Saturday, December 27, 2014

Black Money and Bubbles

RBI Governor, Raghuram Rajan whose name is often mixed up as Raghuraj Raman by Manmohan Singh (Mansingh Mohan?), was recently speaking to a news channel. He expressed his well-known mantra that RBI does not want to flip- flop in administration of interest rates. Therefore, he would rather wait till softened inflation becomes sustainable before deciding to reduce the Repo rate.

This conservative strategy is not necessarily a wise strategy. In the stock exchange, one cannot time the market. Similarly, money market also does not respect timing strategies. However, given RR's standing, very few people would point out that he is without clothes even if he is naked.

He pointed out how RBI was trying to prevent formation of bubbles in real estate. He referred to insistence of a minimum stake of borrower's equity stake in purchase of house. Ceiling for debt amount and floor for equity preempts bubbles.

Usage of black money in purchase of real estate, he said, further bolstered the equity. The Governor is bold enough to accept the almost universal reality of black money in such transactions. This, of course, is not a justification of black money. The government should take some strong measures against black money. Clarion calls from the judiciary alone will not do.

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