Reserve Bank Governor Raghuram Rajan came under attack from BJP lawmaker Subramanian Swamy for the second time in two weeks on Tuesday. This time, Harvard-educated Dr Swamy upped the ante against the RBI chief by seeking his dismissal in a letter to Prime Minister Narendra Modi.
Dr Swami is critical of the RBI Governor for keeping interest rates high and moving from wholesale price inflation to consumer price inflation for setting interest rates. An analysis of Dr Rajan's term however shows that the RBI chief was spot on in his policy actions. He also had the firm backing of the Modi government as far the new monetary policy framework is concerned.
When Dr Rajan took over as the RBI Governor in September 2013, India was in the midst of an economic crisis. The domestic economy was not only struggling with sluggish growth and double-digit inflation, but it was also saddled under the burden of rising fiscal and current account deficits.
These problems led to exodus of foreign funds, hurting both the rupee (which hit a record low of 68.85/dollar) and stock markets.
Within days of Dr Rajan's appointment as RBI chief, the rupee stabilized, and in a couple of months staged a dramatic reversal to rise to 61-62 per dollar. The strong rally in the rupee propelled the domestic stock markets to an all-time high by November 2013.
Dr Rajan initially raised repo rate from 7.5 per cent to 8 per cent between September 2013 and January 2014 in a bid to control double-digit inflation, which had wreaked havoc on the economy. He then maintained status quo on rates for almost a year, before embarking on an easing cycle in January 2015.
His policy action broke the back of inflation, with retail prices averaging around 5 per cent mark now, after staying in double-digits till 2014. Once the menace of inflation was under control, Dr Rajan moved swiftly to cut rates. In the last 18 months, the repo rate has fallen to over five-year low of 6.5 per cent, paving the way for economic growth. Also, for the first time in many years, common investors are earning positive return after adjusting for inflation.
The RBI chief has also been criticized by Dr Swamy for adopting the new monetary policy framework, which mandates RBI to target retail inflation as its primary goal. It is important to note that though RBI informally adopted the new policy, it later got the complete backing of the government. In this year's Budget, Finance Minister Arun Jaitley said the government will amend the Reserve Bank of India Act to add monetary policy framework and monetary policy committee in fiscal 2016-17.
Rupa Rege Nitsure, group chief economist at L&T Financial Services, who was part of the panel that proposed inflation targeting, had last year said that the change marked a "paradigm shift".
"This framework will decrease the uncertainty around the decision-making process and there will be limited possibility of any speculation," she said. "Transparency and predictability in monetary policy decisions are significant progress."
Understandably, most commentators, including right-leaning market analysts and economists, disagree with Dr Swamy's diatribe against Raghuram Rajan.
Former Infosys chief financial officer Mohandas Pai termed Dr Swamy's arguments against Dr Rajan as "silly" and having "no merit".
PN Vijay, veteran fund manager and BJP spokesperson, tweeted, "Respect Swami but don't agree with his views on Rajan. Latter has cut rates by 1.50%. Also making serious efforts to stop crony capitalism."
Respect Swami but dont agree with his views on Rajan. Latter has cut rates by 1.50%. Also making serious efforts to stop crony capitalism.— P.N.VIJAY (@pnvijay) May 13, 2016
(With inputs from Reuters)