Wednesday, 13 July 2016

Many A Few Good Men

“Tis strange—but true; for truth is always strange,
Stranger than fiction: if it could be told,
How much would novels gain by the exchange!
How differently the world would men behold!”

So said Lord Byron. Fiction, is less strange than truth, because fiction has to adhere to the realm of possibilities, where truth doesn't have to abide by these restrictions. While pursuit of truth is a relentless goal, the appetite for fiction is perhaps stronger than the truth - at least in the world of finance. And nothing illustrates it better than the recent hullabaloo over the appointment of the Reserve Bank of India Governor and the reaction of markets. 

Ever since Rajan excused himself from an extension about a fortnight back, the markets have been ripe with speculation for the next probable governor. Immediately after Rajan's announcement, a list of credible probables was formed which included, among others, Urijit Patel, Arundhati Bhattacharya, Subir Gokarn and Rakesh Mohan.

Media quickly pounced on the list and one name stood out: Arundhati Bhattacharya. In Arundhati, they saw someone who could potentially become the first woman to break the glass ceiling at the Reserve Bank. In the age of women empowerment that made a pretty picture, without a doubt. The rumour had enough romanticism in it to last for about a couple of days, and so it did. 

But soon enough, the romance met its fate and the rumor ran out of the steam. The markets, which thrive on speculation, realised that they weren’t looking for a cornered contest. They were instead itching for a fight, a legitimate, pacy duel. After the dust started to settle down, the markets reasoned that perhaps, Arundhati was only a career commercial banker who lacked a background in economics. Urijit, on the other hand was labelled as Rajan’s best lieutenant and therefore, unlikely to find favor with government. Ultimately, as the analysts echoed in unison, the fight might just boil down to Rakesh Mohan and Subir Gokarn.

So, that was the duel, albeit sketched in a hurry. However, the cast of the duel was a little unequal right from its inception. Rakesh Mohan, as several pointed out, was as a little too seasoned and vocal for the job. Alas! that basically left Gokarn as the only contender for the position.  

But then again, one contender didn’t make for a good contest, did it? A lazy rumor reluctantly brought back Urijit’s name back in the contest, but by then, the markets had firmly made up their mind on his unlikely candidature. The winds were hunting for someone new. It was then that the name of Kaushik Basu, another eminent economist, was meekly floated. The markets listened poignantly. Kaushik had all the credentials to match Rajan. But hasn’t he been too leftist, and isn’t he a congressi?  The markets debated. Soon enough, Kaushik Basu was swiftly dismissed. Although he had all the right credentials, he failed to clear, apparently the most important, political allegiance test. 

A lull followed. 

The search for governor, at least for the markets, was turning out to be tiresome. A good rest during the weekend, brought back some clarity of thought. Creative energies were replenished. And the hunger for rumors restored. By now, the markets knew what they wanted. They wanted someone with good credentials and also close to the government. 

With the Monday, came the big “leak”: Arvind Panagariya emerged as a leading top contender out of nowhere! Arre, who is Panagriya, is he desi, is he dove,? The markets wondered. Immediately, Panagariya was frantically searched. Results revealed a self-proclaimed dovish, pro-growth economist and a favorite among Jaitely & Modi. Finally! Someone who ticks all the boxes (except the subramanian-swamy box). Immediately, the traders reacted. Bonds rallied in anticipation of a dovish governor. The volatility was far more than witnessed during the Brexit or closer to home, the Rajan’s exit.

In the world of finance, a credible rumor had (once again) beaten the facts. 

While the decision for the governor is still yet to be out (and can be out any minute - again, a rumor!) and it is anyone's guess on who that could be, one thing remains undeniable: when it comes to markets, truth may be more strange, but fiction is perhaps more strong (and perhaps, more persistent).   

Update: The last two days were spent in anticipation of announcement, however, nothing happened. Just when the markets were becoming to show signs of weariness another name has cropped up as a top contender: Shaktikanta Das. A neutral bureaucrat who has worked extensively and thought to be in sync with the government. The market however has not shown much of a reaction so far, because Das is at best thought to be only a feeble dove. Be that as it may, even Shaktikanta Das doesn't clear the Subramanian Swamy's check.

Update2: The latest to make a comeback in the list is Arundhati Bhattacharya, who is now being seen as the "best bet", when its only been about a week that the media was labelling her as "not a good choice". While all this is floating around, the market is just quietly waiting for the announcement -the sort of quiet before the storm. If its Arundhati Bhattacharya, there will be another rally in bonds, but only due to the additional dovish surprise. Somebody else than Arundhati or Panagariya may actually lead to a tumble because the market is sitting on a heavily internalised dovish expectation.

Update3: It is Friday morning and the announcement hasn't been made yet. The monsoon session of the Parliament starts on Monday. It is reasonable to assume that it would be convenient for the government to clear the air on governor before the parliament resumes. Few more hours to go before the sun sets on Friday. It has been a good build-up for climax. Will it be a wild card surprise? Tick Tock, Tick Tock, the clock pushes by...

Update4: Never has a wait been such a thriller. The latest top contenders are Urijit and Arvind Subramanian, the current chief economic advisor to the government. Arvind Subramanian is believed to be dovish inclined, if not as vocal a champion for rate-cuts as Panagariya. Notably, Rajan was also the chief economic advisor before he was appointed as the governor and like him, has a videshi green card. Tough choices, really!

Update5: It was speculated that the appointment would be announced before Monday, when the Parliament session begins. However, that didn't happen, which only leads to believe that the appointment will likely be announced in the Parliament first. In a related development, Kaushik Basu, one of the earlier contenders for the job, will be ending his term at the World Bank on July 31. Paul Romer, a very accomplished economist, has already been unofficially confirmed as his successor. This leaves Basu with a very smooth transition in the event that he is appointed as the Governor, although his age might be an adverse factor, as he already running 64+.

Update6: After about keeping the markets guessing for more than a month now, the government announced Urijit Patel as the governor. 

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