Tough path to tread! Stepping into Raghuram Rajan's shoes will be a big challenge

The June 18 farewell letter of governor Raghuram Rajan to his staff at Reserve Bank of India (RBI) gave clues to what the institution's focus should be after his exit - giving shape to monetary policy committee(MPC) that will determine interest rates to meet inflation target and banks' clean-up.

With half-a-dozen names being bandied about as his likely successor, the question is will the person succeeding Rajan carry forward the two agenda, given that these could just be the points  .of dispute with Prime Minister Narendra Modi's government.

Historically, anyone who has walked into the corner office at RBI has acquired the DNA of the institution, rather than taking the central bank in a direction the person pleases. And Rajan was no exception. Given that the Modi government is changing the way Delhi functions — from the way the bureaucracy works to how ministers conduct themselves — can the RBI be immune to the changes he desires While the truth behind Rajan's exit, despite his wish to continue, will remain a mystery, there is speculation that crony capitalists who would have lost their business empires due to his whiplash may have had a hand in it.

"A governor is a creature of the circumstances in which he is called upon to act," says Rajan's predecessor Duvvuri Subbarao. "There could be many unknown unknowns as well. The new governor's legacy will be determined by how s/he institutionalises the monetary policy committee and how s/he manages inflation targeting at a time the growth-inflation tension is again sharpening."
But Rajan changed that. The monetary policy framework was one of the six pillars he set about to bring in.

"The primary role of the central bank, as the Act suggests, is monetary stability, that is, to sustain confidence in the value of the country's money.

Ultimately, this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures,had said while setting up a panel under deputy governor Urjit Patel to suggest changes to the monetary policy approach.

"The message from Rajan was: 'My job is to protect the value of your money which means price stability, low inflation and low volatility.' That still remains key for the RBI," said Ajit Ranade, chief economist, Aditya Birla Group.
"India has to bring both inflation and inflation expectation down," he said.

Economists say Rajan started the transition to a new interest rate regime but could not see it being implemented. The new governor will have to see the path is not abandoned. Those who want cheap money, the industry lobby, would be quick to point out that high rates won't bring down food prices that had risen due to supply constraints.
But if monetary policy has to contain inflation by definition, it has only one tool, even if it is blunt, to achieve that — interest rates. India's consumer inflation was at over 10.50 per cent. In February 2015, the government and RBI signed an agreement to bring consumer price inflation to below 6 per cent before January 2016. The target was achieved earlier this year; the second is to bring inflation down to 5 per cent by January 2017 and eventually keep it between 2 per cent and 6 per cent.  ..

Popular Posts