Millennium Post

Lone inflation warrior Rajan fights against vested interests

Raghuram Rajan says he is neither Superman nor James Bond, but he appears to have emerged as a 'lone ranger' —fighting persistent rate cut demands, "schizophrenic" attempts to weaken RBI and even rumours about he being 'kicked up' from the Mint Street high seat.

As 2014 draws to a close, Rajan in his first full year as RBI Governor seems to have followed the principle laid out by former US Federal Reserve chief Ben Bernanke, who had famously said that "the central bank needs to be able to make policy without short term political concerns".

While demands and complaints continued to pour in regularly from the government and the industry for a rate cut, Rajan held onto RBI's fight against inflation and to maintain growth without budging once and rather surprised everyone with a rate hike in the very beginning of the year.

A senior official said there is something in the position of RBI Governor which makes the person occupying this seat someone completely different — one who never budges before any demand, neither from the industry nor from the government, unless it fits into RBI's scheme of things.

A seed of hope, however, has been sown by him with hints earlier this month that RBI may consider a rate cut in February if there is ample proof of inflation having been finally contained to comfortable levels.

In between, he survived widespread rumours about his "imminent" departure from RBI when a new government took charge in May, followed by another round of wild guesses currently on which talk s about he being 'kicked up' to the post of first President of the newly proposed BRICS Bank.

Rajan, a well-known economist and an academician before he became RBI chief in September 2013, also had to fight a never-ending battle to take away some powers from the central bank and the attempts appeared to be much stronger this year.

One of his staunch opponents said that the industry is feeling the pain of RBI's actions and recalled American auto giant Ford Motor Founder Henry Ford's words that the people do not understand the banking and monetary system very well, otherwise there would be a revolution before morning. 

Having a reputation for not mincing his words, Rajan put up a powerful defence to safeguard the independence of RBI and went to the extent of publicly denouncing as "schizophrenic" certain recommendations of Financial Sector Legislative Reforms Commission (FSLRC), which, among other things, has suggested creation of a unified financial sector regulator along with certain powers and functions of the Reserve Bank.

Financial Sector Legislative Reforms Commission Chairman and the author of the report B N Srikrishna also hit back, saying Rajan once held the same view as those suggested by the panel, but was opposing its recommendations after becoming the central banker.

These banters apart, RBI finally appears to be succeeding in its solitary battle against inflation throughout the year, which saw Rajan hiking rates once in January to 8 per cent and then holding on to that level throughout the year.

Finally, retail inflation — RBI's main focus — hit a five-year low of 4.4 per cent in November and the wholesale price index hit an absolute zero.

Last time when the wholesale price index (WPI) inflation turned negative in July 2009 at minus 0.3 per cent, the repo rate was much lower at 4.75 per cent following the global credit crisis.

While fighting inflation, RBI also sought to expand the banking sector and granted two new bank licenses early in the year —to IDFC and Bandhan — while promising 'on-tap' grant of licenses going ahead. The final guidelines also finally saw light of the day for two types of niche banking entities — payment banks and small finance banks.

"One reason for high inflation is supply issues and other is too much demand. There are many ways of constraining demand. Less spending by the government is a way of constraining demand...we think that will happen. Another way is to make demand match supply is to raise interest rates," Rajan had said while justifying the January rate hike.

Acting on the Urjit Patel report, RBI adopted medium-term inflation targets by dumping WPI and adopting CPI as the benchmark and set an 8 per cent CPI by January next and squeeze it further to 6 per cent by January 2016. It also switched to bi-monthly policy instead of 45 days earlier.
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