Tuesday, June 21, 2016

Rockstar is gone to make way for a political bandwagon

Rajan was a pleasing personality. He had his own views and opinions. He was loved by media and public in general. Surely that did not go well with the Govt. who does not want to share the credit of a good story. And in the closed door meetings of big public sector banks, they seemed to be unhappy with Rajan’s move to clean-up banks. All public sector banks had to act tough, write-off some of bad debt, put more money aside for provisions, and finally show losses in their P&L statements. It made those bankers look bad on the way they did their jobs. They secretly wanted Rajan to go. It is party time for them and their prime customers, big borrowers who wanted their loans to be recast. Crony or not capitalism is back in business with the exit of Rajan.

What changes one can expect in the policies after he is replaced with someone who will be obedient to Finance ministry and caring to big capitalists.  Here is a list of changes I expect to happen.

  • Forex reserves to come down by $20 -30 B. This is to help pay those bonds maturing and not to put pressure on Rupee and banking system.
  • Policy rates to come down 50 bps to 100 bps.
  • Cash Reserve Ratio (CRR) to be cut up to 100 bps. This would quickly happen if the new Governor comes from banking background. They (Banks) think 4% CRR results in lots of idle money and affect their profitability.
  • Regulations on NPA to loosen considerably. Infra and Power sectors to come out of the list of troubled sectors.

Immediate beneficiary of these changes will be:

  • PSU banks as their profitability improves and theor management gets a considerably free hand in doing their business.
  • Infra, power, real estate etc. sectors which had huge debts but had trouble in recasting their loans. Pressure on them would reduce to a larger extent. Some of them may get fresh loans too.
  • Consumers in the short term as interest rates come down.

But the consequences of those policy changes would result in the following:

  • Inflation catches up along with the liquidity increase so the trend in interest rate reduction will have to stop and reverse at some time.
  • Undoing some of good things – banks will carry forward the bad loans and if they drop their due diligence, bad loans may rise further.

We like it or not, we have lost Rajan who was giving bitter pills which would improve the health of economy. After him, some of the changes would look like a relief or a good thing for economy in the short term. So those opposing Rajan will get ample opportunities to prove themseleves right. But history is going to be kind towards the efforts of Rajan.