Raghuram Rajan 2.3 12 ideas

Citrini Research predicts an 18% drop in the Rupee. Rajan calls predicting exchange rates a "fool's game" and states he does not foresee a collapse unless exports totally fail. Rajan dismisses the macro-bear case for the currency, suggesting the "doomsday" scenario assumes zero adaptation by the Indian economy. NEUTRAL. He is not bullish on the currency, but strongly refutes the short thesis. A rapid decline in global demand for IT services would validate the bear case for the Rupee.

Rajan admits "routine coding" will be replaced and firms like HDFC are seeing layoffs, but argues big software firms are already retooling with Anthropic/OpenAI to become "supervisors" of AI rather than just coders. The bearish "doomsday" thesis assumes a straight-line extrapolation where legacy firms cannot adapt. Rajan argues these "dinosaurs" will integrate AI to lower costs, potentially unlocking massive volume growth in previously unserviced domestic sectors (e.g., Indian hospitals/SMEs). WATCH. While the "Short India" thesis is challenged, the sector is in a painful transition period of re-skilling. If AI adoption speed outpaces the rate at which Indian firms can retrain their workforce, the "routine" revenue collapses before "supervision" revenue replaces it.

Rajan states explicitly that India should not and cannot compete on "foundational models" because the investment required is massive and US firms are too far ahead. If India pivots to "applications" and "derivatives," they become massive customers/integrators of the foundational models owned by US Hyperscalers. India's survival strategy relies on building *on top* of US tech. LONG. The "AI Arms Race" winners remain the foundational model providers, even if the service layer (India) survives. Regulatory clampdowns on AI model exports or data sovereignty issues.

Rajan emphasizes that the "Indian services story" is not just software; it is about "moderately skilled services" (carpentry, plumbing, urbanization) required for a developing nation. Even if high-end software exports face headwinds, the domestic urbanization story remains intact. The shift to a service-led domestic economy (hospitals, infrastructure) drives broad index growth independent of IT export volatility. LONG. Betting on the urbanization and domestic consumption of India rather than just its software exports. A collapse in the Rupee (which Rajan doubts but Citrini predicts) would hurt US-denominated returns for foreign investors.

Rajan critiques the government's strategy of "subsidizing really, really costly investment in things like chips without getting anywhere near the frontier." He views this as capital misallocation. India is entering a capital-intensive sector late, competing against entrenched players (Taiwan/Korea/US), rather than investing in its comparative advantage (human capital/services). AVOID. Indian manufacturing plays dependent on subsidies may be fragile compared to the robust services sector. Geopolitical supply chain shifts might force manufacturing to India regardless of efficiency, validating the subsidies.

A report warns AI could hit India's IT exports. Rajan admits "AI will replace a lot of the routine coding" and notes "silent layoffs" are happening at major firms like TCS. The "labor arbitrage" model of Indian IT is under threat from AI automation. While Rajan believes the "doomsday" scenario is exaggerated, he acknowledges a structural shift where hiring will be muted and firms must pivot to higher-value consulting or domestic markets. WATCH/NEUTRAL on legacy Indian IT Services. The growth engine (headcount addition) is broken. Indian IT firms successfully deploying AI to lower costs and increase margins faster than revenue declines.