Column: Towards a new RBI

Sep 28 2013, 02:18 IST
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SummaryThe new RBI should, and will, follow the principle of PIR—Policy Informed by Research

In his first policy statement on September 5, the day he was appointed Governor of Reserve Bank of India, Dr Raghuram Rajan outlined his vision for monetary policy. He spoke with considerable confidence about the monetary perils that faced India, high inflation and low growth. Rejecting his own beliefs about the exclusiveness of inflation targeting, Rajan admitted that from India’s and RBI’s vantage point, inflation targeting and growth targeting were twin targets, albeit requiring different weights at different times. This was a dream debut, a century in the very first innings.

On September 20, Rajan came in to bat again. Surprising everyone, he sounded no different from his predecessor Dr D Subbarao, and no different from what the IMF would have said. The fact that he indulged in deep IMF-speak is not necessarily indicative of scoring few runs. After all, it was as an IMF Chief Economist that Raghu was prescient in his forecast that the world economy was heading towards a crisis. But his second innings at the RBI was a dud, as he flailed about scoring (charitably) less than 10 runs. There have been only 17 batsmen in Test history who have scored a debut century and followed it up with a single digit score. Not an auspicious beginning for Dr Rajan; however, in this select club is WG Grace who scored 152 on debut and 9 in the second innings. And the betting should be good that Rajan can be, and likely will be, an economist’s Grace.

There were several inconsistencies that were responsible for Rajan’s low score. What has US tapering or no tapering got to do with Indian inflation, where most of the inflation is due to food, and when most of food inflation emanates from administered minimum support prices? It is true that tapering provides incompetent governments with an excuse for their domestic failures, but for Rajan to offer this excuse was a snick that did not carry. Rajan seemed to be worried about the recent rise in WPI inflation “as the pass through of fuel price increases has been compounded by the sharp depreciation of the rupee and rising international commodity prices”. There is precious little RBI can do about price increases beyond its control—like domestic food and international commodity prices. And was the depreciation of the rupee to near 70 because of the inevitable possibility of US tapering?

There were other snicks in Rajan’s

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