Raghuram Rajan loses his 'comfort' factor

A month  after the global financial meltdown in September 2008 , the then prime minister Manmohan Singh brought him to the Prime Minister's office as an honorary advisor. He was later dispatched to the finance ministry under the Congress-led UPA government as economic advisor. P Chidamabaram, the former finance minister, trusted him to head the Reserve Bank of India (RBI) at a time when  the domestic currency had gone for a tailspin. He also commanded respect from other economist colleagues  in the previous regime like C. Rangarajan  and Montek Singh.

Many say, the comfort factor of Raghuram Govind Rajan, the 23rd Governor of the Reserve Bank of India (RBI) , in the government is now gone with  the Narendra Modi-led BJP government taking charge at the Centre. He now has to deal with a completely new set of people and a different ideology. 

But the 51-year old has his job cut out. Rajan heads an autonomous body with the clear mandate of supporting growth, taming inflation and keeping stability in the financial system. As part of the job, he has to work very closely with the government especially the finance minister.  There is every likelihood that Rajan will now have to deal with Arun Jaitley , the finance minister  and of course Modi , who  himself has ideas of how to steer ahead the economy.

"Prime Minister Narendra Modi ran a campaign to bring down soaring inflation. Rajan  , too,  is working hard to  tame inflation. They both have the same goals," says Abizer Diwanji , National Head ( financial services ) at EY India.

Clearly , Rajan, irrespective of the change of guard in Delhi has a job to do with runaway inflation and dangers of future quantitative easing by the US.  On the inflation front , the consumer price index ( CPI)  is expected to average 8 per cent in the current year  which is  well over the RBI's comfort zone of  four per cent. This actually leaves little scope for Rajan to reduce rates immediately.  On June 3 , he is widely expected to leave the repo rate unchanged.

That is one area where many say  it would be interesting to watch how the relationship between Rajan and the new government develops

The concerns are justified as  the previous RBI Governor D. Subbarao  had a tense relationship with former finance minister ( now President ) Pranab Mukherjee. Subbarao refused to   budge on cutting the interest  rates despite Mukherjee's insistence he do so. Subbarao was of the view that  the role of an interest rate reduction is negligible in reviving growth. In the mid 1950s, the differences between  the then finance minister T T Krishnamachari  under the Prime Minister Jawaharlal Nehru  and the RBI Governor  Rama Rau culminated in the  resignation of the Governor. Rau is the only RBI Governor in history who resigned because of differences with the then government.

"The RBI is an autonomous body with full freedom to set interest rates in consultation with the government," say experts. But not much is not about the new economist who will be part of the Modi's team in the  Planning Commission and Economic Advisory committees. Two names often  doing the rounds are economists Jagdish Bhagwati and Arvind Panagariya , who have hailed the Gujarat model in the past.

In fact , there was  no dearth of advice for Subbarao during his stressful years in the RBI.  Economists like C Rangarajan , Montek Singh Ahluwalia  and Kaushik Basu publicly aired their views on the  inflation and interest rates. That upset Subbarao. 

Rajan is no novice. He understands the mandate of the RBI  and also the relationship between RBI  and the government. In a recent meet abroad when Rajan was asked on the RBI's autonomy, He said ," I determine the monetary policy. I say what it is. The government can fire me , but the government doesn't set the monetary policy."

At the same time, Rajan reiterated the point of consultations with government." I'm happy to talk to the government. I'm happy to listen to the government but ultimately the interest rate that is set by me," he said.      

But certainly Rajan doesn't enjoy the comfort factor that he enjoyed with the previous government.