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Raghuram Rajan must stay on as RBI Governor!

Last updated on: May 23, 2016 12:15 IST

'The 'Off-with-Rajan's-head' brigade bases its arguments on mistaken beliefs, erroneous causalities, and even downright prejudice,' says banker S Muralidharan.

Reserve Bank of India Governor Dr Raghuram Rajan


For long I have been an admirer of that Indian political gadfly, Dr Subramanian Swamy, for he is all the things I wanted to be, but could not be!

I am amazed at his access to information concerning various matters, especially when it concerns the Maino (of Sonia Gandhi fame) family and their shenanigans. But I differ with him when he says that Reserve Bank of India Governor Raghuram Rajan should go. Sorry, Dr Swamy for this once I don't want to be you!

The chorus of voices demanding Dr Rajan's head -- which is nothing short of well orchestrated but ill-founded -- has but one agenda -- lower interest rates. This uni-dimensional school of thought hangs all its economic hopes and conclusions on just one peg, the aforementioned interest rate.

It is obvious that the Indian economy is far bigger today and far more complex than it was a couple of decades ago to be explained by a single factor, howsoever powerful. The 'Off-with-Rajan's-head' brigade bases its arguments on mistaken beliefs, erroneous causalities, and even downright prejudice.

First the credentials. Dr Rajan is no ivory tower academic descended from the Gothic piles of the University of Chicago expatiating on economic theory, his hands unsullied by the grime and dirt of real world economics.

He was the only one who stood up and spoke about an impending crash being built up by the excesses of the American banking system. His views, expressed at the Jackson Hole conference in 2005, were on the lines that easy money was causing an asset bubble and that complex financial shenanigans like credit default swaps and mortgage-backed securities were making the world a riskier place and not safer and better as was being claimed. The august assemblage did not like it. With the benefit of hindsight we all know now who was right.

Dr Rajan is concerned about the adverse impact that supereasy money, such as the Quantitative Easing (QE) the US Federal Reserve ushered post 2008, can have. He fears that a period of easy rates and abundant supply of money can distort investment decisions and result in excessive and misdirected allocation of investments in the economy.

One has only to recall how this happened in China in the real estate development sector. Entire cities, having been developed fuelled by abundant money supply at easy rates, are now lying totally empty, ghost cities all.

While QE appeared the only way to avert a total global meltdown in the immediate aftermath of the credit crisis of 2008, Dr Rajan knew it could also lead to asset price bubbles and misallocations. He is thus in favour of withdrawal of these desperate measures.

The problem is, of course, withdrawing the drug without killing the addict.

'We're in the hole we are in. To reverse it by changing abruptly would create substantial amounts of damage. So I'm with Fed officials in saying that as we get out of this, let's get out of this in a predictable and careful way, rather than in one go,' Dr Rajan said in a 2013 interview.

When Raghuram Rajan took over the RBI's reins in 2013, the consequences of the US Fed's tightening became personal -- he was now in charge of one of the 'fragile five' economies deemed most vulnerable to the Fed's tightening.

He held his nerve even as all around him were losing theirs. Investors exited India in panic, pushing the rupee down.

With deft touches, he managed to get the confidence up and investors back in and was hailed as a rockstar in the Indian media, with one female socialite-turned author going so far as to declare her hots for him. The same people are now baying for his blood!

Dr Rajan also believes that high inflation can kill growth more effectively than tight money. 'The way to sustainable growth is to bring down inflation to much more reasonable levels.' he maintains. This could explain his reluctance to drop interest rates dramatically, to make headlines, or throw money from a helicopter, acts that the political and business classes would dearly love.

If the proof of the pudding is in the eating, then the Rajan pudding must be good indeed.

There is now no rush for the Exit doors, the investors are back, and inflation is certainly under control.

The rupee has fallen since 2013, but we cannot lay everything at the RBI's or Raghuram Rajan's doors.

Dr Rajan has been advocating greater coordination between the US Fed and leading central Banks. When there is lack of coordination between the Fed and other central Banks, the steps that the latter take to protect against consequences of the Fed' steps -- like building up reserves -- can result in aggravating American problems which could force the Fed to do more, which would get more reaction, and so on.

The problem is no central banker, being an unelected official, can totally ignore the demands of the elected ones, howsoever populist they might be. This is as true in the USA as it is in India.

The responses required to counter the Fed's move may not be what the Indian government likes or can even tolerate. It is obvious why coordination with the Fed is so crucial to our own policy making. Dr Rajan's street-cred is an asset when it is time for a tete-a-tete with US Fed Chairman Janet Yellen. In contrast to Dr Rajan, previous governors had largely focused on internal policy.

Now to the much discussed interest rate reduction issue. The demand originates from Big Business -- the same people who kept demanding less regulation and 'liberalisation' and when given a taste of those, lost no time in forming the 'Bombay Club' to safeguard their privileges; the same businessmen who benefited from the license-permit-quota Raj even as they were pretending to be stifled by it.

Businessmen have been plundering the public banking system and running their businesses to the ground even as their personal wealth zooms north. What is the percentage of interest cost in their turnover? What portion of that will 0.25% reduction in interest rate constitute? It is all tax deductible anyway.

The interest rate demand by Big Business is nothing but an attempt to get something out of a government politically paralyzed and held to ransom by a personally motivated Opposition.

Some argue that Dr Rajan is not in touch with Indian ground realities. This is like suggesting that only a cancer victim can be an oncologist. Dr Rajan is too intelligent to not know that he is not elected and that the elected officials who are answerable to the people will call the shots; too intelligent not to know that economics operates through politics.

He also knows that elected officials think nothing of spending Rs 50,000 crores in freebies just to get elected again.

This conflict between the monetary independence of the central Bank and the fiscal profligacy of elected officials is well known and something that is universal for Dr Rajan not to know and take into account. To suggest otherwise does no credit to his detractors.

The specifics may vary, but the basic principles of economies are the same the world over: Governments have to make do with limited resources and try to satisfy diametrically opposed demands of the citizenry.

All elected officials promise the electorate things that do not exist at prices the economy cannot afford. They want to spend the money that has not been earned, and favour the specific electorate that favoured them with electoral contributions.

The Central Banker is the only line of defence between the people and the politicians' limitless financial irresponsibility. But the political class is elected and the RBI Governor is not.

We have seen the consequences of political interference in the banking system. Giving into political whims and fancies in monetary matters will reduce India to a banana republic without any bananas to eat.

Dr Rajan has learnt to manage political demands through compromises and conviction. Let us not put out an advert for a kowtowing invertebrate RBI Governor.

The position of central bank governors is a very difficult one -- their remit is onerous, but they are unelected officials, without any popular mandate. The fact that their currency, if you pardon the pun, is esoteric and beyond 99.999% of the population makes their jobs nearly impossible.

Which is why it is important that their credentials and motives be beyond question. The RBI governor has to walk the high wire between what is the right thing to do and what the elected ones demand, knowing fully well that the government cares only about the next election whereas the consequences of what the RBI governor does could be felt for a hundred years.

Bureaucrats with an economics degree in the distant past are passe; a practising economist with global credibility is the least the country deserves.

S Muralidharan retired as the managing director of BNP Paribas after serving the bank for 20 years. He began his banking career at the State Bank of India and worked at SBI for 12 years.

S Muralidharan