RBI GOVERNOR IN MODI ERA - TO BE OR NOT TO BE....

By Ruma Dubey

Just as the market is today celebrating the election of Modi, who has promised a new India, a few months ago, another man had first brought a sense of hope – RBI Governor, Raghuram Rajan.

There is growing speculation in the market about a face-off between the two – Modi v/s Rajan. This ‘tension’ rises from an earlier head-on collision between the two. Rajan had published a report in September 2013 – The Raghuram Rajan Committee report for Evolving a Composite Development Index of States. This report ranked overall performance of all 28 states in the country. And as per the findings of this report, Gujarat fell under 'less developed' and was ranked at 12th position in overall development.  This report went on to get used by the Congress to blow holes into Modi’s Gujarat Model and stated how ‘Congress states’ were much better developed. Also Rajan is stated to be close to Finance Minister, Chidambaram.

Well, the report by Rajan was non political but the Congress made it political and since then, there has been a rumour that once Modi comes into power, Rajan’s job could be under threat.  And closeness to Chidambaram? All over the world, the Central Bank has to work in close tandem with the finance ministry, though none can dictate the other.

Ever since the Modi wave hit the Indian shores, the grapevine is ripe with whispers that Rajan as RBI Governor could be moved – can a leader talking only about development work with a hawkish RBI chief?

First, can Rajan be removed by the new Govt? Yes, the BJP/NDA can oust Rajan as it is the Govt, in this case the Congress Govt, which appoints the RBI Governor. So if the Govt appoints, it can remove also. History has shown us that most Govt’s do not make this change – the BJP did not remove Bimal Jalan, who was Congress appointed, when they come to power in 1998.

But two other RBI Governors have been moved – Janata Party moved out the then (1977) RBI Governor KR Puri and it happened another time in 1990, when RM Malhotra was replaced by S Venkitaraman- this was when Samajwadi Janata Party came to power for less than four months.  Of course there were two other RBI Governors – Osborne Smith and Benegal Ram Babu who resigned due to differences with the Govt.

The BJP, which is so attuned to what the people want, surely know that Rajan is very popular and very well liked by all. So if they keep this in mind, it seems unlikely that Rajan will be moved out.

And then one more question comes to mind – will there be political interference in RBI’s workings? Rajan’s job is to first fight inflation and there is no way that he is going to bring down interest rates in a hurry, with CPI holding a strong promise of only going up. On the other hand, Modi wants to kick start the economy, wants to spur demand and for that, he would surely want lower interest rates. The BJP has time and again stated that interest rate is not the tool for fighting inflation; it believes one has to remove supply-side constraints. Thus there are differences of viewpoints here but aren’t these issues there world over?

RBI is accountable to the Finance Ministry and not the Parliament but at the same time, RBI Governors have been strong enough, independent enough to never allow the Finance Ministry to dictate what should go into its monetary policies. Rajan’s predecessor, Subbarao was extremely independent, even to the extent where he and Chidambaram could not see eye-to-eye as he refused to toe the line set by the Finance Ministry. Rajan is also unlikely to dance to the tunes of the new Govt and his steadfast focus on keeping a tight leash on inflation will continue. Last week, Rajan had retorted when asked about his independence, "I determine the monetary policy. I say what it is. The government can fire me, but the government doesn't set the monetary policy. So, in that sense, am I independent! Well, I am happy to talk to the government. I am happy to listen to the government but ultimately the interest rate that is set is set by me.” Well, looks like Modi Govt will have to just learn to work around RBI as there is no compromise.

Just as Rajan is not expected to go on an aggressive rate hike spree, Modi Govt might indeed work on solving supply-side issues. Surely Rajan and his office will be respected and will be allowed to work as an autonomous, independent body; after all it is indeed one of the very few organizations in India which actually does its job well, commands immense respect.