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Will RBI Governor Raghuram Rajan succumb to pressure to cut rates?

Manojit Saha says the RBI's policy review on Tuesday will be a litmus test for governor Raghuram Rajan, who is facing pressure to cut rates from the finance ministry

Manojit Saha  |  Mumbai 

Raghuram Rajan
Raghuram Rajan

Tuesday will be a litmus test for an economist with unquestionable credentials. Come December 2, Reserve Bank of India Governor Raghuram Rajan’s resolve to fight inflation will be tested against the backdrop of finance ministry’s constant soundbytes to do otherwise.

Pressure from the mandarins at North Block – where the Finance Ministry is housed – is not new for a central bank governor. Both Rajan’s and current finance minister Arun Jaitley’s predecessors were often at loggerheads openly, sometimes through TV appearances or the written word.

Jaitley’s predecessor Pallaniappan Chidambaram once famously said when Duvvuri Subbarao declined to cut rates that the government would walk alone to revive growth. To which Subbarao’s parting shot was ‘Let Chidambaram take a walk but he will thank that the RBI exists.’

While Chidambaram - a lawyer by profession - was keen to portray himself no less than a super regulator, his predecessor was less ‘hands on’. Pranab Mukherjee, the then finance minister and now President of the country, left the job of managing government banks to the bureaucrats, particularly to one DK Mittal who was the then financial services secretary. He shot to fame by sending instructions to public sector bank chairmen almost every day, thereby encroaching on the ‘turf’ of RBI which is the constitutional body to regulate banks in India. Later, a committee appointed by Rajan and headed by former Axis Bank chairman P J Nayak, and a former bureaucrat in the finance ministry, pointed out the need to end dual regulation because it crippled the functioning of PSBs.

Then, too, the finance ministry never quite liked the idea of the RBI governor crossing the street, quite literally, to visit South Block – where the prime minister’s office is located – after the customary pre-policy meeting with the finance minister.

So why should we expect Jaitley to be different? There is absolutely no reason, even if Jaitley is not seen as ‘hands on’ or known for ‘handpicking’ secretaries, (which is now done by the prime minister himself).

However, in the the last one month of his five-month tenure, Jaitley increasing looks like his ‘super regulator’ predecessors. He has made it a habit of giving the same soundbytes to the media like his predecessors on why RBI should cut interest rates.

That is why this is the first time that Rajan, the former chief economist of the International Monetary Fund, is facing perhaps the toughest test in his one and a quarter year tenure at Mint Road. This will likely be a tougher battle than the currency crisis that India won hands down or the inflation battle which Rajan is on the verge of winning – retail inflation has fallen from double digits to below 6% in 13 months.

It has been proved beyond any iota of doubt that previous finance ministers miscalculated the ferocity of inflation which impoverished the marginal sections of society for about three years now.

It is best left to the governor of central bank who is better equipped to tackle it. To quote Rajan himself: “Let’s fight the battle against inflation once and win.”

(Manojit Saha is the banking editor for Business Standard)

First Published: Mon, December 01 2014. 09:28 IST