Raghuram Rajan's dilemma

Damned if you do, damned if you don’t, is the uncomfortable position he is in

John Connally, US treasury secretary during Richard Nixon’s presidency is reported to have famously said to his developed country counterparts, “The dollar is our currency, but it's your problem.” There is quite some backdrop to that statement but the short point was that the US will run economic policies that serve its own interest and the others have no option but to grin and bear it. With the US only growing in economic heft, that truism continues to play out to this day. So, when the Federal Reserve Chair, Janet Yellen, decided to stick to status quo with respect to the Federal Funds rate, the rest have no option but to suck it up. A Yellen-modified version for emerging market central bankers would have read, ‘It is my interest rate but it’s your problem.’

Yellen might have stated that the recent economic turmoil in China had forced the Fed’s hand but the fact remains that so far interest rates have been scraping the bottom of the barrel to stoke a recovery in financial assets and thereby engineer a US economic recovery. While the Yellen Put is now a given, the US’ well-deserved economic heft does not go down well with the grasshoppers who having danced away the summer are unprepared for the winter ahead. One such grasshopper is India which still depends on portfolio flows to maintain sanity in its financial markets. And unlike China, India’s imperial ambitions may just be bombast but the economic pain that it is feeling is real.

The RBI governor, much relied on by investors, is now faced with a tough choice. While the Fed’s status quo hasn’t shrunk the yield cushion, Raghuram Rajan might be forced to act soon. Even though the mandarins at North Block have been baying for a rate cut, his stance in this monetary gasoline-spraying era has been staunchly rational. He may not have much of a fan club among spendthrifts but global investors would want him to stay on the job more than he himself might want to.

Then, if the latest August CPI data at 3.7% is to be believed, it is the first time after many years that savers are getting a real return on their bank deposits. The avowed inflation fighter that Rajan is, he would like to retain the yield cushion for a few more quarters. Not only would it encourage more savings, NPA-ridden state-owned banks could do with the rush of deposits and that would just add to whatever capital the state injects. That may be ideal but world over it is savers who have been hung out to dry and if push comes to shove, here, too, they should be no exception.