Sensex up 200 pts: Should Raghuram Rajan be talking up the market?

The market is gung ho once again, after a disappointing run over the last few days of uncertainty. Today’s joyride (Sensex is up over 300 points and Nifty about 100 points) is being attributed to two central bankers, RBI’s Raghuram Rajan and US Fed’s vice-chairman Janet Yellen.

Rajan on Thursday called a surprise press conference to say that there is nothing much to worry about the currency and Fed tapering. He said this year’s current account deficit, which has been the biggest worry for the Indian economy, will be well under control at $56 billion. He said majority of the oil companies’ dollar demand is back in the market without the market even knowing about it and that second half growth figures will be better. He also announced an open market purchase auction of bonds, which is intended to infuse liquidity into the banks.

[caption id=“attachment_1200841” align=“alignleft” width=“380”]  RBI Governor Raghuram Rajan. Image courtesy PIB[/caption]

The bond and forex markets were happy pulled back from their lows in no time. The equities market had closed by the time the governor made his announcements. So they are reacting today.

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Adding to the bullishness was Yellen’s dovish comments that are to be made in front of the Senate Banking Committee today. “I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” Yellen will tell the panel, according to prepared remarks released late on Wednesday.

Yellen is US President Barack Obama’s nominee for the next Fed Chairman. So her comments are significant for the global markets. Not surprisingly, Asian shares have risen on hopes that the US is likely to continue with its accommodative policy for longer period than expected. This means cheap liquidity will continue flowing to the emerging market economies.

But there is nothing unusual in the way she made the comments. They were prepared in advance to present before the committee which will vet Yellen’s candidature for Chairman’s post. In contrast, Rajan’s comments are unusual. They were made at a surprise press conference. This is a major departure from the traditions of the central bank.

Experts have hailed the move. They said the governor is actively communicating with the market.

This is where there could be a difference of opinion.

True, Rajan has been unconventional. He does things other governors have not done. This is good. But a second reading of yesterday’s press release raises suspicion that whether he was playing for the market too much.

He has only good things to say about the economy. CAD will be better this year, he said. But he did not make a mention about the fiscal deficit, which is a bigger worry now. The government has not come out with a concrete plan to rein in this, though the finance minister has reiterated he will control it.

Interestingly, most of Rajan’s statements echoed the finance minister’s views in his recent interviews and press conferences. (For instance, those about about gold. Just like Rajan, in a recent interview P Chidambaram had also downplayed the surging gold smuggling.)

In this sense too, Rajan is walking a tight rope. If he is not careful, he may be accused of ceding the little independence that the RBI enjoys.