RBI vs Fed? RBI wins, hands down!

“We look at the Fed stance but it is not the only thing we look at”- Raghuram Rajan. There are enough reasons not to. While the Fed is still thinking about rate cuts, postponing it as much as possible, Rajan took the world in a storm with aggressive rate cuts and policies. Yet, he cannot be termed as a man with vigour but no value for the increased GDP of India in two years is credited solely to him.

1. In what might well be termed as a Diwali bonus, though he says it is not, Raghuram Rajan cut repo rates by 50 bps. Industry anticipated a cut of no more than 25 bps. Hence Rajan kind of threw it in the face of the industry who forever complained he was coming in the way of their growth. Thus the banks are forced to cut interest rates. Though US Fed did not raise rates in its September 17 meeting, it decided to do so in its unscheduled meeting in October as Janet Yellen, head of Federal Reserve Bank, anticipates US inflation to hit its 2 % target soon. Her comments come just a week after Fed policymakers voted to keep interest rates at near-zero – where they have been since the 2008 financial crisis – and she warned that the US economy was not yet strong enough to withstand “recent global economic and financial developments”. The numbers measure the strength and it measures well.

2. Rupee strengthened during Rajan raj while strong dollar weakened during Yellen’s rule. While Yellen is still apprehensive to raise cuts with the weak dollar, it’s been seven years of weak dollar. Rajan revived the Rupee in two years.

3. Rajan took aggressive steps to increase the local demands in the market, considering weak commodity prices at global markets. And it would not only slow inflation, it would increase demand and employment too. At present, US is suffering from weak labour market, with unemployment rate over 10 per cent. The contrast between the two countries, a developed nation and a developing nation, clearly speaks about Rajan being a better governor than Janet Yellen.

4. The American markets stumbled a little after Fed announced unchanged rate cut policies. But look at the markets today! The man behind the Banking Revolution 2.0 sure gave a Diwali Bonus a month in advance as both Nifty and Sensex came back up in green. All hail to the boss of Dalal Street.

5. While Rajan is the man who brought down India’s inflation, today’s rate cuts prove that there is need of more aggressive steps; which goes on to prove that there are undeclared factors which might hinder the growth and increase inflation.

So also, weaker market environment forced the Fed to keep rates unchanged since 2008. While the step saved the economy from a downfall for seven long years, the truth is there is no perfect time for raising rates. Fed’s steps only increase the chances of hidden factors hindering the growth to pop up. Even Yellen said if rates are kept low, it could lead to excessive risks. So what is stopping her? Rajan’s enigma, perhaps!