Rajan's Indian Funeral Pyre

Raghuram Rajan has been in his job at the head of the Reserve Bank of India for just a few weeks now and already changes are being made as the 23rd President. He plans to make sweeping changes to the financial system and bring the hierarchical administrative make-up of the sector to its knees by introducing liberal laws that will allow banks to open up branches without gaining prior permission from the Indian central bank. He wants to free up money for the economy to inject it into the private sector.

  • Today Rajan has raised the repo interest rate (the rate which the central bank lends to commercial banks) from 7.25% to 7.5%, while maintaining the quantity of bank deposits that must be kept in cash (the cash reserve ratio) the same.
  • Inflation is reaching levels that are causing the Indian economy great strife and currently it stands at 6.1%.
  • That's the highest for the past half year.

Putting up the repo rate means that Rajan is worried about the hike in inflation, but he was expected to do nothing of the sort under pressure from the government and industrialists that wanted money and they wanted it now to get the economy growing. Analysts weren't expecting it either.
It's always good to be where the people that are watching don't expect you to be.

Rajan and India

Rajan and India

India's Hike

Raghuram Rajan is the guy that put the sex back into Sensex, the Indian stock market, apparently. The Indian press are more interested in what he looks like and the fact that he woos the women while what they should be worrying about is what he will be doing to the Indian economy.

He's hailed as a sex bomb, sex bomb; a rock star from the West and not just any old Bollywood-style boy from Bombay. He has more handles and pseudonyms than a spy but he's called the Monetary James Bond, the guy that is licensed to kill on her Majesty's Service. But, just what will he be killing and will Moneypenny find out?

At least Rajan was visionary enough to warn of the financial crisis that was looming back way before it actually did. But, back then, even when put before the unfolding events, witnessing what was happening, nobody wanted to believe that anything was possible except carrying on regardless. It was at Jackson Hole in 2005 that Rajan (Chief Economist at the International Monetary Fund then)warned the central bankers from around the world that there was going to be a world crisis.

Raghuram Rajan may be making changes but can he make Sensex become sexy again or will the flow of capital continue from India as it has been in the past few months ever since tapering hit the headlines?
Now that Ben Bernanke has side-stepped, peddled backwards and cried wolf so many times as if he were playing with fire the dammage has been done. The Indian economy was already suffering from a slowdown in growth but since tapering became the first item on the agenda it's been even worse. The Federal Reserve should think twice about the fact that people who play with fire inevitably get burnt. It's India that has been thrown on the funeral pire to burn only and to end up being tipped into the sacred Ganges to float away.

Fed's Reasoning?

But, perhaps that was the idea anyhow that the Federal Reserve had. Killing off the growth in India can only benefit the USA where growth has already suffered from the effects of Delhi Belly ever since the financial crisis hit.
Unemployment is still stuck in a rut and failing to get off the ground at 7.3% (double that if we take into account those that are underemployed and who have given up work in a dismal state of disappointing discouragement from seeking work because there is none). If we look at the data we might be under the impression that there are results showing for the US economy.

  • Women in particular look as if they are getting jobs left, right and center and they have an unemployment rate of 6.3% according to official figures.
  • That's the lowest since December 2008. Great news!
  • But, that drop from 7.3% since January 2013 for women is only in sectors such as waitressing and in-home health care, housekeeping and food preparation. Nothing else.
  • Where are the executive jobs? The jobs that pay? The jobs that are full-time?
  • The US administration has increased women's job prospects but 60% of the jobs that have been created aren't worth the paper they're advertised on.
  • They only bring in an average of $10.10 per hour.

Indian Results?

  • Since Rajan has taken over the mere mention of his name has put a cheeky grin on the Sensex stock market in India and it's strengthened somewhat.
  • The Sensex reached a three-year high at 20, 646.64 (up by +684 points) at close yesterday.
  • The Rupee has given in to him too and risen against the Dollar and stands at 62.2775 (up 0.5025 or 0.81%) today at 07.29 ET.
  • The Federal Reserve's change of heart over the $85-billion stimulus plan and the probable putting off of tapering until approaching the end of 2014 and maybe even beyond that.

But, will that continue? The hike in interest rates may well slow down the growth of the Indian economy, although in the long run it will bring prices down. But, it won't give the immediate fast growth that the markets may want right now. For sure, the improved international scenario of a Federal Reserve that is going to carry on with Quantitative Easing will help (and probably the immense difficulty that any successor will now have after Bernanke's statement about continuing with the printing presses rolling out the greenbacks).

This will bring an inflow of foreign investment once again into the country (just as long as the Indian government finally implements structural changes, which is one of the reasons the money fled too). But, Rajan's message to the economy is that he is looking to control rising prices and that he will firmly stand his ground faced with government and industry pressure to reduce interest rates. The politicians and businessmen are interested in the immediate vote-winning and money-spinning results, while Rajan seems more set on getting the economy back on its feet for a lengthier period. Short-term gain just means long-term pain. Isn't it wonderful to see someone actually working for the benefit of their country rather than just having the puppet strings pulled from up above?

But in Rajan's own words he's " here to run the bank and not win Facebook 'likes'".

Some other people should have attempted to follow suit or at least should have been as visionary as Rajan rather then just trying to win the popularity stakes when it's the economy that's on the line.

Then, there are others that have decided neither to win the Facebook 'likes' nor to run the banks, aren't there? But, they'll be gone pretty soon (although the strings are still likely to get pulled from up above).

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tothetick

Professional team of writers/analysts analyzing the financial markets.

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