Lessons from Raghuram Rajan's exit: Don't paint RBI Governor as Superman

Raghuram Rajan has done the right thing. By opting out of seeking an extension as Reserve Bank Governor when his term expires in September, he has protected the institution from further politicisation. While RBI Governors, given their different briefs, have always had a degree of tension with the finance ministry, this time the exit of a Governor has resulted from a highly public, personalised attack on him by a BJP Member of Parliament, Subramanian Swamy. It was Swamy’s accusation that Rajan had “wrecked” the economy that made it difficult for him to stay with any sense of dignity, and he chose the right path: goodbye. In fact, Swamy made it difficult for the government to act either way: ask Rajan to go or stay. Rajan made the decision easier for the government, and for this, Arun Jaitley owes him one. [caption id=“attachment_2787262” align=“alignleft” width=“380”] RBI Governor Raghuram Rajan. PTI[/caption] Unlike state governors, who play a quasi-political role and usually find themselves out of a job when the central government changes, RBI governors have so far been insulated from such abrupt ousters. But with Rajan, this changes. Future governors should take note. But contrary to what some commentators think, the relative independence of the governor will not change. That comes from the institution, and not the man occupying the chair. Those who think this is the first time this has happened, some delving into history is useful. TCA Srinivasa-Raghavan, who edited some volumes of the RBI’s history, wrote in Business Standard last year that at least five governors were asked to go, including Osborne Smith in the pre-Independence era. Of the remaining four, two were on the Congress hit-list for apparently acting independently; the other two went when the Janata party defeated the Congress after the emergency in 1977 and when Chandra Shekhar was Prime Minister briefly after the VP Singh government fell in 1990. Yashwant Sinha, the interim Finance Minister, apparently sent Governor RN Malhotra a coded message that he could leave – and he did. The point is that tension has always ruled between Mint Street and North Block, since one defends the value of the rupee and the other has a broader political role. But it is rare to see the tension boiling over to a point where the Governor had to go. But the message it clear: when it comes to an eyeball-to-eyeball, it is Mint Street which has to blink. Not surprising, since RBI governors are executive appointees. It is, therefore, a pity — but not a catastrophe — that the fifth RBI governor to leave in unpleasant circumstances is one of the best occupiers of the office. While the die has been cast, the only way the NDA government can make amends is by announcing a credible successor quickly and ensuring that there is continuity in monetary policy to calm down the market’s nerves. Unlike some scare-mongering in favour of Rajan, foreign investors do not enter or exit markets just because they love the central bank governor. Three US Fed chairpersons — Alan Greenspan, Ben Bernanke, and now Janet Yellen — have done more or less the same obvious thing (keep money cheap to keep the economy from tanking) but the US dollar has gone from strength to strength in spite of them. This shows that it is the broader comfort with the economy that matters. Uncle Sam is a safe haven for money. The value of the dollar does not depend on interest rates at all. In India, the comfort is with Narendra Modi’s government and not merely Rajan’s stewardship of monetary policy. And this does not change even now. The important thing for Modi to do now is to not appoint a candidate who looks like a pygmy before Rajan’s qualifications. Rajan’s exit has piled on the pressure on the government, not the institution. The second point worth noting is that RBI governors derive their powers from the office and not the government. The institution, including its stodgy bureaucracy, while slow to change, offers a protective “kavach” to any new governor. This is why even when governors are personally chosen by a government in the hope of creating a pliant moneyman, the former find the necessary spine to stand up to power. It is no surprise that many RBI governors come after a posting in the finance ministry – Bimal Jalan, YV Reddy, Duvvuri Subbarao, and Rajan among them. But not one of them did the wrong thing by the country. The third point is interest rates and the efficacy of monetary policy. One can always argue whether interest rates should be higher or lower at any point of time, but governors do not have the luxury of hindsight to know if they are “ahead of the curve” or behind it on interest rates. For example, today, retail inflation is edging closer to the 6 percent mark, but industrial sluggishness also is not going away. So when Rajan says the GDP data are suspect, he should be cutting rates and not keeping them relatively high. But when you decide what to do in the given fog of real (or unreal) data, you can be right or wrong. Only history will let us know the truth. What does a governor do when the price data and the GDP data are in conflict? I doubt Rajan has a clear answer to that one. The only thing that can be said is that fiscal policy has more instruments at its command than monetary policy. Governments that want lower rates can ensure this in multiple ways. While Subbarao was probably behind the curve at some points in confronting inflation, we know this only today, well after the 2008 crisis seems behind us and inflation spiralled out of control under Pranab Mukherjee and P Chidambaram. While Mukherjee’s CEA Kaushik Basu wanted the previous governor to think “out-of-the-box” on rates, Chidambaram publicly expressed unhappiness over Subbarao’s refusal to cut rates in October 2012. Subbarao was right on both counts, but who will compliment him for this? Is Janet Yellen ahead or behind the curve on the Fed rate? Are the Bank of Japan and the European Central Bank right to flirt with negative interest rates? We don’t know today. It is the same with Rajan’s interest rate policy. The best thing about Rajan was that he spoke a lot about what he was doing with monetary policy and why. The worst thing about Rajan was that he also spoke on matters unrelated to monetary policy, sometimes miffing politicians with his choice of words. Outspokenness is usually not appreciated in central bank governors beyond the ambit of money policy. Perhaps this is one lesson all governors can learn. Rajan faced flak because he seemed to be playing to a world gallery, when the government was over-sensitive to domestic and international criticism after Modi came to power. Given the English media’s ambivalence — if not outright hostility — to the Modi government, Rajan unnecessarily gave the impression that he was not a fan of the government. The media’s decision to paint him as Superman did not help matters. We lost a good governor in the process.