We don't know whether Rajan will be reappointed: JPMorgan

Rajya Sabha MP Subramanian Swamy’s rant against Raghuram Rajan and his latest missive to the PM seeking the RBI chief’s resignation have sent industry and media into a mood of speculation regarding how markets would pan out.

“We don’t know whether Rajan will be reappointed. It depends on who replaces him,” said Jahangir Aziz Of JPMorgan speaking to CNBC-TV18. His sense is that if India is growing at 7-7.5 percent, faster than the global economy, then there shouldn’t be any problem.

The government on Tuesday appointed a five-member Fiscal Responsibility and Budget Management (FRBM) panel which will look into the FRBM Act. The panel will be headed by NK Singh. Along with Singh, CEA Arvind Subramanian, RBI deputy governor Urjit Patel, Sumit Bose and Rathin Roy will a part of the panel.  Taking about the composition of the panel, he said these four-five guys are the best and he trusts in them. “I don’t think there are many people out there who could do what they do,” he said.

Regarding fiscal discipline, he said as long flexible targets are based on the cyclical position of the economy or the political cycle, then there is merit.Below is the transcript of Jahangir Aziz’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: In case the term of the governor is not extended, is that going to be taken very badly by the markets or the foreign institutional investor (FII) committee? I assume you are in touch with them.A: There is obviously a lot of concern as to how this reappointment goes through, simply because under Governor Rajan, we have seen in almost three years of significant amount of – I mean the RBI policies have been directed towards keeping macroeconomic stability and this has played a significant role in driving fixed income to India. But, I would say the concerns in the market may be pretty pre-mature. We do not think whether he is going to be reappointed or not and more importantly, it all depends on who the person is who replaces him. The RBI, at the end of the day, is an institution and that institution over the last 3-4 years has shown that their objective is driven by keeping macroeconomic stability. You have a memorandum of understanding (MoU) signed with the government of India. That MoU makes it very explicit what the objective of monetary policy is. So, if you look a the institutional side of it, I would say that this nervousness that investors are putting up probably are pre-mature, so we need to wait and see.Sonia: I am on your side, but do you not think that the concerns that Subramanian Swamy has put out are completely baseless and some of them are even erroneous? If you look at the statements that he has made, he points out to the fact that bad loans have doubled over the past two years and that is a proof of Governor Rajan’s incompetence. But, we know that banks have been forced to recognise these loans and it is not because Governor Rajan is not ‘Indian in mind’ as he says. So, do you not think that this whole debate is just baseless?A: If you make it a debate, I would say over the last couple of weeks, since news reports about his views have surfaced, I have not received a single email or a single client call who has shown any interest in whether or not this changes India’s monetary policy. There has been almost no discussion with my clients on any of these issues. So, my sense is that, I do not exactly understand those accusations or I do not really understand where those accusations are coming from, it is very hard for me to say that India growing at 7-7.5 percent when the global economy is growing at 2 percent is wrecking the economy. So, I am going to leave it at that at this point.Latha: In the evening we also got the announcement of a new Fiscal Responsibility and Budget Management (FRBM) panel being constituted. Now, the Budget speech of the Finance Minister said that they would like a range and that fiscal policy should be expansionary when the banking system is contractionary. Would you fear that the fiscal discipline would be let loose given the terms of the announcement of this panel?A: First of all, look at the composition of the panel. If these 4-5 guys cannot put together a decent and a sustainable FRBM act, I really do not think there are very many people out there who can do it. So, I would trust the panel. These are people who have been working on fiscal issues for a very long period of time and many of them have actually been policy makers. On the overall idea that we should have a flexible fiscal target, if we look around the world, there are flexible fiscal targets, but the flexibility is not on the target per se, but the flexibility is on the time period over which these fiscal targets needs to hold. Many countries have things like structural fiscal deficit as a target so that you are able to take out the cyclical variations of an economy. If that is what is meant flexible fiscal targets, I would say there is merit to that. There are many countries in the world who have tied the fiscal performance to the political cycle and if that is the way in which flexibility is going to get interpreted, I would say again there is merit in that argument. But if the flexibility is going to get interpreted as, at any given point in time, if I hit 3-4 percent or whatever the number is, then I am fine, then I would have problems with that kind of flexibility. So again, it depends on how this committee interprets flexibility, some form of flexibility is desirable, but that flexibility has to take into account, either the cyclical position of the economy or the political cycle.