We certainly are living in interesting times! Economies around the world are adopting unconventional monetary policy measures to either come out of recession or to avoid falling into its trap. The result has been somewhat encouraging for those indulging in Quantitative Easing but we do know that every action has an equal and opposite reaction. That may be a law in Physics but we are witnessing the impact in the world of policy making as well. The mere mention of the prospect of tapering or end of Quantitative Easing leads to a bloodbath on financial markets in the emerging economies as indices come tumbling down.
Indian economy is no different in that sense. Increase in demand for Dollar as investors push for exit from the Indian stock and bond markets has hammered the Rupee. Three months back the debate was whether Rupee would hit 60. Quickly enough, by the beginning of September, the debate moved to the possibility of an exchange rate of 70 Rupees against a Dollar but one person seems to have changed the sentiment completely. This person was termed a 'Luddite' when he predicted the 2008 sub-prime crisis. Luckily for India, he is not the harbinger of doom but of hope, atleast that is what the world has come to believe. This, despite the fact that the April-June GDP growth numbers were disappointing. The gloom that should have set in given the GDP growth rate of 4.4% in the first quarter of financial year 2013-14 has given way to some kind of euphoria. All thanks to the appointment of a renowned Economist, Raghuram Rajan as the Governor of Reserve Bank of India.
The gentleman in question comes with impeccable credentials but one point has been appropriately raised against the 'feel good' factor that has come to occupy the national conscience and perhaps the investors have also not been left untouched by it. Remember, controlling India's ballooning fiscal deficit or the current account deficit is not exactly in the hands of the RBI Governor. It is the national Government that calls the shots on these issues.
The ideas that the new RBI Governor has come up with indeed inspire confidence but that is for the future and completely hinges on the fact whether he implements pioneering policies while clearly understanding the need for them or waits for a green signal from the Government. In many cases, that is hard to come by. The ambitious plans for making Rupee a currency for international trade and reducing the statutory limit for investment by banks in Government securities are some of the ideas that deserve a mention. These are ambitious plans that will take a long time to come to fruition if at all steps are taken in this direction.
The Government's finances are already stretched with the quarterly or the annual fiscal deficit numbers hovering around the 5 percent mark and the depreciation in the value of Rupee further adding to the woes. Creating parallel channels for Government debt will certainly take time. The immediate euphoria over the appointment of Mr. Raghuram Rajan as the RBI Governor does seem misplaced thus as in a matter of days sentiment seems to have seen a sea change. There is a positive here though. The economy that was only getting hammered by negative news from all quarters seems to have got something right all of a sudden even though the fundamentals remain the same. One thing that we can all agree on is that he has his task cut out. What should be the priority for him then?
Managing inflation with growth while ensuring the CAD does not spiral out of control was termed as a 'trilemma' that the previous Governor had to face. The circumstances of operation have not changed much for the new incumbent either. If anything, the situation is even worse. The sharp contrast is in the sentiment. The Rupee has seen a rebound and is now around 65 against the Dollar from the lows it touched beyond Rs. 69. Industry captains seem to agree to the pronouncements that the worst is over. The positive sentiment should work in the favour of the Governor but there is a point that is missing from the national debate right now. The bad debt of Government banks needs to be taken seriously, that too with immediate attention. A 10-12% share of bad debt in the overall finances is not exactly a frivolous matter especially when the credit default swaps are touching the highs and share prices of banks are plumbing new lows. Some action here would perhaps ward-off an economic mess in the making!
Indian economy is no different in that sense. Increase in demand for Dollar as investors push for exit from the Indian stock and bond markets has hammered the Rupee. Three months back the debate was whether Rupee would hit 60. Quickly enough, by the beginning of September, the debate moved to the possibility of an exchange rate of 70 Rupees against a Dollar but one person seems to have changed the sentiment completely. This person was termed a 'Luddite' when he predicted the 2008 sub-prime crisis. Luckily for India, he is not the harbinger of doom but of hope, atleast that is what the world has come to believe. This, despite the fact that the April-June GDP growth numbers were disappointing. The gloom that should have set in given the GDP growth rate of 4.4% in the first quarter of financial year 2013-14 has given way to some kind of euphoria. All thanks to the appointment of a renowned Economist, Raghuram Rajan as the Governor of Reserve Bank of India.
The gentleman in question comes with impeccable credentials but one point has been appropriately raised against the 'feel good' factor that has come to occupy the national conscience and perhaps the investors have also not been left untouched by it. Remember, controlling India's ballooning fiscal deficit or the current account deficit is not exactly in the hands of the RBI Governor. It is the national Government that calls the shots on these issues.
The ideas that the new RBI Governor has come up with indeed inspire confidence but that is for the future and completely hinges on the fact whether he implements pioneering policies while clearly understanding the need for them or waits for a green signal from the Government. In many cases, that is hard to come by. The ambitious plans for making Rupee a currency for international trade and reducing the statutory limit for investment by banks in Government securities are some of the ideas that deserve a mention. These are ambitious plans that will take a long time to come to fruition if at all steps are taken in this direction.
The Government's finances are already stretched with the quarterly or the annual fiscal deficit numbers hovering around the 5 percent mark and the depreciation in the value of Rupee further adding to the woes. Creating parallel channels for Government debt will certainly take time. The immediate euphoria over the appointment of Mr. Raghuram Rajan as the RBI Governor does seem misplaced thus as in a matter of days sentiment seems to have seen a sea change. There is a positive here though. The economy that was only getting hammered by negative news from all quarters seems to have got something right all of a sudden even though the fundamentals remain the same. One thing that we can all agree on is that he has his task cut out. What should be the priority for him then?
Managing inflation with growth while ensuring the CAD does not spiral out of control was termed as a 'trilemma' that the previous Governor had to face. The circumstances of operation have not changed much for the new incumbent either. If anything, the situation is even worse. The sharp contrast is in the sentiment. The Rupee has seen a rebound and is now around 65 against the Dollar from the lows it touched beyond Rs. 69. Industry captains seem to agree to the pronouncements that the worst is over. The positive sentiment should work in the favour of the Governor but there is a point that is missing from the national debate right now. The bad debt of Government banks needs to be taken seriously, that too with immediate attention. A 10-12% share of bad debt in the overall finances is not exactly a frivolous matter especially when the credit default swaps are touching the highs and share prices of banks are plumbing new lows. Some action here would perhaps ward-off an economic mess in the making!
