Tuesday, August 6, 2013

New RBI Governor Announced - Pros/Cons - Welcome Desi QE

Well a very well read economist selected to head the RBI i.e. India's Central Bank.

First the good parts - he understands that the basket of goods to be used to measure inflation need to be constantly updated. Very sound knowledge of concepts of Game Theory [In fact enjoys good camaraderie with the likes of Avinash Dixit in Princeton University, a contemporary author  in Game Theory, Pankaj Ghemawat, a leading authority in Corporate Strategy who was also instrumental in setting up the big stage for TCS with Ramodrai] and for that matter, pretty well networked with the likes of Ben Bernanke, Mario Draghi etc. So much so for pedagogy and personal accomplishments. In fact, as a faculty in university, Senor Raghuram has been in the top quartile in rankings for most of his tenure as faculty.

This brings in a lot of fresh lease of energy and ideas to the table with a potent mix of student @ emerging nation, evolved @ developed nation, repatriated with a cocktail, back home. FIIs would love the fact that a protegy of FIAT currency policies is finally making it to our own desi RBI and perhaps hope that FIAT currency policies will be replicated here as well. The probability of this happening is very high.

Now there is more than what meets the eye in this selection process. First and foremost, Subbarao has most of his experience home grown, understands the macro-economic situation of India extremely well. He is not the one who buckles under pressure and tries his best within the limited arsenal of tools that he has to stem a currency riot and keep bond yields under check without injecting too much liquidity [knowing very well that his counterparts in US, UK, ECB and Japan are rampantly doing so in turns] He is not the one who buckles under pressure even if the hotline rings from Chidambaram or Manmohan Singh. Fortunately neither is Subbarao like Durga Nagpal nor is Chidambaram like Akhilesh Yadav or else things would have been far worse than 2008 in Indian macro-economy by now!

The most logical step would have been to give Subbarao an extension of term because with due credit to him, despite so many hurdles beyond control and limited tools awarded by Indian democracy, he has done the fair bit from his side. The case for the same becomes even stronger given that the erstwhile deputy S. Gokarn has joined some other institution. No the UPA government found Subbarao a pain for them to continue their hyperinflationary monetary easing policies. Even more so because having been institutionalized in the Indian bureaucratic system, he knows to have his cake and eat it too.

Whilst the external perception is that Raghuram will bring advanced policies to India, the euphoria will be short-lived. Given most of his career formative stages in US, senor Raghuram will try to replicate the economic models of the west [read US] into India. That is too rudimentary because the US Dollar is the reserve currency of the globe and to the extent this holds true, Keynesian economics will only hold true under such conditions and not an economy like India.

Just as the Government of India is one of the largest clients for McKinsey India [reports are made and filed without action], it will be one of the largest patrons of senor Raghuram and put him on a pedestal in public. He may be given a lot of incentives but the veiled threat will be 'Toe the line or face consequences'

Now time will tell whether Raghuram will do so or retreat into his comfort zone and go back to university. In the opening phases of his term as the RBI chief, his policies will be very very accommodating i.e. very very positive for stock markets [post-election 2014 of course]. There will be asset bubbles in real estate, gold, silver big time; prices of rice, sugar, cereals, wheat etc will double in 3 years instead of the current cycle of 5
Balance sheets of banks will swell and loans will be offered by the dime to almost anybody and everybody.

Then, the next step will follow; CAD issues. He would then apply the ISLM models and ask government to reduce taxes on crude oil and take steps to eliminate kerosene and subsidies. Will the ruling party at the centre bite the bullet? No ways be it UPA or NDA or Third Front - nothing to do with vote bank politics and large chunks of money to be made in taxes and tax evasions will ever be altered [unless GOD comes down and forces it on Indian politicians] Now senor Raghuram will feel cheated having given his share and getting nothing in return. To the extent all his reports and comments will be stonewalled. The story comes a full circle.

More and more NPAs on banks' asset books [perhaps as high as 5% of the loan books], a Rollar near 70 levels and a total systemic collapse. Is there anything we can do to stem this rot? Well nothing - keep yourself tuned to the time and price actions. The story of 2009-2010 is very soon going to  unfold after the next elections. Ensure that profits are booked on time. Enjoy the next mega-bull run post-election 2014 as your next central banker is going to unfurl the Desi Version of QE.