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Home / Opinion / Online-views /  Ten signals from Raghuram Rajan’s exit

Central banking is all about signalling. Moving policy rates up or down is one such signal. Mario Draghi’s telling markets that he will do ‘whatever it takes’ to save the euro is another. Bank of Japan governor Haruhiko Kuroda’s announcement of negative interest rates was another one. Alan Greenspan’s Delphic jargon-filled utterances soothed markets and lulled them into believing all was well. Communication is all-important to a central banker. So, when Raghuram Rajan dropped the bombshell that he wouldn’t be here for a second term, what signals did that send?

The first and most obvious message is the government does not like his policy of keeping interest rates high in order to snuff out inflationary expectations and put the conditions in place for sustainable growth. It believes high interest rates are hurting industry and hampering growth. Whether its perception is right or wrong is beside the point—what matters is the government believes this. Small wonder then that some analysts have already started talking of lower interest rates in future and a rally in bonds.

The second signal is the government is unimpressed with Rajan’s plea that savers need to get positive real rates of interest on their savings. His formula that the real rate of interest on a 1-year Treasury bill should be 150-200 basis points above the consumer price inflation rate seems to be unwelcome. Remember that the government is the largest borrower and rules like this drive up its borrowing costs.

That brings us to the third message. In the tug-of-war that is monetary policy, the interest of the borrowers is paramount. The bigger the borrower, the more interested it will be in keeping interest rates low. More worryingly, Rajan’s exit also sends the signal that he may have lost the fight against crony capitalism that he was waging.

Four, the whole idea of having an independent, technocratic central bank governor is that the government will not impose its views on it. But the denial of an extension to Rajan indicates that what matters for the government is not the idea of central bank independence, but getting someone who will toe their line. There are many problems with this idea of central bank independence with those against it arguing it compromises democracy while those for it say a central bank under the thumb of the government will lead to populism. But we are discussing signals here, not whether they are right or wrong, good or bad. Further, it’s not just the central bank, the message is they want yes-men in regulatory positions.

Also read: Meet Raghuram Rajan’s likely replacements at RBI

Five, Raghuram Rajan as an RBI governor spoke his mind on several issues. He doubted the new GDP numbers, warned against complacency about India’s rate of growth, spoke about the pitfalls in the ‘Make in India’ project and spoke out for tolerance. The signal sent out by his exit is the government does not tolerate either plain-speaking or dissent and wants cheerleaders in positions of power.

Six, while one may disagree with Rajan’s views, it is undeniable that he is held in high esteem among academicians and central bankers across the world. In India, he has carried out no less than a structural revolution in monetary policy in a mere three years. The laser-like focus on bringing down inflation, the sea change in the banking system, the war against crony capitalists and the attempt to clean up banks’ books are all part and parcel of this structural change. Letting him go indicates the government is not particularly interested in retaining talent. Why should it, if the talent does not do what the government wants? It is a warning to other Indian academics abroad who want to serve their country, as it is to independent-minded talent within the country.

Also read: Our view: The Raghuram Rajan affair

Seven, the government should have managed Rajan’s exit better, instead of letting it come as a huge surprise to the markets. It could, for instance, have decided on an impressive replacement and announced it together with the exit. That would have removed uncertainty. That it didn’t do so signals both complacency and incompetence. And it should have snuffed out ugly personal attacks, such as the ‘mentally not fully Indian’ jibe. That it didn’t do so indicates a lack of grace.

Eight, the government or the ruling party will not counter charges or propaganda made by the so-called ‘fringe elements’ within the party, whether the fringe is Yogi Adityanath or Sakshi Maharaj or Subramanian Swamy. At best, it will try and disassociate itself from their remarks, but it will do nothing to bring them to heel. This leaves them open to the charge that the attacks are orchestrated with the full knowledge of the party top brass. Changing what Raghuram Rajan said a bit, it turns out that in the country of the blind, Subramanian Swamy is king.

Nine, one of the inspiring messages of the new government was of conservative economic policies with strong regulators in place, a message that resonated with pro-market forces. That message has faded rather fast.

Also read: Raghuram Rajan’s RBI tenure: Three years that packed a punch

And 10, the final signal is there can’t be two leading men in a movie. Rajan had acquired a huge following and commanded immense respect internationally. He was, as the media repeatedly said, a rock star. His exit signals that in India, there can only be one rock star. The rest can, at best, make up the chorus.

True, signals sometimes take on a life of their own and quite a few of them may be unintended. The messages emanating from Fed chairperson Janet Yellen, for instance, are very confusing and markets have a hard time interpreting them. Many of them may not be what she wants to convey. Similarly, it is possible that some of the signals from Rajan’s exit may be inadvertent. But it is up to the government to clear these up as soon as possible, by appointing a new, equally independent, equally articulate, equally capable and universally respected RBI governor.

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