Raghuram Rajan is absolutely correct…
Not because RR is of my age, but somehow I seem to be liking this guy!
Speaking at Frankfurt RR made one statement saying ‘I am not sure whether keeping interest rates at zero or such low figure is a good idea’ . Agree with him. Completely agree.
If today I were to get money at 1% p.a. the chances are I will OVER LEVERAGE and borrow to my fullest extent and invest in all kinds of assets. That would be simply because such a low threshold level I would ‘assume’ would be easy to earn.
Exactly what people thought about equity markets in the period 2003-7. Here is an example…by a person who was then a Relationship Manager.
A client walked into the bank to pay Advance tax of Rs. 25,00,000. This RM was aghast that he was losing such a chunk of Casa. So he said ‘Sir Invest Rs. 25L in xxxx mutual fund equity scheme..I will get you a loan against this of Rs. 24L…use that money to pay the Advance tax.’
Absolutely ridiculous thing to do, but the client did it. So instead of losing Rs. 25L this RM had created a relationship of Rs. 49 lakhs. Obviously he got rewarded. Today he is a CXO in a bank. Cannot name him or the bank, he will lynch me.
So all such stupid strategies worked, and worked well.
Similarly Bernanke keeping the interest rate low in the US (and therefore around the world) the threshold investment rate – or the hurdle rate is very low.
When interest expectation is low asset prices are high. (Please read this sentence enough no. of times, you need to understand this mathematically) .
So low interest rates all over the world is a terrible background – this creates bubbles. We have no clue where all we are creating bubbles – real estate, gold, oil, commodities, ….and that is scary. We start to believe that this is the new normal!!
So RR talking about increasing interest rates makes a lot of sense. Also it makes sense for senior citizens to be compensated for some part of the loss that they are making to inflation!
So keeping the threshold a little higher, paying a reasonable return to the saver, giving partial compensation due to inflation loss – all this makes sense Raghuram Rajan, thanks…
Amrut
I like this guy as well.
He is the person who has guts to go against the system to do right things. He is the person who criticized fed’s chairman’s policies in chairman’s facilitation ceremony. He was the person who had predicted in 2006 itself about market bubble.
Krish
I am failed to understand why RBI governor is made so important. There is a limitation for monetary policies of what they can do to the economy. Govt can not raise diesel prices, cut subsidies and reduce military expenditure. Moreover it rolls over pay commission. If government can not reduce CAD, there is little can be done to improve the situation. Looking at RBI to fix state of economic affairs in the country is akin to thinking of air hostess managing the flight.
Bull Bhai
Anyone please explain
Similarly Bernanke keeping the interest rate low in the US (and therefore around the world) the threshold investment rate – or the hurdle rate is very low.
When interest expectation is low asset prices are high.
Sachin
@Krish,
If you –> “failed to understand why RBI governor is made so important.” then can you explain why their was turmoil in all equity markets when Mr Ben Bernanke said he is thinking of reduce buying bonds (taper) ?
So don’t underestimate the power of those who control money supply. Sometimes they wield more power than their political bosses.
Its like “Captain America” who is all powerful but he himself don’t know that !!!
Santhanam
@Krish,
//I am failed to understand why RBI governor is made so important ? //
It took one T.N. Seshan (who had real spines/guts) to make understand people of India that there is an official called “Chief Election Commissioner of India” (in fact he is the 10th “Chief Election Commissioner of India” and most people remember only him).
I hope that Raghuram Rajan will also make understand people that “RBI Governor” has an important role to play in India.
I pray that RR is also aware of lots of poor people (like street vegetable vendors, street food hawkers etc.) who don’t have a permanent address/credit history & out of the current Banking System, who pay usurious interest rates (colloquially known as “Kanthu Vatti”, “meter vatti”, “blade interest”) for loans taken from local financiers.
Anon
I have personally observed local financier charging Rs 10 as interest for a Rs 100 loan to a hawker… and you wont believe it was for per day…yes per day Rs 10 interest for Rs 100 loan for a hawker.
Unfortunately the hawker don’t understand maths and how it is going to impact him… i simply paid his Rs 100 to financier and closed his loan. RBI governor need to understand how important is to especially bring all poor guys into banking system.
Krish
@Sachin. One may be King of ants but that does not make him King of Jungle. Comparing RR with Ben is as rediculous as it. Understand howmuch US media is covering our Indian PM visit in US. Nothing in print or national channels. Those who had been to US would never dare to compare anything with India in physical infra or protection to its citizen.
Why not we focus on simple and proper garbage collection, 24-hr water supply and regular power at homes or traffic congenstion than REPOs, CRRs & FOREX. Protection to citizens : Keep on adding metal detectors everywhere including your own home. Ask how our female population feels after recent incidents.
80% of our stock market is bought by FIIs and imagine what will happen if this oxygen supply gets exhausted or stopped.
bharat shah
i read somewhere that the previous RBI governor wanted to raise interest rates , but FM did not allow then. i think , the real powers of USA counterpart may be different than india RBI governor.
Sachin
@Krish, Now you are bang on… comparing between Ben and RR is ridiculous. But i just wanted to put my point that they have some power WITHIN their jurisdiction. King of Ant can control ants family and unfortunately Indian people are ants now.
I am in USA so i can see the diff. MMS is no where in US media. US media is giving more bytes to Europe and middle east (iran, syria, israel, egypt) than India even now. MMS should feel lucky to get time (my be last time) to meet Obama.
amarrdiip
Some thing new I learn today morning
Indian
Are u ready to pay the comparable charges for waste disposable &water charges in India as in US. 99% ppl don’t pay charges here but demand services.