I do What I do is a compilation of Raghuram Rajan’s speeches & articles given at various forums. The thought & ideas he presented are quite impressive, straightforward and based on facts ‘available’ (As his predecessor had pointed in his memoir Who moved my Interest Rate, ‘everywhere in the world the future is uncertain, in India even the past is uncertain’). 

i Do wat I do

Thoroughly enjoyed reading his thoughts & his vulnerability of the media quoting him out of context every time he stepped out for an address.

On being asked whether I was dovish like Yellen or hawkish like Volcker, I wanted to pushback on attempt to pigeonhole me into existing stereotypes. Somewhat jokingly, I started in a James Bond – ish vein, ‘My name is Raghuram Rajan …‘ To my horror, mid-sentence I realized I did not know how to end in a way that did not reveal more on monetary policy than I intended. So with cameras trained on me, I ended lamely ‘… and I do what I do‘!

Below is my interpretation of the book – 

  • Every 1 rupee rise in dollar-rupee rate would cost us 40000 cr more in import duties. So FCNR deposits was taken as a planned risk – on coming out of the fragile five immediately after joining office
  • Whenever you want to embark on a set of actions in public life in India , it helps to have a report recommending the actions. It indicated wise people have thought deeply about the problem and give your actions legitimacy – Multiple instances are there to prove the same in our business environment as well. Is it an efficient way? The jury is still out. But it surely is an effective way
  • I was the last governor to set policy individually. Govt nominated its appointees to the monetary policy committee soon after I left office
  • Beating inflation via an illusion of an even higher impending inflation leads to inflationary spiral inhibiting growth. Lower rates do not motivate industrialise to invest more. Also, reducing rates during inflation doesn’t make sense as the depositor puts a floor to basic rate that has to beat inflation which leads them to invest in real assets rather than financial assets. This leads to borrowing to trigger investment in growth
  • MSP is set by CACP. Setting MSP may fuel food inflation as it also drives input cost. Also, it skews the farm production to rice and wheat leading to sub-optimal production mix of other needed commodities – On setting up of MSP by the government for certain commodities and how it impacts inflation
  • Interestingly, short term spikes in food staples are not really controllable by monetary policy, which then leads to the incorrect generalisation that since monetary policy cannot control the politically most important aspects of inflation, it cannot control inflation in general – on perceived impact of monetary and fiscal policy
  • True competition eliminates the need for planners, for as gravity guides water through the shortest path, competition naturally guides the economy to the most productive route. Without intervention, we get competition of the jungle where strong prey on the weak – on competition and why a guiding framework (intervention) is important in a competitive environment
  • The interest that we pay consists of a default risk premium, a term premium, an inflation risk premium, and the bank’s compensation of costs. None of which are directly affected by the policy rate – this is for us to know what constitutes the interest rates that we pay on loans
  • Observers may be impatient, but my belief is that steady and irreversible reforms and ‘mini bangs‘ rather than big bang is the need of the hour
  • Financial inclusion is about – broadening for people without access, deepening for people with minimal access and greater financial literacy to make apt choice. To ensure inclusion, mandates can work only for a short term. For true inclusion, the poor customer has to be made a lucrative/ profitable customer for the banks. Impediments to financial inclusion are – IIT Information, Incentives and Transaction costs
  • We have focused too much on expanding credit. Not much on easing payments and remittances, savings and easy insurances – ease of adoption makes it easier to enhance financial inclusion
  • Importance of debt recovery – we have too many sick firms and very few sick promoters – this is applicable to a lot of businesses as well. The prize for growth is immense but the penalty for default is weak/weakly executed
  • The mistake on all sides is to treat RBI governor as just another bureaucrat. The governor is the primary manager of macroeconomic risk in the country.
  • What dampened the India success story? The fiscal and monetary stimulus injected post 2008 crisis for growth led to inflation as the world did not slide into depression. Land or mineral wealth was cheap in the past, which meant very little reward to misallocate them. This growth increased scarcity and the value of these resources making it ripe for corruption
  • The poor needs the politician for jobs and services. The politician needs the businessman to provide funds for patronage to the poor and fight elections. The businessman needs the politician to get public resources and contracts cheaply. And the politician needs the poor for votes. Thus, maintaining status quo
  • Democracy treats every individual equally, with every adult getting one vote. The free enterprise system, by contrast, empowers consumers based on their income and property
  • We need check and balance, but we must also ensure balance of checks
  • With almost everyone at the same boat at IIT, for the first time in our lives we got a chance to bat and bowl at the nets, instead of being posted at deep long on to retrieve the odd six hit by the stars – This shows the importance of opportunity
  • The RBI does not pay interest on its liabilities (public currency and deposits to banks), but generates interest from its assets (government and foreign bonds). The total cost (printing and banker commission) is about 1/7 of interest income. After setting aside needed money for equity capital to maintain creditworthiness (about 10 lakh crore), RBI pays remaining surplus to government (about 66k crore per year in his tenure)
  • The investment managers have largely displaced banks and re-intermediated themselves between individuals and markets since the individual does not directly invest in the market but does through MF, insurance companies, pension funds etc. As competition between these increases, each one attempts to take more risk for a higher reward to assure a customer of better performance. They also do this since their incentive is higher for a higher return but the penalty is not so stern for a down slide
  • The investment manger is supposed to take care of 2 things – his beta (systemic risk) and his alpha (value addition that he brings to investment process). Few sources of alpha are as follows –
    1. Special abilities – only a warren buffet can do it
    2. Activism – a VC who transforms the inventor, a PE who makes a hostile takeover and cuts inefficiency, a vulture investor who buys default emerging market debt and presses authorities via legal devices to press the country to pay more
    3. Financial entrepreneurship or engineering – investing in exotic financial securities that are not easily available to ordinary investor
    4. Liquidity provision – investment managers who have liquidity to hold till arbitrage closes

Do share your views/feedback in the comments section

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