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Raghuram Rajan’s exit provides more fodder to the volatile financial markets

Swamy, who has a U.S. degree and has also worked in America, has no business pointing accusing fingers at Rajan over his Green Card.

Raghuram Rajan; image via Press Information Bureau
Raghuram Rajan; image via Press Information Bureau

Krishnakumar S.

NEW DELHI: Reserve Bank of India Governor Raghuram Rajan, not being offered an extension of office for another two years, as speculated by the markets, has provided further fodder to the otherwise volatile financial markets, which was already under the shadow of Brexit.

Twenty billion dollar worth of three-year deposits, which were mobilized between September 2013 and November 2013, with the intent of propping up the Indian rupee, is to mature in the coming months. This was already a big headache for the currency managers at the Central Bank.

In case the net capital inflows do not increase in the near-term, given that the $20 billion amounts to over one full  percentage of the GDP of the country, this creates an air of uncertainty in the world of financial markets. It is to be seen as to how the foreign exchange and capital markets would react to all these developments.

The issue of Rajan’s extension wouldn’t have been a matter of public deliberations at all, but for the outbursts of the maverick professor in the Upper House Subramanian Swamy. There have been many Reserve Bank governors in the country, who have served for more than one term, such as Bimal Jalan and R.N. Malhotra.

And then there were many governors who left office without an extension of tenure despite the great work they did. That includes S. Venkataramanan, who had to pledge gold to the IMF during the 1991 financial crisis. He managed the external sector of the economy very well. Similarly, Dr Y.V. Reddy, who, through astute capital account management, minimized the impact of  the global financial crisis on the Indian economy. Though neither was given an extension the country holds each in high regard.

The outbursts of Swamy against Rajan have made it impossible to make a critical scrutiny of Rajan’s time in office. Even as he acted fast in initiating institutional and regulatory measures toward monitoring risk in the banking system, on the domestic front, the last year saw a large increase in the non-performing assets in the banking system due to the economic downturn.

A good part of the debt was incurred by corporates for expansion of capacity during the liquidity upsurge of the 2003-2008 period. The same was turning bad due to the global slowdown, worsened further by the drastic decline in commodity prices. At this juncture, when cornered with demands for interest rate reduction, particularly so when the rates of interest in the rest of the world was low, Rajan chose to tread the path of reducing risks in the system even at the cost of growth.

Rajan was in no enviable position, trying to use his economic statecraft to fix the vertices of interest rates, exchange rates and price level of the monetary triangle of India, during a highly unfavorable external economic environment.

His reflections as Reserve Bank governor on the process of competitive monetary easing and it implications on the developing world is a worth read. Aren’t the shifts in risk from the developed to the developing world, as it is showing up in the current world economy, a fallout of the same? Through some of his actions, he seemed to be walking the talk which he did in the academia, knowing only so well the so-called lakshman rekha, which a developing country Central Bank governor could not cross.

Back in 2005, this young professor famously took exception to the rampant practice of incentivizing intermediary managers taking risks, which at the macroeconomic level, he feared, would spell havoc to the world economy. He went to the extent of saying that the interbank market could freeze up and one could have a full-blown crisis. This was at Jackson Hole Conference, held in honor of Alan Greenspan who was to retire as president of the Federal Reserve, much before the global financial crisis.

No wonder, when all and sundry were singing hosannas for the 20- year tenure of Greenspan, the lone ranger Rajan was caricatured as a Cassandra of sorts. It was a matter of time before this doomsayer was christened as the hero who saw the crisis coming.

In his book Fault Lines: How Hidden Fractures Still Threaten the World Economy, he explained to the world in prescient prose what went wrong in the global economy. For those of us who are mesmerized in the world of financial markets, missing the wood for the trees, the book is a must-read.

Even when the government argues that the Indian economy is performing better than the rest of the otherwise gloomy world economy, Swamy’s attribution of Rajan’s tenure to the low rates of growth doesn’t hold water. Swamy, who has a U.S. degree and also worked in the United States, has no business pointing accusing fingers at Rajan over his Green Card.

Indeed the autonomy of Central Bank has been a practice which has found favor with libertarians like Subramanian Swamy worldwide, so he should be the last person to object when a Central Bank governor asserts autonomy. Given that Swamy was one of those libertarian rightists who was proffering a tax-free India during the last elections, he is disgruntled and envious that Rajan was able to score a point over the greatest libertarian Reserve Bank governor of all times, Alan Greenspan. That, more than anything else, explains the animosities Swamy holds against Rajan.

In any case, while the lurking uncertainties in the global economy offers ample avenues for researcher in Rajan, his entry back into academics might make posterity better-off.

All said, in the coming months, the world would now be watching as to how Rajan is going to manage the news of his own exit.

(Krishnakumar S. teaches economics at Sri Venkateswara College, University of Delhi.)

(This post was updated on June 21, 2016)

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