)
When Raghuram Rajan took over as the Reserve Bank of India Governor in September last year, many in the finance ministry and the central bank had hoped to reset the relationship that had taken a few hard knocks during D Subbarao’s tenure. One of the decisions taken at the highest level of the government was that the ministry would not make any public statement post the monetary policy announcements by the RBI. And expectations ran high that Rajan will be able to bridge the growing chasm between the two.
The honeymoon, however, seems to be finally over.
Consider the government’s sharp reaction to the Urjit Patel committee report – something that is obviously close to Rajan’s heart. The core recommendation of the panel was ultimately to bring down CPI inflation to 4%, plus or minus 2%. While that would make policymaking more predictable and less prone to government pressure, it also means rates would stay high for longer as CPI inflation now stands at nearly 10% -- the highest among major economies.
A day after the report, Economic Affairs Secretary Arvind Mayaram said making CPI the nominal anchor for monetary policy will be premature. Chidambaram, who has been the fiercest lobbyist for lower interest rates over the past couple of years, made the ministry’s displeasure more explicit by terming the targets set in the Patel report “ambitious” and by offering a reminder that the central bank, too, had a duty to push growth.
But Chidambaram should have known Rajan better. For, the former Eric J Gleacher Distinguished Service Professor of Finance at the University Of Chicago Booth School Of Business has always been a vocal critic of easy money policies. His wariness of inflation is well-documented, as is his cynicism about central bank efforts to juice growth with loose monetary policy.
So, just five days later, Rajan responded – and how. Speaking to media, Rajan didn’t name anybody but said the notion that the central bank is standing in the way of economic growth is "nonsense". Also, increasing the repo rate in the latest monetary policy – his third in four quarters -- was just one minor part of his response. Rajan went on to say that there was no trade-off between growth and inflation and he is bent on moving towards a "glide path" towards lowering the CPI according to targets laid out in the Patel committee report.
Without explicitly saying so, the RBI has effectively begun to target inflation based on consumer prices, which is a dramatic shift in approach for a central bank that has so far struggled to manage the balance between growth and inflation.
The signal was clear: the new Governor will brook no opposition to his plan for adopting retail inflation as the main price gauge. Consider his statement: “What we can do (on the Patel committee report) and we want to do, we’ll take up.” That is what is hurting the finance ministry the most. For, if the report is adopted by the Governor, one can kiss goodbye to any ideas about a drop in interest rates this year at least.
Rajan didn’t stop at that and also said, “If the government policies in aggregate prove to be expansionary, we will have to adjust policies ourselves to meet the overall disinflationary process.” No RBI Governor can speak his mind more clearly than this.
What takes the cake, however, is the way the Governor criticised the Union Cabinet’s move to raise the cap on subsidised liquefied petroleum gas (LPG) cylinders from nine to 12 per connection in a year. Minutes after the Rahul Gandhi-inspired move was made public, Rajan told a TV channel that it was a “misdirected subsidy”. Though the government hasn’t responded to the latest barb as yet, the distance between North Block and Mint Road has certainly become longer.
Rajan was all along well aware of this problem. The day he took over, he had recited a stanza from Rudyard Kipling’s famous poem, “If”. The Governor said he agrees with the author that “You can keep your head when all about you are losing theirs and blaming it on you”.
Famous first words – those.
