed was never intending to move as fast as he was expecting. 
 
Thirdly, while Rajan and his peers at the RBI had the right strategy of recouping FX reserves by buying back dollars at around 60-62, we aren't seeing much benefits of that either. The idea was that on a rainy day, the RBI would actively intervene and defend the rupee. But we have had the USD-INR close above 65 for the last few sessions after the spillover effects of the yuan devaluation. So, unless the RBI is now aiming for a substantially weaker exchange rate, Rajan does not score too highly on the FX policy report card either. I am all for gradual depreciation of INR over the years. But the fact that the rupee is getting hammered in an macro environment which should really be conducive to a commodity importing nation is a sign of how global investor perception is quickly changing. If India is to be perceived as a sound economic story with strong fundamentals, the INR would have to behave like a safe haven currency like the Swiss franc, Japanese yen and the US dollar in times of turmoil.
 
Forget Greece and Europe. Forget China. Forget monetary tightening in the US. The biggest risk to the India story today is a hawkish Rajan. We urgently need a 50 basis points rate cut.

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COMMENTS

SACHIN PANGARKAR

1 year ago

If low interest rates meant higher consumption and consequently higher investments the american and the european economies should have been booming.

how much does reduction in interest rate have an impact on the cost. So if it were a factor wouldnt companies be passing on benefits due to reduction in commodity prices to consumers and reaping the benefits of higher volumes. The question to be asked are companies not confident enough that the fall in prices of end commodity will give the desired result otherwise wouldnt they be doing the same.

webkitendfullscreen

2 years ago

Take the case of onion prices, what has Rajan got to do with it,
This rise in onion prices is yearly ritual with massive rise in sept-oct. wit middleman making huge cut,
When government cannot be proactive In planning early imports to check prices, who is to blame, similarly toor dal is around 140 same as a cost of 1 Kg chicken,
So interest rates are not , but addressing supply side issues is,
Air we going the Chinese way in property crash, wise to follow Dr Rajan here.

REPLY

Yogendra Sontakke

In Reply to webkitendfullscreen 1 year ago

Very well said. Property prices are high due to government inability to tackle black money. With rental yeild at less than 2%, there is a crash on our hands.

webkitendfullscreen

2 years ago

Well it was Y V reddy who had right policies during 2008 crisis, similarly governor Radian been making right moves, he will Indians Saviour like Gavernor Y V a Reddy,
Rate cut is just one lever, there are many levers rusting at govememts end, no one speaks about it,
Easy to bash RBI governor,
Bigger risk is policies of Finance minister ,and MOS yesterday was addressing Monday's market crash by donning his Investment banker hat.
Sad but true
Pravin

Danny Allen

2 years ago

Well said. Food prices won't go up with a interest rate cut. His logic seems to be bizarre and weird.

Govardhan Parthasarathy

2 years ago

Vatsal Srivastava, your comment "He wanted to keep ammunition in his bag in terms of domestic rate cuts in case global markets witnessed turmoil. But clearly, that all has been wrong."

Now we know who is wrong.

PRABAL BISWAS

2 years ago

I can see the future Governor in making.

Ralph Rau

2 years ago

Indian banks have a serious issue with NPAs. In a sluggish environment there is a need to repair balance sheets with improved margins so banks cannot cut their rates to match those of the RBI.

Rajan's remit is clear. Decisively bring and hold inflation between 4-6%. The RBI consumer survey has demonstrated that inflation expectations have not abated.

The risk of a poor harvest and its impact on food inflation simply cannot be wished away.

REPLY

Manoj

In Reply to Ralph Rau 2 years ago

RBI does not control inflation. Hope you havent forgotton that Rajan has been on record that higher interest rate was only needed till inflation was in double digits. Well now, it's half of that & he's now offering expected inflation rise as an excuse. It makes no sense because monetary policies can only react to inflation, not control inflation

MG Warrier

In Reply to Ralph Rau 2 years ago

Let there be clarity on one aspect. The impact of changes in RBI's base rates on ground level lending rates is very limited and 'percolation down the line' is very slow. Any 'cut' will quickly get factored in, in deposit rates and this gives banks some comfort.The clamour for rate cut comes from certain quarters having some interests beyond interest rates. Government throws its weight with those asking for rate cut by RBI, primarily to divert attention from its own weak fiscal management.

Ralph Rau

2 years ago

Make in India will only work if India's cheap labour arbitrage is protected so we can compete with Chinese and East Asian exporters. There is no basis for pretending the Rupee can match the Dollar.

The Real Estate speculating tycoons must be brought to their knees at some point - the earlier the better to end the absurd property price bubble and avoid a spectacular collapse later with collateral damage to the financial sector.

Median Property price must never be allowed to exceed 8x - 10x the Median Income.

REPLY

Manoj

In Reply to Ralph Rau 2 years ago

True. And that can only happen if banks do not have 2 concurrent loans running against the same asset - one to the builder, and another to the end buyer. While it increases banks profitability, it also drives asset inflation. Like all other asset backed loans, the first must be extinguished before the transfer of asset happens.

This kind of practices, taken to the next level, was what caused the toxic CDO crisis finally.

Meenal Mamdani

2 years ago

I am not an economist, just an interested reader.

The comments so far have been enlightening. In my humble view, what will give a boost to Indian economy is better infrastructure, less crony capitalism thus less NPA of banks, swift justice so investors can be assured of redress in case of financial shenanigans, increased demand in rural areas by improving the rural economy, etc.

If rate cuts alone could boost an economy, then why has the US economy shown such poor growth despite almost 0% rates.

REPLY

Manoj

In Reply to Meenal Mamdani 2 years ago

Good comment. And you've hit the nail on the head. Interest rates are only cost of money, keeping them high lets banks get a bigger share of earnings being generated in the real economy. When too high, there is no incentive for growth or new startups in the real economy, so it starts stagnating. If the potential for earnings in the real economy is itself low, no matter how low the interest rates, real economy wont grow.

That is why interest rates can only slow or accelerate the real economy, but they cannot drive the real economy up, though kept too high they can prevent it from growing.

SAMUEL WARBAH

2 years ago

Friends can have differences in opinion.Nothing wrong in that.

Dr Anantha K Ramdas

2 years ago

Vatsal Srivastava concludes his article by saying :"we urgently need a 50 basis point rate cut".

So "hawkish" Rajan complies with your suggestion. Unless the effect of this cut is passed on to the ultimate consumer who needs the funds, and that too for "productive" use, we land up nowhere.

A brief study of banking operations would indicate that the Banks are extending credit facilities, a good percentage of them are NPAs, the purpose of rate cuts will also be lost.

Our serious attempts should be to increase exports, reduce the rubbish imported from China and others and increase the savings. There is urgent need to exercise control on imports and "freedom" to invest abroad when there are hundreds of ways to increase productivity in the country itself.

We may as well expect at least two more "adjustments" of Yuan before the year is out. We need to strengthen our own Rupee by greater exports and lower imports.

Chandragupta Acharya

2 years ago

It is a myth that Rajan is preventing rates from falling. It is also a myth that economic recovery is being held back due to high interest rates. Author seems to have formed his opinions without looking at data. Looks like a cheap motivated attack on Rajan.

REPLY

MG Warrier

In Reply to Chandragupta Acharya 2 years ago

Thank you Acharya for crisply giving the reasons why moneylife readers restrained from commenting on personal comments against Dr Rajan.Still, such occasional diversions give opportunity for keeping abreast of the 'thinking' of people who 'matter'!

MG Warrier

2 years ago

First, let me restrict my comments to the rate-cut issue and monetary policy. Based on the August 2015 Monetary policy statement, I have made the following observation:
According to RBI assessment, liquidity conditions have been very easy in June and July. A seasonal reduction in demand for currency and increased spending by Government coupled with structural factors such as low credit deployment relative to the volume of deposit mobilisation contributed to surplus conditions in the money markets. This resulted in a significantly lower average daily net liquidity injection under the fixed rate repos under LAF, and variable rate term repo/reverse repo and MSF at 477 billion in June, down from 1031 billion in May. In July there was net absorption of 120 billion through these facilities. In response to the reduction in the policy repo rate in June the weighted average call rate eased from 7.47 per cent in May to 7.11 per cent in June.
.
Those who are making a plea for more ‘cuts’ may try and understand the following observation in the policy statement:

“Since the first rate cut in January, the median base lending rates of banks has fallen by around 30 basis points, a fraction of the 75 basis points in rate cut so far. As loan demand picks up in Q3 of 2015-16, banks will see more gains from cutting rates.”
RBI has a much larger role than that of a Rate-cutter as is being made out by some analysts.

narendra

2 years ago

Well, dont know about Rajan but I know this much is that you have an agenda against him and I know why.

Well, for others let them see you are more wrong than Rajan and in fact ALL THE TIME WRONG as far as analysis is concerned.

below are links to prove.
http://www.businesstoday.in/current/worl...

http://www.sify.com/mobile/news/great-bu...

REPLY

MG Warrier

In Reply to narendra 2 years ago

Thanks Narendra. Opened and read the articles following the links.Irrespective of the rights and wrongs, such comments give one the comfort that readers of Moneylife cannot be taken for a ride by talking "high high".

narendra

2 years ago

Well, dont know about Rajan but I know this much is that you have an agenda against him and I know why.

Well, for others let them see you are more wrong than Rajan and in fact ALL THE TIME WRONG as far as analysis is concerned.

below are links to prove.
http://www.businesstoday.in/current/worl...

http://www.sify.com/mobile/news/great-bu...

Speed Bumps: Why It’s So Hard to Catch Cheaters in Track and Field
A cache of leaked blood tests showed hundreds of track athletes have recorded results “suggestive of doping.” With the 2015 world track championships about to start, a look at why anti-doping tests are so ineffective
 
Earlier this month, London’s Sunday Times and German broadcaster ARD published a joint investigation on doping in track and field that included an analysis of 12,000 leaked blood tests from 5,000 athletes between 2001 and 2012. The tests had been carried out by the IAAF, track and field’s international governing body. Two respected experts in doping methods said blood tests of 800 of the athletes were “highly suggestive of doping or at the very least abnormal.” Ten runners who won medals in endurance events at the 2012 Summer Olympics in London had suspicious test results. And a startling 80 percent of Russian medalists recorded tests that showed likely doping. The vast majority of athletes with suspicious tests were never sanctioned.
 
On Saturday, the 2015 track and field world championships kick off and, of course, some athletes who are doping will vie for medals. Most will not be caught; only 1 to 2 percent of tests in international Olympic sports result in sanctions each year. If doping is so rife in track and field, why are athletes penalized so rarely? It’s partly because many suspicious tests don’t quite reach the high evidence bar to be considered officially positive. But it’s also because doping athletes tend to employ methods that make drug testing extremely difficult. As Paul Scott, head of Scott Analytics, which provides testing services in multiple sports has put it: “Drug testing has a public reputation that far exceeds its capabilities.”
 
Here’s a look at why drug tests will never snare every cheater.
 

Looking for a (tiny) edge

Top-tier track and field has become so competitive that the margin of victory is often vanishingly small. In the men’s 100 meters at the last Olympics, the difference between gold and silver was .12 seconds, less than the time it would take you to blink if a flashlight were shined in your face. The difference between silver and bronze was less than half that. 
 
The tiny gap between winning and losing has led athletes to look for what they call marginal gains, whether that comes from extra sleep, better equipment or cheating. It also means that athletes needn’t take the industrial strength drugs that some baseball players and Soviet Bloc athletes famously took. The most popular doping agents today are synthetic versions of natural hormones: testosterone and human growth hormone — which aid muscle building and workout recovery — and EPO, which causes the body to produce more oxygen-carrying red blood cells. Athletes have learned they can take small amounts — known as “microdosing”— to evade detection and still get the benefits. 
 

Why is it so difficult to detect?

For starters, accurately measuring the presence of tiny concentrations of drugs — particularly synthetic versions of natural hormones — is difficult. For the sake of calling a test positive, it’s even more difficult. Consider the ubiquitous anti-doping test known as the T/E ratio. “T” is testosterone and “E” is another hormone called epitestosterone, a natural product of steroid metabolism that provides no benefit. Most people have a T/E ratio of 1-to–1. But there is natural variation among people, so the World Anti-Doping Agency (WADA) set the T/E ratio limit at 4-to–1. If a test goes above that, it is deemed suspicious and testing for synthetic testosterone ensues. This gives an athlete with a typical T/E ratio room to dope before hitting 4-to–1, and even small amounts of testosterone provide benefit. To make matters worse for drug testers… Continue Reading…
 
Courtesy: ProPublica

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