Modi deserting Raghuram Rajan bitter but better

The BBC interview of the outgoing RBI governor Raghuram Rajan and his comments about the prime minister betrays the bitter relation between the two top functionaries of governance. Rajan has never shied away from expressing his displeasure at the government’s policies. He has been a very political RBI governor without having affiliation to any political outfit.

In his latest interview with the BBC, Rajan refused to answer a rapid fire question saying “Whatever answer I give will be problematic, so I will just pass.” This shows his utter dislike for the incumbent government. With this statement Rajan may go out at a bold and upfront RBI governor but history may consider him a misfit RBI governor.

If one goes by the role and functions of the RBI as envisaged in its establishment in 1935 and nationalization in 1949, she would not imagine a political RBI. And, this is where Rajan looks a misfit for the role. He remains the academician that he has been for long.

The Banking Regulation Act 1949 and the RBI Act 1953 has given the RBI the power to regulate the banking system. The website of the RBI lays down the following functions of the central bank in India:

Monetary Authority:

• Formulation, implementation and monitoring of the monetary policy.

• Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:

• Prescribing broad parameters of banking operations 

• Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.

Manager of Foreign Exchange:

• Managing foreign exchange as mandated under the Foreign Exchange Management Act, 1999.

• Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency:

• The RBI issues and exchanges or destroys currency and coins not fit for circulation.

• Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Developmental role:

• Performs a wide range of promotional functions to support national objectives.

Related Functions:

• Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.

• Banker to banks: maintains banking accounts of all scheduled banks.

Clearly, the RBI’s defined role is to be the support system of the government of the day. But, with all academic brilliance, Rajan has failed to implement the laid out mandate. Perhaps, his academic brilliance, his astute understanding of the economy forced him to run a somewhat parallel fiscal policy for the country. (Recall his inflation loaded views on interest rates- not talking of merit, just the mandated role and what Rajan actually did). 

Rajan could not become the next Manmohan Singh, who during his governorship, with all understanding of the then changing world, crumbling cold age economy proved an able support system of the Indira Gandhi government. And, ironically it was Manmohan Singh who honoured a commitment by appointing Rajan the RBI governor. But, it seems Rajan did not learn the art of playing his role according the chair from one of the finest prime ministers of India, that Manmohan Singh was.

It looks bitter that Rajan was not given another term by the Modi government. But, it may actually turn out to be better. Any government under parliamentary form like ours deserves a supporting central bank. An adverse central bank would deviate, deflect and distort government’s policies. It has been happening in India leading a state of policy confusion. India can hardly afford to bear policy confusion as a follow up of policy paralysis.

PS: The author is not suggesting that BJP's insinuating machine (SS) was right in launching a tirade against Rajan.