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News Analysis


19/06/2016
I was shocked after reading our acting Reserve Bank of India (RBI) governor, Mr. Raghuram Rajan’s letter yesterday on his leaving term. Let us not forget that his experience, expertise and contribution to Indian economy especially on new age banking and mobile payments are precursor to what India is going to experience in next three years. During his tenure only, banking reforms and finance sector in India are in better limelight. Role of Institutions Given sudden action of Mr. Rajan, this would be the best time to bring up the distinct role of institutions and people who run them and further how they make a country strong economically. Superpowers of the world are called so for certain reasons and those reasons are more economic than political. Maintaining USD as fiat currency, ensuring quoting oil (and gold for that reason) in USD globally and maintaining such status of USD for a very long time has been the prime deliverables of world’s largest economy – The United States. But how this has come to reality as economic superpower is as a result of monetary and economic policies of US Federal Reserve system. During my executive MBA studies in US when one of the 12 regional heads of Federal Reserve from San Francisco visited us, all this became very obvious. Just like Federal Reserve in US, the role of RBI is equally important for India – the default investment destination among Emerging Markets (EM). Institutions and Market What will happen on Monday, June 20, 2016 in Indian capital market? Well, market will correct depending on how much loss institutional investors collectively view as Mr. Rajan’s leaving the helm as a central banker. Despite the effect of #Rexit on capital market, it is far more important to express the extra-ordinary roles of central bankers on at least two global occasions on surviving them. Ask Americans about Black Monday and they will visibly know it – the first contemporary global financial crisis unfolded in October 1987 and Dow Jones Industrial Average (DJIA) crashed by 22.6 percent in a single trading session on October 19, 1987. Although, the reason for such fall was liquidity, the response from Federal Reserve set a profound example. Remarkably, the role of chairman of Federal Reserve, Mr. Alan Greenspan came in picture and the Fed flooded the market with enough ‘liquidity’ to resolve this crisis. Institutions are meant to save the market and this has been best exemplified in the US. As a result of Mr. Greenspan’s legendary work, he continued to serve as Fed Chair not just ONE but FOUR consecutive terms each of 4 years totaling 16 years! Let us visit recent large correction of Indian capital market in August 2013 which was accurately predicted by our human behavior based software MySmartStocks.com (11.86% correction) on July 19, 2013 when Sensex came down from 20,149 to 17,759 in only 33 days. What Mr. Rajan refers in his letter as India among ‘fragile five’ economies when he took charge as RBI governor in August 2013 – unquestionably his expertise and deployment of policies only survived the disruptive time thereafter and market went up by 40% thereafter during next 18 months. Be it crisis or correction, only true legends at the helm of central bank survive the economies. Political system need only provide support and nurture the best out of the central bankers. Subsequent to #Rexit, another global event #Brexit is occurring during this week on June 23, 2016. United Kingdom in midst of two large democracies is facing a historical referendum event to decide whether to continue to stay in European Union (EU) or not. Since 1973 UK is part of EU but after 43 years (and in-between efforts of withdrawal movements), they have decided for a referendum. Recent survey in October 2015 has suggested that young voters want to remain in EU whereas older voters support leaving. When Euro was introduced even then UK had kept not joining countries adopting Euro. Traditionally, UK although part of EU has not considered itself a part of Europe but an independent Great Britain. Quite notably the young generation in UK would like to support remaining in EU just like any free market economies would afford in order to allow free movement of people, capital and trade. While #Rexit largely affects Indian capital market, #Brexit definitely affects the global capital markets and will be known shortly on June 24, 2016. So, the week of Jun 20, 2016 is very important week for capital market. Finally, what options Indian government proposes in coming days is yet to be seen however Mr. Rajan’s expression of not continuing his 2nd term as RBI governor is undeniably a big loss of a visionary to world’s largest democracy. Mihir Sandesara MySmartStocks.com – While others analyze the Past…we forecast you the Future!


Source : Bloomberg, MySmartStocks.com, wikipedia