How about Dr. Rajan taking a deep breath?

It was kinda amusing to read this statement from RBI’s still new Governor. So now each time the market declines, we will get a statement from RBI Governor saying all is well? I am also not sure about this whole personalisation of RBI. In the past, one usually saw such statements coming from RBI and not from the Governor. It reflected a more collective and institutional spirit of the central bank. Now it seems there is this whole agenda to create celebrity out of RBI Governor.

It is even more weird that someone who believes in markets tries to intervene and make a cool-sounding statement whenever markets decline. His tenure so far has been full of pep-talks which only look good till a point. Even the advanced economy central banks did not release such statements while their economies were in a tailspin.

If all is indeed well, why should the declining markets worry RBI? It will prop up in a while given how the new Governor believes in India’s economic fundamentals. But what happens is just the opposite. The pep-talk comes and revives the sentiment. Then economic data comes in and markets realize the reality and goes for a toss. And then the markets await for the next pep-talk..Earlier FM provided the pep-talk and now this task seems to have been delegated to RBI.

Markets are all about herds and mania mentality and nothing can be done about it. It is a fascination with policymakers that markets track economic fundamentals. With so much happening around the world economy and uncertainty which keep rising, how else should markets be reacting? One keeps hearing how India has grown by integrating itself to global economy. So it is obvious markets in India will react to the global developments as well.

In India’s case one cannot even say about economic fundamentals. Yes India is a huge demand story but we need lot of things for it to play. We are tired of hearing it now. There are constraints everywhere you see. There is a huge political risk playing with people clueless on what is on anvil.

Moreover, the current economic news is mostly bad. Most of the things which have been brought under control are via using sledge-hammer and not really in a fundamental fashion.

  • Fiscal deficit has been brought under control by cutting plan/capital expenditure
  • CAD by cutting gold
  • Rupee by taking off oil demand from markets and also subsidizing the FCNR(B) deposits

Where things have been allowed to move on their own – like inflation, IIP, etc. they continue to pose signs of real worry. With all CPI inflation above 10%, IIP showing below-par growth, GDP coming lower each quarter so much so we are likely to celebrate  5% growth, and so on…How else should markets react?

Markets have been held by just plain talking for a while. Earlier it was the FM and now it is the RBI Governor. Usually RBI Governors in the past have chided away from pep-talking markets and rightly so. They believe more in markets despite their oft-criticized interventionist attitude. RBI has no business to determine market levels and talk its way.

But can talking help address the macro weaknesses? It cannot and soon realization sets in. It is this constant fight between addressing macro fundas and pepping markets which has led to much of the chaos in global economy. Markets being herds forget these lessons time and again and keep moving up and down. So each time policymakers make some smooth talk, it recovers and as talk value diminishes, they decline and demand more talk. RBI usually has stayed away from such noise in the past with bulk of it provided from the North Block. How it was so irritating to hear various FinMin officials (both named and anonymous) providing comments as markets declined. As people stopped believing North Block and shifted to Mint Street and how the latter is obliging.

Infact, if there is so much worry about Indian markets declining, they should also be worried when they rise like they did recently. It was irrational exuberance at its best. There was no reason for equity and bond markets to rally as there was hardly any positive economic news barring Fed going off the taper. Whatever goes up fast comes down as fast. And as again we get the taper news, things again turned the same way. The markets are not moving as per Indian economic fundamentals Dr Rajan. If they were, markets would be trading much lower. It is basically the FII story which has kept pumping money as they have tons of it and need places to invest.

Central Bank talk is valuable only till a point. The more you do it, the more it loses its value and becomes cheaper. One might instead want to save this ammunition for later troubles like when taper actually starts.

Given India’s state of inflation, RBI should be really worried as it has been nearly four years of despair (as inflation started from Nov-09 onwards). 

As I write this, WPI for Oct-13 has come at 7% and guys we actually see a decline in food prices. Which wholesale market was this? We all should be rushing there. Core has moved from 2.11% to 2.63%. Aug-13 numbers have been revised by a whooping 15 tics (index from 177.5 to 179) from a 6.1% to 6.99%.

The statement says at the end:

There is no fundamental reason for volatility in the value of the rupee. We are left with fear about what others will fear and do to explain what is going on. At such times, it makes sense to take a deep breath and examine the fundamentals. I hope you all will do that.

How about RBI doing the same?

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