In August 2013, at the 10th Nani A. Palkhivala Memorial Lecture on \u2018Five Years of Leading the Reserve Bank\u2014Looking Ahead by Looking Back\u2019, a few days before he stepped down as the Reserve Bank of India (RBI) governor, Raghuram Rajan\u2019s predecessor D. Subbarao dwelt on the issue of autonomy and accountability of the Indian central bank.<\/p>\n
Reacting to the extensive media coverage on policy differences between the government and the RBI, Subbarao first quoted former German chancellor Gerard Schroeder, who had once said, \u201cI am often frustrated by the Bundesbank. But thank God, it exists,\u201d and then made the famous comment: \u201cI do hope finance minister (P.) Chidambaram will one day say, \u2018I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists\u2019.\u201d<\/p>\n
He was referring to Chidambaram\u2019s outburst in October 2012 when the RBI chose to keep its key policy rate unchanged to fight high inflation, a day after the finance minister unveiled the government\u2019s fiscal consolidation road map.<\/p>\n
\u201cGrowth is as much a challenge as inflation. If the government has to walk alone to face the challenge of growth, then we will walk alone,\u201d an upset Chidambaram had said, reacting to the RBI\u2019s second-quarter policy review.<\/p>\n
On Saturday, delivering his last speech as RBI governor at St. Stephen\u2019s College in New Delhi, Rajan said: \u201cI would go a little further. The Reserve Bank cannot just exist, its ability to say \u2018No!\u2019 has to be protected.\u201d At the same time, he also made it a point to mention that \u201cthe central bank cannot become free of all constraints; it has to work under a framework set by the government\u201d.<\/p>\n
Dwelling on the RBI\u2019s independence, Rajan said, \u201cWhen the responsibilities of the RBI are fuzzy, its actions can continuously be questioned. Instead, if the constitutional authorities outline a framework for the responsibilities of RBI, it can take actions consistent with those responsibilities and be held to outcomes.\u201d<\/p>\n
An outspoken Rajan also said, \u201cIt is dangerous to have a de facto<\/i> powerful position with low de jure<\/i> status,\u201d and suggested that there may be some virtue in explicitly setting the governor\u2019s rank commensurate with the position as \u201cthe most important technocrat in charge of economic policy in the country\u201d.<\/p>\n
Like his previous speeches, there are sharp reactions to this speech too. I saw one tweet on Saturday afternoon which said the subject of his speech, the \u201cindependence of the central bank\u201d, conveys the message that with his departure, the RBI will not remain independent, and \u201cit\u2019s too pompous\u201d. However, when two successive governors spoke about the RBI\u2019s autonomy and independence, both in their last speech, there could be merit in their arguments.<\/p>\n
Not too many possibly can argue with what Rajan had said from various fora, but many questioned his sagacity in raising those issues as an RBI governor. In other words, there is nothing wrong in his stance against intolerance at the convocation of his alma mater, IIT-Delhi, in the aftermath of the lynching of a person by a mob for possession of beef or his outburst against crony capitalism at the 20th Lalit Doshi Memorial, but as the RBI governor, he has no business to raise such issues. Politicians, academicians, economists and columnists could dwell on those, but the RBI governor should stick to his domain\u2014inflation, interest rates and macroeconomic stability.<\/p>\n
I don\u2019t wish to get into this debate, but it\u2019s clear that we don\u2019t have the culture of mature public discourse, and the concept of an argumentative Indian is a fallacy. Unfortunately, in public discourse in India, there is nothing called a neutral stance; either one is pro-government or anti-government. However, all these may not have anything to do with Rajan not getting another term as governor. After all, the appointment of the RBI governor is a political decision and since Rajan was appointed by the previous Congress regime, the current Bharatiya Janata Party-led government has every right to say goodbye to him.<\/p>\n
How will his successor Urjit Patel be different from him? Many are projecting Patel\u2019s reticence and reluctance to give public speeches (in contrast to Rajan) as his biggest quality that facilitated his appointment. The origin of this is possibly our reluctance to appreciate public discourse. And, in doing this, we are being unfair to Patel. Patel has been chosen as Rajan\u2019s successor not because he will not raise apparently unrelated but relevant issues in public fora but because he demonstrated competence as deputy governor in charge of the monetary policy and he has a mind of his own. I am not going to detail his academic background and assignments that he had carried out through his career.<\/p>\n
If Rajan was found to be aggressive in his monetary tightening to fight inflation and not a growth-friendly governor, we must remember that Patel too played a critical role in the formulation of monetary policy in the past three years and hence it may not be wise to expect that overnight the RBI stance will change. Similarly, those who have been unhappy with Rajan for importing a seemingly Western concept of inflation targeting will have to live with this as the monetary policy committee is being put in place and Patel was the key architect of the framework by virtue of leading the expert committee which suggested that inflation should be the nominal anchor for the monetary policy framework and the target for inflation should be set at 4% with a band of +\/- 2% around it. The committee also charted out the glide path for inflation\u2014from 10% then to 8% over a period of one year and 6% over the next two years before formally adopting the 4% target with a 2% band.<\/p>\n
We have, of course, adopted a \u201cflexible\u201d inflation targeting and this gives Patel flexibility in his approach. It will be interesting to see how he uses this. Meanwhile, let all of us wish him a wonderful stint as India\u2019s chief money man.<\/p>\n","protected":false},"excerpt":{"rendered":"
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