Raghuram Rajan fights for RBI's autonomy amid rate cut rants

Reserve Bank of India (RBI) Governor 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 the central bank 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 cut in interest rates, the RBI Governor held onto the central bank's fight against inflation and to maintain growth without budging once and rather surprised everyone with a rate hike in the very beginning of 2014.

A senior official said there is something in the RBI Governor-position 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 in December that the apex bank may consider a rate cut in February if there is ample proof of inflation having been finally contained to comfortable levels.

In between, Rajan 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 about him 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 the RBI Governor 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 in 2014.

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 the central bank 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 RBI.

FSLRC Chairman and the author of the report BN 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 chief.

These banters apart, the Reserve Bank finally appears to be succeeding in its solitary battle against inflation throughout the year, which saw Rajan hiking key policy rates once in January to 8 per cent and then holding on to that level throughout 2014.

"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.

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

Last time when the WPI-based 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 2014 - 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.

Acting on the Urjit Patel report, the central bank adopted medium-term inflation targets by dumping WPI and adopting CPI as the benchmark and set an 8 per cent CPI by January 2015 and squeezes it further to 6 per cent by January 2016. The RBI also switched to a bi-monthly monetary policy review instead of 45 days earlier.

SHERIFF STICKS TO HIS GUNS

>> As inflation edged down towards the end of the year and the calls for rate cuts got shriller, Raghuram Rajan reasoned that it was low because of a high base effect.

>> Rajan hinted at a rate cut early in 2015 if inflation remains under control.

>> On the monetary policy, he kept stressing that he wanted to fight inflation once and for all, and asked the market to view a rate cut as an action in a single direction rather than doing flip-flops.

>> Coming to the defence of banks regarding NPAs, Rajan said that bankers cannot be always blamed for the rising bad loan situation.

>> Rajan's latest advice to the Narendra Modi government was to focus on 'Make for India' in lieu of 'Make in India' campaign.

>>> Rajan said that an export-led growth strategy is unlikely to work again.

(PTI; with Mail Today inputs)