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Commentary

In God we Trust, Rest bring Data

The position of the RBI Governor is one of Prestige than Comforts. While the RBI Governor draws a Basic Salary of 2.5 Lakhs per month, the CEO of HDFC Bank, the premier most private sector bank in India draws a Salary of 80 Lakhs per month in addition to perks such as ESOP’s which can add a lot to the tally.

Allan Greenspan will be known by millions of people more than those who knew who the head of Citibank was during his tenure. Same is the case with RBI, the Governor’s are those willing to sacrifice a nice salary that could be obtained for being in charge of driving the decision making process at the RBI.

One of the perks of being the head of the Central Bank in most countries is that while they are answerable to the government of the day, they enjoy a very high degree of freedom in exercise of powers that accompany the office.

Yet, clashes between the Central Bank Chief’s and the Elected governments aren’t rare. Just last week when State Bank of Pakistan hiked Interest Rates, the Prime Minister expressed surprise and while talking about maintaining autonomy of State Bank of Pakistan (which is the Central Bank of Pakistan), he asked that in future no such decision be taken without taking the government into confidence first.

Recently, Trump accused Federal Reserve Chairman Jerome Powell of endangering the U.S. economy by raising interest rates.

Politicians around the world are the same. They wish that they have a Central Bank that is Autonomous to the outside world and yet follows the dikkat of the government. From Modi to Imran to Trump, all of them want their Central Banks to lower Interest Rates.

The biggest borrower in all countries remains the Government and a high interest rate means that much of the government budget gets eaten away by interest payments.  Lower the interest rate, better the ability of the government to borrow more without feeling the pinch.

For a moment assume India to be a Company and RBI to be the Auditor. If you are long stock of India and the Auditor after fighting the management for some time resigns due to “personal reasons”, how trustworthy do you think the accounts are – especially since a recent growth number brought out by the company was riddled with deficiencies.

Resignation of the governor of RBI is not the end of the world, yet it’s an important pivot and one that could well define how India fared.

The reason fiat money works is because of Trust – you remove or even start questioning the Trust and the Fiat currently starts looking more like an ordinary paper than a value of exchange.  The last time an RBI governor quit in protest due to “differences with the finance minister” was in the 1960’s when we were a much smaller and closed economy.

Emerging economies including India have had a great time in recent years thanks to the low interest rate and ballooning balance sheets of the Central Banks of US and Europe. But that easy money supply has more or less ended. US Fed is already well on course to contract the size of its Balance Sheet by removing 50 Billion from its Balance Sheet every month. ECB too will be starting the process most likely at the meeting to be held 3 days from now (December 13). With easy money on the way out, attracting FDI / FII money will become tougher for India is not the only emerging economy that is seen as attractive.

When a company loses the confidence of the investors, its tough but bearable to a extent.  But when it loses the trust and confidence of the Bankers, it can be a death knell, especially if the company requires outside finance for growth.

India is at a stage where we require tremendous amount of foreign capital to enable the country to life itself from the emerging nations to the developed nation state. This money though doesn’t come easy and instances like these will have people questioning the Risk Reward characteristics of investing in India in the first place.

“This too shall Pass” is a favourite phrase used by many to describe events that seem big at that juncture but will be all forgotten in time – anyone remember the Greek / Cyprus crisis that was supposed to doom the Global markets for instance? Yet, the markets don’t simply sail over such events – there is a opportunity for those willing to take the risk and threat to those who are already overexposed to the risk.

Markets will go through a tough period – weak hands will be thrown to the wolves while the strong hands will endure the pain to see the light of the new day. As long as you can sustain the pain and have invested in stocks that themselves can survive the oncoming tsunami, All izz Well.

But day’s like this aren’t forgotten for the lessons that could be learnt are too important and timeless to be overlooked by future historians. For Investors, the ride is about to get a lot more volatile.

 

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