The Week That Was:

From: Vartaa Editorial Team on Jun 20, 2016

Raghuram Rajan's watch is over

The biggest story this week was the decision of RBI governor Raghuram Rajan not to seek a second term on his completion of his 3 year tenure this September. The decision came in the wake of continuous attacks on Rajan by members of the ruling BJP including sharp attacks by party Rajya Sabha MP Subramanian Swamy. Rajan's decision came on a weekend and markets are yet to react to it but the commentary on his departure seems to be faulting the government for not standing by him as public sniping against him mounted. It is believed that sections of the ruling BJP were against Rajan's extension as they saw him as a UPA appointee and someone who was unwilling to raise interest rates and thereby compromising PM Modi's promises of economic growth and 'acche din'.

Government appointments under a cloud

As if Raghuram Rajan's departure was not bad press enough, the government also found itself at the receiving end of criticism for appointing ex-cricketer Chetan Chauhan as Chairman of the National Institute of Fashion Technology. Chauhan, who runs a private business outside of his activities within the Delhi District Cricket Association, was criticised by the opposition for not possessing relevant experience for heading a post in a national Fashion industry body. His appointment also sparked off a series of humorous reactions on Twitter as users likened it to the appointment of another Chauhan, Gajendra Chauhan, as FTII chairman who also ran into multiple controversies on assuming office.

Indian hockey has a 'silver' lining

The Indian hockey team created history this past week by claiming the silver medal in the Hockey Champions Trophy. The Champions Trophy is a marquee event of six leading hockey nations and this was India's best finish in the event since 1982. The Indian team drew with Germany, beat Korea and Britain and lost to Australia narrowly in a penalty shootout in the final. In the light of the upcoming Rio Olympics, this performance augurs well for the national team.

Opinions you must read:

  • This week marks 50 years of Shiv Sena as a political party. As it grapples to regain political prominence, the Economic Times looks at the crossroads that the party finds itself at.
  • The Mint writes that the ultimate blame for not standing by Raghuram Rajan's side in this entire episode must fall on PM Modi and Finance Minister Arun Jaitley.

Chart of the Week

Last week the RBI Governor announced his return to academics and not continue another term. So we decided to look at Mr Raghuram Rajan's work in numbers. The role of RBI is to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. The RBI governor bears the responsibility of executing this mandate. However, Raghuram Rajan is probably the first governor who hasn't been as 'distant' as a classical description of a Governor here.

Through this week and the next we will look at two of the most important and constant battles of RBI - inflation and Rupee value (or Exchange Rate). The RBI has a bunch of tools at its disposal to control inflation (or atleast attempt to) like Repo Rate, Reverse Repo Rate and Cash Reserve Ratio. A Repo Rate is the rate at which RBI lends money to commercial banks. Increasing Repo Rate, reduces banks' incentive to borrow from RBI and ultimately reduce money supply resulting in reducing inflation. Reverse Repo Rate is the rate at which RBI borrows from banks. The Reserve bank uses this tool when it feels there is too much money floating in the banking system. Cash Reserve Ratio is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. Its like a disaster day fund in case banks fall short of money to meet payment demands of depositors. Statuatory Liquidity Ratio is the amount that the commercial banks require to maintain in the form of cash, or gold or govt. approved securities before providing credit to the customers. This chart looks at how these knobs which have been tweaked and tuned since Raghuram Rajan took office. There are other ratio's at RBI's disposal like Marginal Standing Facility, Call Money Rate etc as well.

Inflation in itself is complicated to calculate in Indian context and has been a widely debated subject among economists and policy makers. In 2014 the RBI decided to use Consumer Price Index where the Government decided to stick with Wholesale Price Index for calculation on inflation. We got our inflation data from the World Bank which in turn calculated it based based on CPI. The rest of the data is courtesy RBI website.

Next week we will take a look at Forex and Gold reserves, and notes issued by RBI and its effect on value of Indian Rupee.