Rajan's legacy

With his last monetary policy review, outgoing RBI Governor Raghuram Rajan has sigled the closure of more than his contentious three-year term. The Reserve Bank itself is set for some changes, though not structurally or functiolly. But last Tuesday’s bi-monthly monetary policy was the last by a RBI Governor. Henceforth, this task will be taken over by a six-member monetary policy committee. But then, who will decide upon the rates — the Governor or the panel? Rajan thinks future RBI Governors will still get to exercise their power, though in a ‘diffuse’ manner. Given the ture of the hugely complicated job of maging the Indian economy, Rajan believes that inputs must come from multiple minds shouldering the responsibility collectively. The RBI’s focus will remain primarily concentrated upon inflation control, as mandated by the Central government in Fince Bill, 2016. The government has even specified that for the next five years, retail inflation should be maintained at 4 percent; the implication is that the new monetary panel must juggle interest rates in line with this target. As of now, status quo has been maintained. The interest rate (repo rate) at which RBI provides short-term liquidity to banks has been left unchanged at 6.5 percent; also untouched is the cash reserve ratio (CRR) of scheduled banks at 4 percent. According to Rajan’s projection though, inflation will continue to be higher than anticipated. Food prices, particularly of pulses and cereals, are rising. Despite a good ongoing monsoon that will favorably impact the sowing season, inflation is likely to hover around 5 percent by March 2017. Another factor that will bear watching is the higher salary payouts to implement the Seventh Pay Commission award, particularly higher house rent allowances in the housing sector. As for the Goods and Services Tax (GST), even if it is introduced countrywide by April 2017, its likely inflatiory effect is projected to be short term. Overall, the monetary policy pegs the country’s growth rate at 7.6 percent for the current fincial year.

As he prepares to leave office early next month to return to academia in the US, Raghuram Rajan’s legacy as the last all-powerful central bank czar has become a matter of heated debate. He was perceived to be at odds with the NDA dispensation, particularly over the PM Jan Dhan scheme’s burden on the banking sector. His ‘one-eyed’ comment on India’s growth and foray into the ‘intolerance’ debate did not go down well with the powers-be in New Delhi. It has been speculated that the Sangh Parivar unleashed Subramanian Swamy to mount a vitriolic attack on Rajan and send him packing. Swamy fired a fresh salvo on Wednesday, alleging that the media painted Rajan ‘as an angel’, despite his insistence in keeping interest rates high which ‘made it impossible for small and medium industries to take loans from the banks’. The broad consensus is that Rajan was undoubtedly hawkish on monetary policy, wary of lowering interest rates despite public proddings from Fince Minister Arun Jaitley. Be as it may, Rajan will take credit as the RBI Governor who cracked the whip on banks to do something concrete about their bad loans burden. On Tuesday, he took some satisfaction in commenting that the ‘culture of cleaning up (by banks) seems to be well embedded’. To what degree the RBI keeps banks accountable in future about their non-performing assets (NPAs) remains to be seen. Rajan has also been characteristically forthright in his views about the course pursued by central banks in the US and other developed countries. He has been strongly critical of the new ‘beggar-thy-neighbour’ policy under which central banks are not creating growth, but trying to shift growth from each other’s countries. Printing excess money to achieve a higher (but mageable) inflation, then lowering interest rates to induce people to borrow and spend, thereby seeking to revive business and push up economic growth — is a recipe for debilitating currency wars that will do nobody any good, Rajan had warned in London last year.  As a top economist with an authoritative grasp of global fince, Rajan’s steady hand at the wheel in India will surely be missed.