Is the honeymoon over?

Almost everybody even faintly familiar with the movements on the stock market would know that volatility is intrinsic to its existence.

This is all the more so when portfolio capital is the largest player in capital markets such as India’s; despite the spread of the equity cult — the retail investor who would probably want to play safe and cling to his shares expecting their value to rise exponentially to a point when selling them would help pay for his daughter’s marriage — it is portfolio capital that determines the behaviour of the Sensex.

Such capital, at least in India’s case, is notoriously fickle, its commitment in shares based on quick and high returns; surgical strikes as it were.

So it is hardly surprising that volatility comes close to Paul Krugman’s memorable description of stock markets as “manic depressives”.

Indians are only reluctantly beginning to believe that the Sensex’s swing moods are intrinsic to the game they are playing; experts may suggest that the equity markets are better than bank savings but more risky; no one tells you why they are so; not just because what goes up must come down but because of some not-so-invisible forces forcing the pace of that roller-coaster ride.

WPI variations as guidelines

It’s only in India that economic indicators once thought stable and subject to changes over the longer term than the blink of an eye are now beginning to sound as manic depressive as the equity market.

Inflation appears one such indicator. Never before has so much minute attention been paid to the Wholesale Price Index as at the present. It’s one thing for the media to report on consumer price movements to a public immediately affected by prices of goods and services consumed by it. But are prices as amenable to changes without some shift in the reasons for their present values?

The ardour with which the monthly variations in WPI are reported, not so much as a piece of rather irrelevant information but as guidelines, could be passed off as media illiteracy, were it not for the way even policymakers are prone to draw similar connections.

So, when monthly WPI declines, it is hoped the RBI will reduce interest rates; when the rate rises, as the latest inflation data for August shows, hopes of the RBI easing key rates recede; fearing an increase, industry representatives expect New Delhi to ensure the removal of supply constraints, as the FICCI spokesperson did recently.

Misreading Rajan’s speech?

Meanwhile, the RBI’s new Governor, in his opening remarks on taking over, expressed the need for more time to study “all major developments in the required detail.”

That may also give him time to factor in the US Fed’s moves once the new governor takes over. It’s hardly surprising that media reports from his speech were highly selective, meant to whip up frothy expectations.

To be sure, Rajan did announce some measures, for instance, allowing banks to swap FCNR deposits as they desired or hiking the limit of borrowings overseas against the unimpaired Tier-I capital.

But by and large, the speech was like any predecessor’s: avowing commitment to the RBI’s mandate, endorsing financial inclusion, priority sector and SMEs lending and getting the DGs to work on various committees dealing with issues that need further ‘study’.

What was not reported or highlighted were his strong views about aspects of supervision. He came out in favour of improving the efficiency of the recovery process with due accounting for fairness and “preserving the value of underlying assets and jobs where possible…”

Then he broke stride: “Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures.”

Delhi on a high

But New Delhi is on a high and giddy with prospects of quick change now that Mint Road has a fresh mind not drenched in bureaucratese, from Chicago University no less.

Just to make sure and set the pace for the central bank, it made it easier for FIIs to invest up to 90 per cent of their limit in government bonds without going through auctions for the permits to buy the bonds. That was followed by the Chairman of the Prime Minister’s Economic Advisory Council, a former governor of the RBI, C. Rangarajan rooting for new bank licences ‘on tap’, in his words, a system of “continuous authorisation” of new banks instead of the current “stop and go” or block method whereby the central bank periodically issues fresh licences.

Rangarajan was addressing members of Assocham at its banking summit. He echoed the plea of industry for ‘streaming’ licences — like movies on NetFlix — and assured the audience that change was near with Rajan as the chief banking regulator.

We can only gauge the new governor’s views on the matter by what he said in his speech, and what he said would not have enthused industry as much as the former governor’s ringing endorsement: a three-tier process of evaluation and screening with results to be announced in January 2014.

Then he referred to “an excellent document” on the RBI site discussing options of differentiated licences, one of which was the ‘on tap’ choice. “We will pursue these creative ideas of the RBI staff and come up with a detailed roadmap of the necessary reforms and regulations for freeing entry and making the licensing process more frequent after we get comments from stakeholders.”

Just a few days into the new tenure one gets a sense of two mindsets at work; in New Delhi, impatience with regulation, a hurry to get to that halcyon phase of high growth, even if sounds like the route Iceland and Ireland took, oh! so long ago.

Rajan’s has the weight of a tradition of caution and a memory of a warning delivered at Jackson Hole; and dismissed by the likes of Summers and Greenspan, not to mention the Fed and Washington. The world is still paying the price.