50, handsome and hugely qualified,
Raghuram Rajan was hailed at India’s first wunder-kid
governor of the Reserve Bank of India (RBI). So
delirious were the scribes with the looks and body
language of the youngest governor, that they set him
up to hit half a dozen effortless sixes in his first
over. Rajan even looked the part. He didn’t play a
single wrong stroke in his first press conference
and talked of financial sector reforms. Many
reporters really didn’t know what these actually
might be. But it didn’t matter. Everything was
upbeat after his predecessor, Duvvuri Subbarao.
The governor’s honeymoon lasted 17 days. It ended on
mid-day of Friday, 20 September 2013 with Rajan’s
first monetary policy announcement. After Ben
Bernanke had put a hold on QE tapering which made
stocks shoot through the roof while strengthening
the Indian rupee (INR), his Indian counterpart
announced an unanticipated 25 basis points (bps)
hike in the repo rate to 7.5 per cent.
Although Rajan rolled back some earlier liquidity
tightening steps, the press went ballistic. ‘Rajan
brings on a Hangover’ headlined The Economic Times;
‘Inflation-wary Rajan skips Fed party’ wrote the
Business Standard; Reuters called him an ‘Inflation
hawk’; and ‘No steam for the growth engine’ said
Now that our affair with the new governor has come
to an end, it may be useful to make four basic
points which might suggest future directions that
the RBI could take.
The first has to do with QE. Irrespective of the US
Federal Reserve deferring the QE tapering on 18
September, the fact is that the party must come to
an end sooner rather than later. In August 2013, US
unemployment was 7.3 per cent. It should fall below
the 7 per cent mark by the end of the year, or by
early 2014. That will certainly trigger change. If
anything, one should be prepared for the tapering by
November 2013. When it is announced, be ready for
another outflow of dollars to the US and a resultant
depreciation of the INR.
The second is inflation. Wholesale price inflation (WPI)
was 6.1 per cent in August 2013, up from 5.8 per
cent a month earlier. Consumer price inflation was
at 9.5 per cent. Despite good monsoons, there is a
sense of a price uptick — on account of vegetables
and fruit and, more importantly, due to higher fuel
costs because of firm crude oil prices and
depreciation of the rupee. Rajan has reasons to be
skittish in an environment where the WPI inflation
remains resolutely above the ‘safe’ rate of 5 per
cent. Its is debatable whether raising interest
rates can supress primary product or fuel inflation.
But since the RBI can only play with what it has, I
wouldn’t be surprised if one sees higher rates in
the offing if WPI inflation were to cross 7 per cent
and trend upwards.
The third is the fiscal deficit. I have tremendous
respect for finance minister P. Chidambaram’s
determination to hold the deficit for 2013-14 at 4.8
per cent of GDP. But I doubt if he can — thanks to
higher cost of crude and naphtha, low growth
affecting tax revenues and an additional outlay on
food subsidy to demonstrate that the Food Security
Act is being implemented. If Chidambaram can keep it
to last year’s 5.2 per cent of GDP, he will have
done well. That will cost an extra Rs.45,200 crore.
The fourth is autonomy. Since Y.V. Reddy, successive
RBI chiefs with some of the deputies have vigorously
defended their policy-making turf, much like Beckett
as the archbishop of Canterbury. On several
occasions, the defence has been ‘we, the prudent’
versus ‘they, the prurient’. This dichotomy, though
occasionally useful, needs to make way for better
dialogue between the RBI and the finance ministry.
But I doubt it.
Given these four forces, I wouldn’t bet on an
accommodative or expansionary stance of the RBI in
the next few quarters. India Inc. and North Block
better look elsewhere for solace.
Published: Business World, October 2013