NDTV exclusive: Sleep was hard to come by when rupee was plummeting, says Raghuram Rajan

NDTV exclusive: Sleep was hard to come by when rupee was plummeting, says Raghuram Rajan
New Delhi: 

Reserve Bank of India (RBI) Governor Raghuram Rajan has said that tough measures like raising rates are needed to tackle inflation in India. In an exclusive interview to NDTV's Prannoy Roy, Dr Rajan's message to India Inc is: Bear with us. If we don't fix inflation now, the problem will get worse.

He also shares that sleep was hard to come by when the rupee was plummeting against the dollar.

Transcript of the interview:

Dr Prannoy Roy: Hello and welcome to this special fireside chat with Dr Raghuram Rajan, the Governor of the Reserve Bank of India. I say fireside chat only because he is right by, sitting by a country whose economy, especially its inflation rate, is on fire, so not the typical fireside chat. Many have described the decision to make Dr Rajan the RBI Governor as the best decision this government has made in the last five years. Frankly that's not saying much, and I think he will be very happy with it. It reminds me of a time when we used to do The World This Week and people used to tell us, it was a show on Doordarshan, they used to say, it's the best thing on Doordarshan. And then they ran but Doordarshan isn't too good is it? So, it's a kind of backhanded compliment. But if you ask me, and if you read the reviews, I think by global standards, it was a brilliant decision. Some of the reviews in fact that I have read about the appointment as RBI governor of Dr. Rajan said that, "Oh God I wish he had been made the Chairman of the US Federal Reserve." I wonder which he would have preferred given the situation right now.

But overall I'll just start with one anecdote about Dr Rajan. Three years before the crash of 2008-2009 he made a speech at a very public important gathering. And he warned the world that a financial crisis was about to happen. And a great economist, Larry Summers, and many others, said he was not right. In fact Larry Summers called him a Luddite, pretty strong words. But in the end Larry Summers was wrong, Dr Rajan was right. And if they had done something some of the pain could have been avoided. But now they do listen to Dr Rajan. That's a true story, right? He did call you a Luddite?

Dr Raghuram Rajan: Well, yes. He did call me a Luddite. And it was because he thought I was saying lets do away with modern finance. Lets go back to the boring banks and so he thought I was going to reverse progress and suggest that

Dr Prannoy Roy: He didn't listen to you. You're undermined, you weren't against; you weren't going to go back

Dr Raghuram Rajan: Well, yes. I didn't want to go back. But I wanted to make better. I wanted to curb the risk taking, which I thought was excessive. We needed to control risk in the modern financial system. And, in a way I was advocating a return to boring monopolistic banks. However, to some extent, even then I sympathised with where he was coming from, which is that, "regulators all the time are faced with loony's saying world is coming to an end, watch this, or watch that" And even today people would say there are housing booms, prices are going through roofs. There is a bubble

Dr Prannoy Roy: That's been very modest on your part. Because there were not too many who so accurately and specifically pointed to the financial crisis and why it was going to happen. So if you saw Larry Summers right now, sitting here, what would you say to him?

Dr Raghuram Rajan: Well! Larry and I have talked about it. He is been very, very ...

Dr Prannoy Roy: Contrite?

Dr Raghuram Rajan: Not contrite. Look, he recognises that perhaps a lot of people, including him, were oversold on the benefits.

Dr Prannoy Roy: Larry Summers recognises he might have been wrong?

Dr Raghuram Rajan: I think a lot of people thought that the markets would take care of themselves; that people in markets were responsible adults and that they had the right incentives. They were right about the responsible adults, they were right about; these are the smartest guys on the planet. Where they were wrong is that these guys had the right incentives. And I think that they have recognised and I think they will try to make it sure that it doesn't happen.

Dr Prannoy Roy: You know the story about the Queen of England going to LSE and looking at all these great economists and said, "Why couldn't one of you forecast that what was this crisis that is surrounding us?" Everybody looked a little sheepish and you could have stood there and said talk to me

Dr Raghuram Rajan: Yes. No. I mean I am not being modest. Look, a lot of dealing with the crisis is also about the predicting about the timing. You can see the forces at work.

Dr Prannoy Roy: But you were pretty close

Dr Raghuram Rajan: Yes, but Bob Shiller predicting a housing crash. He just won the Nobel Prize for all his work. There were others. But the key of course is to get it right, to get the timing right. And you can see the forces in any place.

Dr Prannoy Roy: I am going to come to what you are saying for India. I would just like to divide this chat into two parts. First part: What's the problem? Second part: What's the solution? And there is a third part, which he doesn't even know about. It's a surprise part. So, the Problem, let's just take a look at India's inflation. Basically for 28 years our inflation rate was way below other emerging markets. And suddenly in the last five years we are right about a 130th and 140th, we are in the bottom quota. Our inflation rate is way higher than most significant emerging markets. What went wrong?

Dr Raghuram Rajan: I think if you have to pick one source of our inflation it would be food. And the question is why have food prices sky rocketed? But I think focusing only on food would be problematic, because it's not just food. Food is part of it, but services have been increasing at high rates also, whether it's health care, whether it is education, whether it's housing services. So we do have an inflation problem. And it comes partly because our population is demanding more food, more services. And of course part of the answer is we haven't been able to supply it at the rate that the demand has been increasing. And the key issue is why are we not able to supply at the same rate? And of course there we come into a variety of constraints on production that we have to alleviate.

Dr Prannoy Roy: A lot of people say that, and I have studied this as well, the terms of trade went against agriculture for about 20 years right up to five years ago. And it was time for the terms of trade to go back to favour the farmer. He suffered for twenty years and if you talk to many farmers now they are very happy.

Dr Raghuram Rajan: Absolutely.

Dr Prannoy Roy: The prices have gone up. Their land value has gone up. They are making money. Their kids are going to school for the first time. So this worry about food inflation is an urban phenomenon to some extent because farmers, a lot of them, have gained from that. Haven't they?

Dr Raghuram Rajan: No. Absolutely. I am not saying this is an unmitigated evil in any way. Clearly there has been a change in terms of trade, to some extent pushed by the government, in terms of minimum support price increasing. But its also spread, the inflation, from all that has spread beyond food to wages. Remember many of our workers are at subsistence level. When food prices increase, their wages increase. But wage is at the bottom, then push wages up elsewhere. So across the board you have seen wage inflation, for example, in rural areas till recently was growing at a very high rate. And that feeds into every other service. Where does construction labour come from? From the rural area; so its fed through the economy. Now clearly people have benefited. But equally clearly inflationary expectations are high now. And if in the long run we think that the poorest of the poor are affected by high inflation, but also decision-making becomes more difficult. Your savings, you are not willing to save in financial assets because it gets eroded. All those reasons suggest we need to bring inflation down. And that means we have to take a tough stance.

Dr Prannoy Roy: You must have read advice to you that be a Paul Walker. Go and smash inflation. Smash inflationary expectations. Doesn't matter if you go into recession because in the end you will have the foundation to have a great rebound. So are you a Paul Walker?

Dr Raghuram Rajan: People have a very dramatic view of what needs to be done. We have to be very careful. Can we afford 18% interest rates today? And the answer is we have a weak economy. We have a weak corporate sector. Some of it is highly levered. And we have to be mindful of all that the patient may not survive the medicine. So you have to be careful that your rate of disinflation matches the health of the economy. So we are taking measured steps. Of course there is a point at which you have to act more aggressively. At this point we think we are as aggressive as we need be, given our estimates of already the weak economy, and the fact that that causes prices to weaken in the right direction. So we think interest rates are about where they should be, but we will monitor the economy very carefully. The message we want to send is we will be vigilant and we are trying to bring this inflationary, sort of high inflationary period, to an end.

Dr Prannoy Roy: Is there a, I know it is difficult for you to answer, is there a mandate from the overall government saying elections are coming up 6 months, 200 days, 198 days now; do anything, but do not ignore inflation? Is there a mandate overall because of the elections?

Dr Raghuram Rajan: I think that there is no mandate because of elections. I think the general sense in government and in the Reserve Bank is we have two, two goals. We have to ensure relatively low inflation because that hurts everybody. But also ...

Dr Prannoy Roy: Except the farmers? They may be...

Dr Raghuram Rajan: But right now, not the farmers. But remember minimum support prices have been raised only by fraction of the rate by which they were raised in the past. And so, at some point it will stabilise and they will start getting hurt by inflation. Already as I said rural wages are not growing any faster and maybe coming down even more. Inflation is going to start hurting in real terms, even in rural areas, if we don't bring it down.

Dr Prannoy Roy: So you are not Paul Walker but you are an inflation hawk, that you will deny, right?

Dr Rahuram Rajan: These terms get bandied around. The truth is the best way we can support growth at the Reserve Bank are really two: One which is consistent with central banks everywhere is to bring down inflation to a level where an ordinary person doesn't have to worry about it everyday and decisions can be made about investments, about savings without these kinds of problems. I mean, take one from inflations causing, manufactured goods they are not seeing high inflation.

Dr Prannoy Roy: Manufactured goods are 2%-3% investment.

Dr Raghuram Rajan: Exactly. So for them if I set the interest rate at 10 percent, they are seeing a huge interest rate. They are saying it's killing us. On the other hands if you look at the saver, he is saying 10 percent is not enough. You are inflating away because I have to pay for my consumption goods at 11-12 percent a year. The point here is....

Dr Prannoy Roy: So he just goes into assets or gold or something

Dr Raghuram Rajan: Exactly. And so saving rates in the country fall, net effect we will go borrow from outside to finance our investment. The point is that inflation is hurting us, creating distortions. We need to bring it down so the manufacturer sees the same inflation rate as the consumer. And that interest rate brings them together.

Dr Prannoy Roy: Actually there is a huge disparity, I think if you look at the CPI right now inflationary rate overall is 9.8-10 percent.

Dr Raghuram Rajan: 9.8 yes

Dr Prannoy Roy: But manufacturing is about 2%

Dr Raghuram Rajan: Exactly, 2.1

Dr Prannoy Roy: But food is 18%.

Dr Raghuram Rajan: Exactly.

Dr Prannoy Roy: So that's such a difference, I mean inflation. You have got a real tricky problem

Dr Raghuram Rajan: Right, the variability starts killing you

Dr Prannoy Roy: Between different sectors, not only over time but across

Dr Raghuram Rajan: Now some of the variability is good because it takes resources towards the areas, which are high inflation. If you look at the elements of food, which have been increasing in price in the past, you are seeing resources moving towards that, more production being created. For example poultry, for example milk, there has been more production and some of those inflation rates have stabilised. But you know you want to do it in a better way than you know massive rates of inflation causing...

Dr Prannoy Roy: And this is not a planned distribution or re-distribution of your product

Dr Raghuram Rajan: Exactly

Dr Prannoy Roy: But one thing, which I don't believe in, but I would just love to know your views, general belief in India is that food prices, inflation in food is caused by hoarders. Do you believe that?

Dr Raghuram Rajan: You know, I mean some element of timing they could be. I have onions. I would rather, if I think the price is going up, hold it from the market. But you know as a general explanation I don't think it works. I think at a particular point sometime and of course what happens is, you know once prices goes up then you have people planting more onions. As you know from your days in the, I shouldn't say days as an economist, you are an economist and you know that there is a hog cycle. You see prices going up suddenly you create more hogs and suddenly there is a glut of hogs. So, I don't think speculation, hoarding, I think certain periods, certain points in time maybe there is certain cause to believe that....

Dr Prannoy Roy: But it's not a general explanation

Dr Raghuram Rajan: It's not a general explanation

Dr Prannoy Roy: It's like an excuse.

Dr Raghuram Rajan: Yes

Dr Prannoy Roy: But there is that worry that in this kind of a skewed situation where manufacturing is 2% and food is 18%, what rule can the RBI do to control 18% inflation in food? Onions, what can you do? That's another area, just import or increase supply or...

Dr Raghuram Rajan: We can't, we can't control onion prices.

Dr Prannoy Roy: You can't?

Dr Raghuram Rajan: Not in the short run. In the longer run what we have to do is bring down people's expectations of inflation, and then give the onion farmer less incentive to raise onion prices when he is selling it in the market. You know reducing his cost increases so that he feels comfortable selling it at a lower price. I mean the point is that inflation gets embedded and to start reversing it is a hard process, but it is a necessary process. And for that there is some amount of pain, which has to be experienced by the economy. This inflation is not necessarily pain free. I am hoping that the slow growth we have already is part of the pain we are occurring, incurring in order to get the dis-inflationary process working and there is only limited amount of pain we need in addition.

Dr Prannoy Roy: You don't want to step on the brakes so hard that the passengers fly through the windscreen

Dr Raghuram Rajan: Absolutely

Dr Prannoy Roy: So that's the main point. How you do it?

Dr Raghuram Rajan: I mean we are a poor economy. You don't want to step so hard that you have business failures. You have people with massive unemployment that would be problematic in its own right. So it's a measured process and I am hopeful that with a bountiful harvest we will get some benefit.

Dr Prannoy Roy: It's great to have a good monsoon this year.

Dr Raghuram Rajan: It comes at the right time

Dr Prannoy Roy: Just spot on. I mean when inflation is at a higher and a good monsoon. One issue, just like your views on every country in the world, just have a look at, as declared, at a target interest, a target inflation rate, is this what we are comfortable with that or below? For example Brazil says 4.5, China says 3.5% inflation, Indonesia 4.5 and Turkey 5. But India stands out as, we don't know what our target is, where we say look, this is what we are targeting. And let the world know, this is what we are targeting, and we will try and achieve that. What would your target, I know that the indices in India are not quite right yet. The wholesale price index has got problems, no services in it. CPI is still to be refined and I think you are doing quite a lot of work on both these indices. But with a proper index what would be your target inflation?

Dr Raghuram Rajan: Well, I think with the wholesale price index we would say 5 %. It's a little higher from other countries. You know we are early days, in terms of sticking and hitting the target and sticking to it.

Dr Prannoy Roy: That's not bad for a growing economy

Dr Raghuram Rajan: Absolutely and for a poor economy where the processes are less well established. As far as the CPI goes we have to get more comfortable with the series. What it really means, how it moves over time, before we can put a sort of target in stone

Dr Prannoy Roy: I have a request, when I was with government for a short period I worked on de-seasonalising all our indices, because India is much more seasonal than the other countries because of the monsoon, harvest etc. Can't we de-seasonalise? This year on year is a very inaccurate figure, doesn't tell you the latest inflation pressures

Dr Raghuram Rajan: Absolutely, I couldn't agree with you more. The key of course is trying to explain it to the public. Because the public has got...

Dr Prannoy Roy: You just publish only de-seasonalising. That's what everybody does. This is the inflation rate. You don't go one year ago it was...

Dr Raghuram Rajan: But that goes to my first point. You need to understand the dynamics of this CPI inflation better so we can de-seasonalise in a better way. But you are right. We should be looking at the momentum of inflation rather than what happened last year, where are we this year

Dr Prannoy Roy: It doesn't tell us latest movements

Dr Raghuram Rajan: Absolutely

Dr Prannoy Roy: If I just get onto industry, who are facing a tough time right now. I just want to ask you, I loved your analogy about cricket and that we get too euphoric when we do well and get too critical. Dhoni has been through it and now you are the new Dhoni of the financial sector. But I have one difference with that analogy and that is globally there is a bit of pessimism in India. Now where ever you travel negative feedback on India, falling off the map a bit. Then India- China is not talked about so much. What went wrong with that wonderful India story?

Dr Raghram Rajan: We slowed down

Dr Prannoy Roy: Why did you slow down?

Dr Rahuram Rajan: Well, we slowed down partly because we came up against constraints to our growth, which we had not fixed, which in years of strong growth our institutional structures also worked on and to some extent we came to realise that these were problems.

Dr Prannoy Roy: We need some example.

Dr Raghuram Rajan: Allocating resources. When coal was plentiful we didn't need coal mines and then we started growing. We started building power plants, needing more coal. And we came to the limits of what coal in India could produce. We needed private allocation. We didn't have a system to allocate privately. And then we have Coalgate. And that slows down the whole process even further. Except from allocation, we have had problems with that. But allocation...

Dr Prannoy Roy: What about things like, which depressed most of the world, retrospective tax, this kind of error?

Dr Raghuram Rajan: Some of those, in hindsight, were definitely avoidable. Let's take the Vodafone case. Yes retrospective tax. We can talk about the semantics of retrospective tax and so on. But the key however is that the story doesn't get out in a way, that in a sense, is yet to be taxed. That it's still unsettled. They have been talking for so much time. Some compromise will eventually arise, but more important that despite this they putting more money into India. And buying back all the equity, that's outstanding, suggesting that they think there is money to be made. This is the story that doesn't get out, that the foreign co-operation in India, the ones who learnt to work with the system are making money. Hindustan Lever tried to buy back a significant chunk of its equity. People are seeing there's money to be made. And this is different from the FDI experience in some other countries. So, my point is it's not just us, because we are an open society, because we talk about it all the time.

Dr Prannoy Roy: ...and because of the media.

Dr Raghuram Rajan: Your job is not to tell feel good stories all the time. Your job is to point out problems. And then we have foreign correspondents who are here, who see the media, who read the papers, who do a little bit of poking around. And what sells now? It's the bad stuff. We feared India as a competitor. As Chindia, we are close to China. But you know it's not all it's cut out to be. The Nandan Nilekani quote, Cornell as a safety school. That scared a lot of people. I had people, billionaires in the US, saying will my son actually have a living? Where is your son? Stanford, Harvard. That was the level of fear that India inspired. And there is a little bit of comeuppance now, "Oh yes, they are not such tough guys" And there's relief. And therefore there is a little bit of also focus on how bad are these guys really? Which was ignored then. At that time too

Dr Prannoy Roy: And that was pushed by the Brits; because it helped the West as well.

Dr Raghuram Rajan: There is a little bit of that.

Dr Prannoy Roy: Although I must say there are quite a few people who did that; Democracy, with a high growth rate, was great to see.

Dr Raghuram Rajan: I think that is the India story. When we get over this, and I am saying when, not if, when we get over this period of slow growth, when we get back to stronger growth, and when our people, when the country is a middle income country, the one difference from other countries, Asian countries, large countries that have grown, is that we will have grown with democracy.

Dr Prannoy Roy: Which is a wonderful feeling

Dr Raghuram Rajan: Absolutely. That there is a message to send to the rest of the world, that it can be done.

Dr Prannoy Roy: So in some sense this is obviously simplifying what you are saying. You are saying that really institutional, systematic problems we had, and probably will have, that prevented us from continuing on a high growth rate, a bit like your speech in 2005 and 2006, where you said there is a systemic problem which will cause a financial crisis. So similarly here there are systematic problems like allocation of resources, which we have to solve.

Dr Raghuram Rajan: Absolutely. We have to. And to some extent our democracy is both pointing out the problems as well as pushing institutions to try and solve them.

Dr Prannoy Roy: Do you feel, I mean to be really positive in a way of thinking that this whole process is a catharsis, is a cleansing process? We are finding things, which use to be under the carpet before and we have demanded that they be fixed

Dr Raghuram Rajan: Of course it is. It is clearly that process. The danger that we have to be wary of, is that we get convinced ourselves, that finding all these problems, that we are a no good society, that no good economy, nothing happens. And we get into a funk. And this is where we need rebuilding of the animal spirits, that we can do it and fix the problems and move ahead. And this is why one of the important things I wanted to say is lets not mistake our long-term issues, which we need to solve, for the short-term problems, which are easier to solve. So longer term we need better infrastructure. We need better education. We need much more reasonable regulation. And we need a stronger financial system. But these are five to ten year issues that we need to solve. Short run it was implementation, it was let's get a clear, transparent system for allocating coal mines, let us get a decent system for allocating spectrum. And we are in the process of solving them. So my sense is that when people from the West look, "Oh, these guys don't have manufacturing", that's really why they are in the dumps. No. No. That's not why we are in dumps. We are slowing down because we expanded too fast and we have these...

Dr Prannoy Roy: Old Systems.

Dr Raghuram Rajan: Yes

Dr Prannoy Roy: So what you are saying is with these old systems, if these remain in place, our growth rate is going to be capped at 4 to 5 percent. If we change the system we can go back to our 9-10% on a long-term basis.

Dr Raghuram Rajan: See 7-8 is what is feasible. These are all numbers, guess work

Dr Prannoy Roy: Yes. I love the way we put it out with decimals. You mean 7.25%

Dr Raghuram Rajan: Yes, absolutely. I think we could get back to a decent, remember 8% is what we grew at from 2002 to 2012 on average. We can get back to that if we fix the allocation processes and there is confidence in them.

Dr Prannoy Roy: And that's not so tough to fix

Dr Raghuram Rajan: It's not that difficult. Now I do think we can go to 12. But for that we need to fix the other four problems, infrastructure, human capital, regulation and finance.

Dr Prannoy Roy: And those are slightly longer but 7 to 8 to 9%, by these quick fixes, I mean not difficult fixes, are doable.

Dr Raghuram Rajan: Absolutely

Dr Prannoy Roy: I do want to come to industry, because man they are, you are not the most popular cricketer with them. They have got a triple squeeze. Their prices are not going up, it's about 2 %. Their interest rates are what, 10%, whatever, more than that. And anybody who is importing stuff it's gone up by 15-16%. So their costs are going up, their output prices are not going up. Any words to industrialists to say there is the end of the tunnel ahead. Or you want to just...

Dr Raghuram Rajan: No, I am hoping their growth starts picking up for reasons other than what we are doing. Like the monsoon, like the exports, like the un-stalling fuel, well that's a bad word for what the CCI, Cabinet Committee on Investment is doing. Large projects coming on screen will be very helpful. I also think that some of what we are doing in financial sector reforms will help establish growth over the short-medium term, probably more medium term than short term. But the message I think Industry has to hear is that if we don't fix inflation now, the problem will get worse. And that squeeze they talking about, their prices which are determined by global competition, global trade, will stay relatively fixed. Their cost is going to go through the roof because they are paying for services, they are paying for inputs; they are paying wages. So they are going to get squeezed more unless we tackle inflation. And I would say bear with us. We have to do this in your interest.

Dr Prannoy Roy: But, it's a short-term bitter medicine. And industry has to live with this for a while

Dr Raghuram Rajan: I think they have to. And I think they have to see it as part of the longer term short of solution, the medium-term solution.

Dr Prannoy Roy: Saying if he is an economist in the long run we are all dead. So, I don't know. How long is long?

Dr Raghuram Rajan: No. We will be alive. Over the next few years, when hopefully inflation would have come down and they can celebrate

Dr Prannoy Roy: I do want to go to the, how our growth went slip sliding away? You wouldn't know that?

Dr Raghuram Rajan: Yes. I know that. I am your generation.

Dr Prannoy Roy: For 10 years, we were growing at 8, 6-7-8-9 percent, and then 2009 suddenly we just started going down, down, down, and right down to now 5%. Why did that happen, in sharp 2009?

Dr Raghuram Rajan: 2007-8, global crisis went down. Actually '08 -'09 is the year we went down, and then '09, '10 '11 we picked up very rapidly. Two years of very strong growth and that's where I think part of the problem arose. We did three stimulus packages on the fiscal side, monetary, we cut interest rates very sharply again because was saying growth is so...

Dr Prannoy Roy: That's true, that's true. Yes

Dr Raghuram Rajan: Two years of very strong growth and where I think part of the problem arose that we did stimulus, three stimulus packages on the fiscal side, monetary we cut interest rates very sharply. Again, because people were saying growth is very slow and at that point of time we ignored the fact that CPI inflation was already high even during the crisis. And I think, to some extent, those stimulus in hindsight of course, hindsight, is 20-20 too much. And we started having high rates of inflation, excessively high rates of growth and put on that the problem of these allocations comes back to hit us at that point. And put one more, said officials, on that which is we become more conscious about development and its effects on the environment. We become conscious of its effects on our tribal population and we start trying to put it in safeguards, the Forest Act, the Environment Protection laws that we start implementing. All these come together sort of a perfect storm.

Dr Prannoy Roy: Exactly, perfect storm.

Dr Raghuram Rajan: Over time we will learn how to protect the environment but not having infinite delays in permissions while protecting it.

Dr Prannoy Roy: These infinite delays, that every project seems to go through, that has to end otherwise we are back to a 4 to 5 % capped rate, the new Hindu rate of gold.

Dr Raghuram Rajan: Absolutely. I think we have a short term fix which is coordination at the very top, saying we've got to clear these projects, that's the Cabinet Committee on Investment and its supporting Secretariat. But long term that cannot be a permanent fix, we have to create the structures within the Ministries that are willing to speed up these decisions.

Dr Prannoy Roy: To get rid of these systematizing problems, allocation problems, don't go in for too much artificial boosting of the economy and you have a new 9 to 10%...

Dr Raghuram Rajan: 7 to 8, 7 to 8...

Dr Prannoy Roy: In the long run

Dr Raghuram Rajan: 7 to 8, then you need to do the other stuff to get to the 9 to 10

Dr Prannoy Roy: 7 to 8 is not bad. You can do that for a while.

Dr Raghuram Rajan: It's great

Dr Prannoy Roy: I want to come to the Rupee. Again for a long while it was pretty stable, 45-50 you know, between that. Then it went into this free fall, suddenly from 50 to 65. Then you came in then it went back to about 61-62. I mean the world really lauded the measures you took and felt confidence in it. But what, two questions, what led to that free fall in such a short time and is that free fall over? Are we stable now?
Dr Raghuram Rajan: Well first, as a central bank you should never say never. So the moment I say yes, you cannot display any complacency. You have to be aware of what could happen. So I won't say we are immune from it. I will say we are much better prepared to avoid such an event. I think what was happening is, there was a little bit of panic setting in. You know on one hand, the government and the RBI were taking a number of decisions to try and prevent the panic. But given that investors across the globe weren't fully aware of why we are doing it. Suddenly people started thinking there is more to it than we thought.

Dr Prannoy Roy: If they are working so hard trying to fix it then there must be something broken

Dr Raghuram Rajan: I think there was a little bit of that and the ill informed started saying okay, sell India and a lot of investors tell me, I mean longer term investors tell me that they were getting calls you know, from head office saying why are you still in India, haven't you read the newspaper, they are a basket case on this and everything. And my sort of concern was how a country with 280 billion in reserves, with external debt of about 22% GDP, how come we got so close to the edge, because we can pay back all our short term debt with our reserves tomorrow. And...

Dr Prannoy Roy: Twice, I think

Dr Raghuram Rajan: More than that. But the issue is why did we come to such an edge? And I think it was really the build up of all this.

Dr Prannoy Roy: I hate to use the phrase 'Chinese whispers' playing up

Dr Raghuram Rajan: Absolutely there was a certain amount of that. And in a sense the solution to that was to change the conversation a little bit, which was...

Dr Prannoy Roy: I know it's tough for you to say this, are you comfortable with 60-61-62 Rupees?

Dr Raghuram Rajan: Well, I think the right way to say it is we don't know at what level it will settle at. What we do need to do before we are comfortable that the market has reached an equilibrium, is remember we took the oil demand off the market. We are giving the oil companies dollars directly. We need to get them back onto the market to purchase dollars. Similarly we have sort of diverted all the FC in our NRI deposits directly into our treasury. We are taking the dollars directly...

Dr Prannoy Roy: Some measures I am just saying for the viewers maybe a bit temporary.

Dr Rahguram Rajan: Yes we have to bring all those measures to an end as they get back to the market, then we will have a market which is fully, sort of, there is full participation. Typically markets are supposed to anticipate all this. So you know is the market equilibrium much different from 61 and change, which we are. I won't think so. But I don't know until I get it all back.

Dr Prannoy Roy: But you feel not uncomfortable with 61-62? A lot of, you don't feel...

Dr Raghuram Rajan: I am not uncomfortable with where it is.

Dr Prannoy Roy: A lot of exporters would like to hear, you don't want it to go back to 45?

Dr Raghuram Rajan: I don't want it to go back to 45. I would agree with that. I don't want it to go back.

Dr Prannoy Roy: Just asking quickly, about the Forex reserves, I know we are nearly 300 billion. But compared to other countries it's still not that secure, like Brazil has got 12 times in short term depth, in terms of foreign exchange reserves. Mexico 7 times, China 6 times, Russia 6 times, India about 2, a little more than 2 in your estimate?

Dr Raghuram Rajan: No, it depends on how you count. If you count original maturity it's about 4, no it's about 3. And if you count, I know this jargon, let's say 2 is fine.

Dr Prannoy Roy: That's only above say South Africa's 1.5 and Turkey which is 1. It's not very comfortable, but 2 times is better than being for many...

Dr Raghuram Rajan: Yes and there is a legitimate question about whether we should bolster reserves when the time comes. Of course we will address that question when, as I said, before we get to that question we first have to bring the market back into its full form.

Dr Prannoy Roy: How close are we or is this again 'Chinese whispers' to a downgrade and to a junk status?

Dr Raghuram Rajan: I don't think we, anybody who takes a sensible view of India, I know, come on it's a country growing at 5%. You know some people will dispute four and a half. But four and a half is still four and a half. But if you think of a sovereign debt, its all Rupee denominated for the most part. And our debt to GDP is about 65%. Compare that with a US 100, Japan 220. I mean even among many emerging markets we are not that out of line. And the most important thing is that it's a long maturity debt, 9.5 years to 10 years and it's Rupee denominated and it's been coming down. Are we going to have a sovereign default?

Dr Prannoy Roy: No question

Dr Raghuram Rajan: No question

Dr Prannoy Roy: I think that's a really important question. Just coming to the end, when you talked about, we reacted, so many policies, where people are going to say my God this is something worse than we think, because India is over reacting. One of the things which got very back pressed was a little tinkering, tampering, which reminds you of the old days. Instead of 200,000 dollars, 75,000 dollars, don't buy property, you know, it didn't deflect much. You have said that it's temporary and how long term is temporary?

Dr Raghuram Rajan: I have to let the markets come back. I see that as a part of the policy that we are a still developing country. When times are good and money is pouring it out of our ears, let's let it out, because we don't want to absorb it. That would cause us to appreciate too much. Let's let it out. When the money is scarce, let's put some constraints. Now if you locked into some contract to buy something or to pay for kids, some programme your children are in, we should allow flexibility

Dr Prannoy Roy: Just like it is a bad signal maybe releasing a small thing like this, is it a good signal?

Dr Raghuram Rajan: You think that would be right, but let's get comfortable. What people don't appreciate is one of the factors that lead to decisions like that is equity. You are telling rural India, poor Indians that your major source of investment, gold, is not appropriate. We don't want you to invest in gold so you should shut down gold imports. But at the same time this rich family, which is going to take out 300,000 per person per year, 1.2 million. How many families can afford that? We are not going to cut that at all.

Dr Prannoy Roy: That's true about signals but in terms of absolute amount gold and these differences are like a million.

Dr Raghuram Rajan: It is a signal and it's got a fair amount of political value but also I think there was a possibility, and remember we are in a situation, we are trying to close all doors, to send the signal that we have the situation under control and to be fair to the Government and the RBI at that time. You should accept that. What now the market has come to accept was what the government was saying then, that we have got the current account deficit under control. It is going to be 70 billion, not more. In fact now market analysts are saying, it's going to be much less. But that was a message that finally helped turn the tide.

Dr Prannoy Roy: I think I have to differ with you on that. Because it reminds me of days when we use to transcend the signal that matches, that we are going to increase the excise duty, the budget, and we are going to in carbon-blackened tires, we are going to increase. You know this is what we are doing; it's like tinkering and tampering. This is smacked of that

Dr Raghuram Rajan: No to tinkering and tampering, there was a little bit of tinkering, I am not talking about this is being central to that. I am talking about the range of measures that were taken, including the clamp down on gold, which is, you will agree, a fairly interventionist policy because tariff rates have been increased and there are also effectively quantitative restrictions. But it was necessary at that time. And again the idea is this will not be a permanent solution.

Dr Prannoy Roy: Well all I can say is, you are a very tolerant man. Coming from a University of Chicago background, how do you take all this? You've got to be flexible I guess, I mean how did you get rid of that?

Dr Raghuram Rajan: No look, you have a larger goal in mind. And you try and say that's where I want to go. I the middle, I am willing to do a little bit of a detour. But we need to get there, not too much. And you recognise that markets sometimes do panic, sometimes markets are somewhat irrational. And therefore at times like that you need to take certain actions, which you know in normal course you would be reluctant to take.

Dr Prannoy Roy: Retrospectively may look bad. But you do the best of your time.

Dr Raghuram Rajan: Absolutely. I mean look at what the US did? US intervened, bailing out their banks. And where is the free market there. And you are saying am I better off with the banking system that exists and a bail out?

Dr Prannoy Roy: This is Chicago talking now

Dr Raghuram Rajan: No. I have friends in Chicago, Gene Fama, who just won the Nobel Prize, who was entirely against the bailout

Dr Prannoy Roy: I thought you were just against it right now. When you were talking, no?

Dr Raghuram Rajan: No, I am saying that they could have been harsher on the bankers, but bailing out the banking system was the right thing to do because we creating a banking system, from once its collapsed, its going to take you 20 years. Do you want to be in the doldrums for 20 years? I think the answer is no

Dr Prannoy Roy: Finally, a rock star, superman, you could get a role in Bollywood anytime

Dr Raghuram Rajan: Boring central banker, world decided that.

Dr Prannoy Roy: But does that; you hate it? Love it? Ignore it?

Dr Raghuram Rajan: I try and ignore it because I think mood changes. If things don't go as well, I very sure, I might get those words

Dr Prannoy Roy: I will call you the new Dhoni of economy.

Dr Raghuram Rajan: And Dhoni just got his house stoned, right. But seriously, I do think we should look beyond these sobriquets or epithets or whatever you will. And look to what you have really trying to do. I do want to send a message that we are trying to change and we have a programme. And we will try and follow that programme, as more than just about inflation it's about changing the financial system. And we will do what we can.

Dr Prannoy Roy: That's the key point that you are saying. That it is the constraint to growth

Dr Raghuram Rajan: Exactly, and we need to make it an enabler of growth. So, lets see.

Dr Prannoy Roy: And you are a young man, who doesn't have these kinds of problems, but what fears keep you awake at night or do you sleep like a baby?

Dr Raghuram Rajan: No. I have to tell you sleep was harder to come by when the Rupee was plummeting, because you are trying to say, this is part of the frenzy of the activity, what more can we do because it's not stabilizing? But I would say that worry, this is the point I made earlier about cranks. There is some crank who is telling me, this is going wrong and I am not listening to that crank. And I should be listening. Now who is the one?

Dr Prannoy Roy: Like the one in '90 to '96. Which is the right one?

Dr Raghuram Rajan: Because I get five letters everyday on my table saying you should watch for this particular problem. And which one do I read carefully and take note of?

Dr Prannoy Roy: It's a thrill to know that you are still absorbing and listening. And I am sure with your experience you will choose the right crank

Dr Raghuram Rajan: Well thank you very much. I hope so.

Dr Prannoy Roy: God bless you and good luck


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