Reserve Bank of India (RBI) Governor Raghuram Rajan is part of the MIT gang which controls the global economic landscape but unlike the rest, he stands alone as the only hawk within a global deflationary environment…writes Vatsal Srivastava
Paul Krugman recently blogged about the dominance of the “MIT gang” in global economic policymaking. From Ben Bernanke (former Fed chairman) to Mario Draghi (ECB president) to Olivier Blanchard (IMF chief economist), the MIT educated economists have played a crucial role in steering the global economy out of the financial crisis.
Our beloved rockstar central banker, Raghuram Rajan is also a part of this MIT gang but unlike the rest, he stands alone as the only hawk within a global deflationary environment. As Rajan noted: “The Indian economic recover is still a work in progress.” But surely, further monetary easing can play no role in aiding this recover in Rajan’s eyes.
The worst aspect of Rajan’s press conferences is that he makes absolutely no effort to sound accommodative in the future. I don’t remember the last time the market was so unenthusiastic about the sharp fall in crude prices. Both crude benchmarks have fallen sharply and their three-year future contracts also point to a very weak or no recovery at all. But the RBI has the mandate to target an inflation basket which clearly seems to ignore the capitulation in oil.
Yes, our deficit situation is getting better day-by-day with the fall in energy prices which should have lead to an appreciation of the rupee. But the RBI has been recouping FX reserves at 60-62 acknowledging the fact that the dollar has begun a secular uptrend.
To expect easing from Rajan at the next policy meeting is absurd. Of course, August rainfall will play a crucial part in his decision. But I don’t think Rajan has the courage to front-run the US Fed as it is still unclear whether Janet Yellen will raise rates in September.
This is where one can make a case for some sort of silver lining in today’s decision to keep policy rates unchanged. The US bond market is currently trading at levels which imply only a 50 percent probability of a rate hike in September. If we get another solid jobs data report on Friday, one should expect the short end of the US treasury curve to rise, and rise sharply. The US equity markets are also trading at crucial technical levels. In fact, the Bollinger Band width indicator is the lowest it has been since the winter of 1993. This implies that a big move (maybe 5-10 percent) is coming soon. Recall what happened in 1994 when the Fed made the mistake of tightening too fast.
US markets are trading with a scary sense of calm right now and a repricing in the treasury market will lead to volatile moves across the global markets. If that is the case, Rajan will be well-placed in having some ammunition in his bag in terms of rate cuts.