In this week's newsletter, we talk about why Shaktikanta Das may get another term as RBI Governor, why Volkswagen is struggling, soaps and more.

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"Personal finance is only 20% head knowledge. It’s 80% behaviour!" - Dave Ramsey

The secret behind Shaktikanta Das’ unmatched RBI streak

Every three years, a selection committee led by the Prime Minister picks the next RBI Governor. There’s no detailed rulebook for eligibility or any fixed checklist.¹ Just that the folks on the committee are experts in economics, banking, finance or public administration.

This year, though, something’s off. The government hasn’t even formed a selection committee yet. And with current RBI Governor, Shaktikanta Das, set to finish his term in December — less than a month away — there’s no buzz about a potential successor.

Naturally, this has sparked chatter that Das might just stick around for another term.

It’s not far-fetched either. Das took the helm in 2018, got reappointed three years later, and is now the second-longest-serving RBI Governor, only behind Benegal Rama Rau, who held the position for 7.5 years starting in 1949.² And another reappointment could cement Das as the longest-serving Governor in RBI’s history, provided he completes the extended term.

Which brings us to the real question — What makes Das so special that the government hasn’t lined up a successor yet?

Well, there aren’t any official reasons for this explicitly out there. So we’ll speculate a bit. And we have a couple of theories.

Maybe the government doesn’t want to shake things up too much?

You see, there are quite a few unfinished regulations the RBI has introduced for banks and financial institutions. These need to be fully implemented or, in some cases, revisited. And keeping Das at the helm could make this process a whole lot smoother.

Take the Expected Credit Loss (ECL) framework, for example.³ It’s a big change the RBI is gearing up to roll out for banks. Currently, banks set aside funds for loan losses only after they happen. But under ECL, they’ll need to be proactive — saving up for potential losses before they occur, like setting aside money for a rainy day. Banks will need to estimate credit default risks in advance. They’ll analyse historical default trends, predict future risks and set aside funds accordingly. So the riskier the loans, higher the provisions. The goal is to ensure that banks have stronger reserves to weather defaults.

Now, here’s where Das comes in. The RBI already rolled out this framework for NBFCs back in 2020, and Das was the one steering the ship then. He knows the drill — the challenges, the hiccups and the solutions. So, having him oversee the rollout for banks might just make the whole transition a lot easier. After all, he’s been there, done that.

Then there’s the bit about the RBI looking to tighten rules on loans for infrastructure projects. Because, let’s face it, they’re risky. These projects take years to complete before earning a single rupee. So, banks need to make calculated guesses about when they’ll start generating income and how much. Only then can they decide the loan amount and interest rate. But if a project stalls or gets scrapped, banks are left high and dry. That’s why these loans, called project finance loans, are structured so that repayments only start once operations begin.

And given the risks, the RBI is asking banks to set aside more funds as a buffer — upping provisions from 0.4% to 5% of the loan value. It’s a move to keep bank balance sheets stronger and resilient.

Of course, this is just one piece of the puzzle. The RBI also juggles things like keeping the Rupee stable, controlling inflation, tweaking interest rates and managing the delicate balance between bank loans and deposits.

Sure, a new Governor could handle and manage all of this. But Das brings the weight of experience. Under his watch, the Rupee has stayed stable, core inflation (not considering food and energy prices) hit a 4-year low of 4.3% in FY24 (even lower for core services) and India’s foreign exchange reserves soared to $700 billion, making it the fourth-largest in the world.

So maybe the government doesn’t want to risk handing over the reins to someone new at such a critical time, with delicate regulatory changes in progress.

Or maybe it’s the trust Das has earned from the government over the years?

Just think about it. A new RBI Governor would need time to get up to speed on everything that’s already in the works. And if disagreements crop up between the new Governor and the government, it’s a situation no one wants to be in.

But the chances of that happening with Shaktikanta Das are minimal, because ever since he took charge, such conflicts have significantly reduced.

To put things in perspective, you could look at how the RBI shares its profits with the government. Every year the RBI sets aside some of its profits as reserves and transfers the rest to the government. This money comes from lending, commissions and profits on foreign currency assets, after paying for expenses like printing currency and salaries.

This year, the RBI transferred a record ₹2.1 lakh crores to the government without a hitch. But six years ago, it was a different story.

Back then, the RBI couldn’t transfer enough to the government because it had spent heavily on printing new currency after the 2016 demonetisation, leading to disputes with the government over transferring reserves. That disagreement even led Urjit Patel to resign as Governor. And it wasn’t just Patel. His predecessor, Raghuram Rajan, also believed the RBI should have the freedom to say no to the government when necessary, to maintain its independence and serve everyone’s interests.⁴ This likely led to more conflict with the government rather than working in sync with them.

Das, however, has taken a different route.⁵ He seems to have found a way to balance the RBI’s autonomy while maintaining a collaborative relationship with the government. Perhaps that’s why he’s been their go-to choice for two consecutive terms, and who knows, maybe even a third.

The only potential conflict?

Interest rates.

Das has been a strong advocate against cutting rates to make borrowing cheaper, arguing that it’s crucial to control the flow of money and tackle inflation — especially until it hits the RBI’s target of 4%. Right now, overall inflation is just over 6%, which is actually the upper limit for tolerance, mainly due to rising food prices.⁶ So, the RBI will have to decide whether to cut rates or hold off, all while Das’ current term is winding down.

So yeah, whether that happens or not, the odds are largely in favour of Shaktikanta Das getting another term at the RBI. We’ll just have to wait and see if he ends up making history in the process.

Story Sources: Hindustan Times [1], The Morning Context [2], CNBC TV18 [3], The Hindu Businessline [4], Financial Express [5], Deccan Herald [6]

Why is Volkswagen having a rough ride?

€230 billion ($240 billion)!

That’s the staggering debt sitting on Volkswagen’s (VW) books. And that makes it one of the most indebted listed companies in the world. But if you think that’s the only trouble brewing for the German auto giant, buckle up.

Its profits have hit a speed bump too — down 20% in the first nine months of 2024 compared to last year.¹ And now, VW is weighing a drastic move — shutting down three factories in its home turf, Germany.

If that happens, tens of thousands of jobs could vanish, a gut punch for a country where VW is the largest employer.

And that signals a troubling time for the world’s second-largest automaker.

So, what’s driving this crisis, you ask?

To understand that, we’ll have to go back in time and see where it all began.

In 1937, Germany’s government, led by Adolf Hitler, founded Volkswagen, or “The People’s Car Company”.

The idea? To build an affordable, fast car priced under 1,000 Reichsmarks, the currency back then. Ferdinand Porsche, the engineer behind the design, came up with the KdF-Wagen, which we now know as the Beetle.

Sure, World War II put a halt to production, but VW found its footing again post-war.

And of course, the car’s Nazi roots and tiny size didn’t win over Americans at first. But in 1959, a genius ad campaign turned the Beetle’s compactness into its charm. Suddenly, it became America’s favourite foreign car.

Then came a big shift. The German government sold off 60% of its VW stock to the public, privatising the company. And not long after, VW hit a historic milestone. The Beetle broke a major record, surpassing Ford’s legendary Model T, which had held the worldwide production record of 15 million vehicles since the early 1900s.

From there, VW was unstoppable. By the 1990s, it was on a buying spree, snapping up lavish brands like Škoda, Bentley, Lamborghini, Ducati and Scania trucks.² Its market share in Europe surged from 12% in 1980 to 25% by 2020. At one point, it even overtook Toyota to become the world’s top carmaker. It was riding high, with an audacious or as some people would call arrogant slogan — “Das Auto” (The Car).

But 2015 changed everything.

That year, the US Environmental Protection Agency (EPA) uncovered a shocking scandal. VW wasn’t playing fair. It had been rigging its cars to cheat emissions tests, letting vehicles spew out 40 times the legal limit of nitrogen oxide for over a decade!

If you’re wondering how it got away with that for so long, well, it had a little trick up its sleeve — a “defeat device”. This was a sneaky software designed to outsmart emissions tests.

It would monitor details like speed, engine activity, air pressure and even the steering wheel position to detect when the car was in a controlled testing environment. And that would switch the car into a special “clean mode”. In this mode, the engine would emit far less pollution than it actually did on the road. But as soon as the test was over, the car went back to its regular polluting ways.

And that’s how VW’s so-called “clean diesel” vehicles managed to become a hit, capturing nearly a quarter of their US sales, until the truth came out.

When the scandal broke though, the backlash was swift and brutal. VW’s once-pristine image was tarnished. Its stock nosedived and customers didn’t want to touch the brand with a barge pole, especially in the US.

The financial hit was colossal — €31 billion ($35 billion) in fines and settlements that kept draining its coffers until 2021.

But VW knew it had to bounce back and fix its reputation. It had to build great cars again and take on its competition the honest way.

Then came the twist.

The pandemic hit global economies hard, but Germany’s woes were particularly worse.³ Its economy slowed to a crawl and never quite recovered. For context, Germany’s GDP barely grew 1% above its pre-pandemic level, lagging far behind the 5% growth in the rest of the Eurozone and more than 10% in the US.

Things only got worse with the Russia-Ukraine war. Russia’s invasion led to skyrocketing energy costs, especially after it cut off gas supplies to most of Europe. And Germany, heavily dependent on Russian energy, was left scrambling. Industries that guzzle energy — chemicals, metalworks and yes, even automakers like VW, felt the heat. Rising input costs squeezed VW’s margins further.

And if that wasn’t enough, the EU (European Union) added a new challenge. In 2023, it announced plans to ban petrol and diesel cars from 2035. This meant that VW had to pivot hard towards electric vehicles (EVs), moving away from the combustion engines that had long been its claim to fame.

But shifting to EVs wasn’t smooth sailing either. VW was late to the EV party, and the timing couldn’t have been worse.

Germany had ended its EV subsidies after spending €10 billion to support 2 million electric vehicles since 2016, declaring the subsidy program a success.⁴ And without these incentives, Germans had little reason to switch to pricey EVs, especially VW’s, which came with higher price tags.

To top it off, VW faced another hurdle ― a shrinking pool of skilled workers.⁵ An ageing population made it harder to find the young talent it needed to keep production running smoothly.

It was a perfect storm of challenges.

What was left then?

Exports?

Well, that hasn’t panned out either.

Take for instance Germany’s trade with China. Back in the 2010s, the trade between the two countries was a win-win. Germany sold cars, chemicals and machinery to China, while China in turn supplied consumer goods and things like batteries and electronics. But now, China produces most of those locally, at much lower costs. So, VW cars aren’t as competitive in China anymore.

Even in the US, VW struggled to understand the market.⁶ The cars it made were either too small, too expensive or both. By the time VW caught on to what Americans wanted, Japan and Korea’s automakers had already learned from VW’s mistakes and grabbed the market share.

So yeah, with home and international sales dropping, VW expects to deliver just 9 million cars globally this year, down from 9.24 million in 2023.⁷

And maybe it sees cutting costs as the only way out.

But here’s the thing. Even if it goes down that road, it’s going to affect the entire automotive industry. After all, the automotive sector is Germany’s biggest, contributing 5% to GDP and employing nearly 8 lakh people — close to 40% of them at VW.

Can cutting costs help VW drive out of its slump, even if it means dragging down its own country’s economy?

Only time will tell.

Story Sources: Volkswagen Group [1], The Conversation [2], The Economist [3], Technology Review [4], CNN [5], Capital One [6], Fortune [7]

Infographic 🤔: Brand Names - Then vs Now

Today’s Discussion 🤯: Scent-sational Marketing

Imagine opening your daily newspaper expecting to read the top stories of the day, but there’s something different.

It smells of Jasmine!

But wait, fragrance out of a newspaper?

Here’s how–

In 2016, Lux introduced their new Jasmine soap, and decided to advertise in Pakistan’s biggest newspaper to pull off their ‘big idea’.

It wasn’t just another print ad in their newspaper—they were quite literally under people’s noses. They had mixed the fragrance of Lux soap with the printing ink that the newspapers used.

But, did it actually work?

Think about it—certain scents make you nostalgic, hungry or even sleepy!

Now, many people choose soap based on its fragrance, but most of them come in packs that restrict you from ‘trying before buying’. But with this move, millions of readers got a free “smell test” of Lux’s new soap.

And that’s how Lux created an emotional connection with people, right in their homes.

And that's all for today folks!

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