Now that they’ve gotten rid of Rajan, India’s former central banker has some parting advice for his fellow economists: be wary of low interest rates and exhausted, depleted institutional capital in an age as threatening as ours.
Modi’s recovery in replacing Rajan with a deputy was sound maneuvering, but I’m afraid the damage was done and it was permanent damage! In my view, Modi’s regime has begun its terminal decline evidenced in Modi’s unwillingness to openly confront powerful Indian oligarchies, the very clique that sought to hurt Rajan hasn’t been cornered.
Here’s a little history.
India’s bicameral structure of its legislative house is identical to England’s. Its upper Senatorial chamber is identical to England’s House of Lord’s, except it is business interests not hereditary titles that underwrites its social cache. Rajan’s reformation of the central banks business relation to this chamber threatened entrenched interests. He simply had to go.
India’s new central banker has sought to alleviate this seemingly permanent albatross by implementing or openly reforming India’s moribund bond markets. If this parry fails, both India’s democracy and its turn toward free market reform is irreparably damaged.
By servicing a permanent upper-class with direct loans from the central bank damaged the credibility of the RBI. Rajan openly confronted this cronyism by having these titians of industry openly fix failing loans. His successor seeks to have monies raised from investors through open bond auctions. This challenges the state owned banking sector that owns over 70% India’s banks. It means this new arrangement will threaten struggling companies seeking capital; it also means an end to the nepotism between the RBI & this oligarchy.
Rajan and his cohorts knew something these industry tycoon’s didn’t: price discovery and stability requires a sound secondary market. As of August 25, business seeking capital at the RBI’s repo facility can use corporate bonds as collateral. Favoring the buying and selling of bonds by institutional clients removes the RBI from crony political relations while servicing an interest India badly needs; functioning capital/bond markets.
Let’s hope India’s tycoon class has the temerity to seek its own interests: openly and with confidence. Something it never had to do.
Review of Rajan’s Tenure at India’s Central Bank, from Hindustan Times.