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Wednesday, August 07, 2013

Rupee makes dramatic recovery on Rajan's appointment as RBI chief
[Editor: Yesterday, in Facebook, I mentioned, if could we have a Pure Keynesian as the next governor of the RBI. Today, the FMO announced the name of the "Sensible Keynesian", Dr.Raghuram Rajan, who was a professor at the University of Chicago Booth School of Business, the heart of neoclassical mainstream ‘vulgar economics’, as Marx called mainstream economics – vulgar because it acted as an apologia to capitalism and was no longer an objective critique as the classical economists of Smith, Malthus and Ricardo had been. Dr.Rajan is also author of Faultlines, a book that claimed Rajan had been first to warn governors of central banks that excessive credit was leading to crisis. Dr.Rajan reluctantly admits that, "Targeted government spending, or reduced austerity, along the lines suggested by sensible Keynesians, might be feasible in some countries and helpful in speeding recovery. But we should examine each policy based on a country’s circumstances. We should be particularly wary of populist Keynesians, who parrot “in the long run we are dead” to justify any short-sighted government action. They do the world a disservice by suggesting there are easy ways out. By misleading people and their leaders, they may well precipitate revolution rather than recovery.” [Financial Times, May, 22, 2012].
Last year in an article in New York Times, Paul Krugman, called Dr.Rajan's arguments as "Sensible Nonsense". He said, "Again, I find it astonishing that anti-expansion arguments are advanced without even a bit of data in support, when a few minutes of looking at that data would make the foolishness of the arguments obvious. Why, it’s almost as if people are looking for reasons not to do anything, and aren’t interested in the facts".
Dr.Rajan seems to suggest that a "Sensible" Keynesian must advocate more austerity and cuts in government spending until the private sector recovers of its own accord.  The question is: can he therefore be called a Pure Keynesian?
Meanwhile, the Economic Times (7th August, 2013) writes: "
India needs lower interest rates to revive growth, but the sharp depreciation in the rupee requires rates to remain high, a conflict that the former IMF chief economist will find difficult to address, though he has hinted that he might give growth a little more attention".
Anyway, my sincere thanks to Mr.P Chidambaram and his team, for removing the non-performing Dr.Subbarao, though I would have been more happy if the name of Dr.Kaushik Basu would have been announced. 
Today Nifty_Spot closed at 5, 542.25 down 143.15 points. Now seeing the FII buying (Rs.212.74 Cr today) once again, I feel that the current market has bottomed out for the time being and we need to cross the next resistance of 5620, to confirm any upmove]
The Indian rupee made a dramatic recovery after the government announced the appointment of Raghuram Rajan, the chief economic adviser in the finance ministry, as the next governor of the Reserve Bank of India. (Read: Raghuram Rajan appointed next RBI governor)

The partially convertible rupee not only erased all losses, but ended higher at 60.77 per dollar as against Monday's close of 60.88. The rupee traded at 61.45 before the announcement of Mr Rajan's appointment.

Dealers said that RBI also intervened which helped prop up the rupee.

Heavy dollar demand from importers throughout the day had pressured the rupee before the RBI's intervention helped it recover and post a 0.2 per cent gain for the day, they said.

Earlier, the rupee had hit a record low of 61.80 surpassing the previous all-time low of 61.21 hit on July 8.

Independent economist Jay Shankar told NDTV that Dr Rajan's appointment will ensure good relations between the Reserve Bank in Mumbai and the finance ministry in New Delhi. (Read: Who is Raghuram Rajan)

"Given the current economic turmoil, we need a lot of global experience. A person who understands global economy and fund flows. It's a welcome move," Mr Shankar added.

India Inc. seemed buoyed on Dr Rajan's appointment as current governor D Subbarao was seen focusing on inflation and rupee over growth.

"The big mistake we have made is not to pay enough attention to the GDP growth of the country. We started to pay too much attention to other areas, which led the difficult economic situation, which led to current account deficit, which led to rupee depreciation. Growth needs to be tackled primarily," Adi Godrej, president of industry lobby CII told NDTV.

"Rajan's appointment is positive news. But I am not expecting any major shift in RBI policy given the constraints it has to face on macro and micro levels," said Pramod Patil, assistant vice president, forex and money markets at United Overseas Bank.

"Even though there was good dollar selling by state-run banks today, I feel the rupee will test 62 levels towards the weekend unless RBI takes some concrete action," he added.

The rupee has fallen 1.5 percent since the RBI unveiled measures to drain cash on July 15, raising doubts about the efficacy of the measures, especially as increased government spending has kept liquidity easy and not tight.

Analysts say the government would ultimately need to take meaningful steps to address the record high current account deficit and stem further declines in the rupee.

Dr Rajan will replace Dr Subbarao, whose tenure ends on September 4 after five years.

(With inputs from Reuters)

Courtesy: NDTV Profit