Rbis Philosopher-King

While the writing of official history of this period will require that it be taken up only after the year 2009, when the memories of those who lived through this period would have dimmed and most of anecdotal history would have been lost to posterity, the Rangarajan era is too important an event in the history of the RBI to be relegated to lack of contemporaneous memoirs. And to this end, it beholds everyone who had some association with Dr Rangarajan to record their knowledge of this period.

Dr Rangarajan joined the RBI in February 1982, from IIM Ahmedabad. Within a short while, he brought to bear on the organisation a totally new outlook. By early 1983, he was clearly the policy supremo. Even his most rabid detractors would readily admit that if there was an intractable problem, it was remitted to Dr Rangarajan and a novel solution would emerge without relenting on basic principles.

 

I am aware that cynics may discount my assessment of the era as merely the recordings of a valet a label I would readily and proudly accept. But then it has given me a privileged grandstand view to write the anecdotal history of this period. It is not known to many that our working relationship began in 1982 in a rather bumpy fashion. Our first encounter was when one of the seniors suggested he talk to me on reserve money. Dr Rangarajan, being the disciplined early riser, wanted to discuss the matter at 6 a.m, and I being totally incapacitated at that hour was totally incomprehensible. Shortly thereafter, I was made a member of the working group on bank deposits and he found me to be the most difficult member in the group. One could not expect a more inauspicious start to an intense and rewarding working relationship which was to continue all the way for the next 15 years. I have somewhat belaboured the point merely to illustrate his unique ability to adapt the Socratic approach of debate and dissent to

achieve progress.

It would be impossible to provide any meaningful assessment of the era this would no doubt need a series of articles but it would perhaps be in order to refer en passant to a few highlights. The Chakravarty Committee report on the monetary system bears the stamp of Dr Rangarajans work and he was solely responsible for initiating work on a comprehensive framework as a background to the formulation of monetary policy and more importantly, integrating the government borrowing programme into a consistent framework of monetary targeting with feedback. In a system where deregulation was a dirty word, he rationalised interest rates and they were evaluated in real terms. Despite his heavy day-to-day duties as deputy governor and governor, he continued his prodigious output of analytical work it is perhaps unprecedented for a central bank governor during his tenure to churn out fundamental path-breaking research studies. His presidential address at the Indian Economic Association on Issues

in Monetary Management (1988) and his Kutty memorial lecture on Autonomy of Central Banks were landmarks which changed the course of monetary history by changing a 40-year flawed system of monetisation of the fiscal deficit.

The end of 1992 was a critical period for the RBI. The institution was being pilloried in the aftermath of the securities scandal and yet precisely this was the time financial sector reforms had to be accelerated. In a financial sector which had lost credibility, it was Dr Rangarajan who was treated as the sage counseller by the JPC before it started its hearings. There obviously was no choice better than him to be appointed as RBI governor in December 1992. His appointment had a magnetic effect. The staff rallied behind him and his standing in the Indian polity as a towering academic with a long and distinguished record as deputy governor and member, Planning Commission, removed any inhibitions about the RBI. It would be no exaggeration to say that he was for all practical purposes the saviour of the RBI in its hour of need. It would just not be possible to do justice to his achievements as governor but then it would be even more unjust not to at least enlist some of the rich achievements the cessation

of automatic monetisation of the budget deficit, the deregulation of interest rates, the large reduction in reserve requirements without loss of monetary control, the reining in of inflation to a 11-year low, the strengthening of the banking system by a gradual tightening of prudential norms, the setting up of new private sector banks and allowing public sector banks to access the capital market. As if all this was not enough, his term as governor saw the implementation of current account convertibility, the move towards a market-determined exchange rate, and the buildup of foreign exchange reserve to $30 billion and the emergence of unprecedented capital inflows. The management of the exchange rate in 1995-96 with deft intervention in the forex market, control of the money market, the reduction of reserve requirements and a reduction in the inflation rate left many an outside critic gasping for breath. When the inflation rate was over 10 per cent two years ago, Dr Rangarajan was relentlessly attacked for a

loose policy, but when deft handling of monetary control despite an unprecedented build up of reserves was combined with lowering of the inflation rate there was insensate criticism that Dr Rangarajan had used crude monetarist policies to bring down inflation. Critics who took the cake were those who debunked the medium-term money-income-prices relationship without caring to understand that the real income elasticity of demand for money (M3) was around 1.6 while that for price was unity; had they cared to understand this simple relationship they would saved themselves from showing their ignorance. But it is the function of central bank governors to bear up to criticism and yet to do the right thing. The nation owes a debt to Dr Rangarajan.

Dr Rangarajan leaves the RBI with a vastly strengthened monetary and exchange system. How would history assess the Rangarajan era? That we can remit to the future. But generations to come would scarce believe that Platos Philosopher King walked the corridors of the central bank in flesh and blood. Today, let the nation salute Dr Rangarajan as he leaves the RBI.