It must have been a good day in the US in 2005 when Raghuram Rajan pulled his paper out at the last minute and submitted a new one for delivering a speech at the occasion of honouring Alan Greenspan, the then outgoing chairman of the US Federal Reserve, it’s Central Bank. The very same paper where he pointed out supply side drawbacks in the highly credit enabled and dependent US economy, and warned them of a severe financial crisis in the years to come. That sure must’ve taken some balls! This paper was heavily criticized. Mr. Lawrence Summers, the then US Treasury Secretary, (he was one of the top contenders for the US Fed Chairman post, could have been the one instead of Janet Yellen, had he not done something so stupid) called the warnings as ‘misguided’ and Mr. Rajan himself a ‘luddite’. It was only for the years to come that in 2008, when the financial meltdown hit the US, this MIT scholar was all over the news for the predictions he made three years back.
Mr. Rajan who formerly has served as Chief Economist to the International Monetary Fund and later on to the Government of India made his way to become the Governor of the Reserve Bank of India on September the 4th, 2013. He came in at a time when the dollar was at about Rs. 68, growth was at a mere sub 6% figure, and the ‘investor sentiment’ had vanished from the Indian Capital Markets. The Fed was slightly hinting at tapering of the easing, or to reduce its bond buying activity and so , the FIIs were hurriedly pulling out. Core inflation was at an all time high with fuel prices rocketing towards the sky and vegetable prices were only pulling the votes away from the incumbent government. Mr. Rajan made his way in like a rockstar during his maiden speech at a farewell event of the outgoing RBI Guv Divvuri Subbarao, being extremely vocal of his war against inflation.
Yes, he did call himself an ‘inflation warrior’ in an interview with a leading newshouse in the country. But he also proved it. After taking charge in September 2013, Rajan increased the key policy repo rates gradually to 8%. His CPI inflation targets for the non-core sector were 8% by January 2015 and 6% January 2016. Retail inflation fell to 6.46% in September 2014, that being the lowest in the past two years since the latest method of calculating CPI was implemented. WPI inflation fell to 2.38%, the lowest in five years. The dollar rates strengthened to about Rs. 60. Petrol rates being cut, diesel rates, now decommissioned by the Government, also fell after years. This Professor of the Booth School surely cast his magic spell to get the ailing Indian economy up and running.
Now the next bi-monthly policy meet in December is the talk of the town for financial institutions and investors as RBI is expected to drop the repo rate by a 100 basis points in order to help stimulate the economy in the face of declining inflation. Even the Finance Minister, Mr. Arun Jaitley has pointed that it is an appropriate time that the RBI should do so. But Rajan and team beg to differ.
It is only now that the policy execution has shown some positive outcome. New FIIs from Japan, positively heightened investor sentiment and confident moves by corporates to invest in new projects sure has set the market on a bull run, the indices reaching all time highs every other day. But to quote the inflation warrior, he wants to slain the monster once and for all. And I see nothing wrong in that. No one knows his macros better than himself. The effects of once applied tight monetary policy measures are not permanent. And we do have a Government is eager to post high rates of growth which is a good sign but not at the cost of the common man bearing the brunt of sky-high prices. Both monetary and fiscal policies should be such as to balance between growth and inflation. Another year with sub 6%-7% growth rate will not hurt if the RBI is able to make a cushion against rising prices, especially in the core sector. Then let them loosen the norms a little bit and let aggregate demand rise sans a rise in prices. However, it would be not be inviting if the RBI cuts the rates in December, not by a 100 basis points at all. We have faith in your stance, Mr. Governor.
Let them say all they want to, I’ll even get to them to think I’m listening.