Raghuram Rajan completes two years as Reserve Bank of India (RBI) governor this week. First, former governor Dr C Rangarajan talks about the governor’s performance over the period.
While rating Rajan very high as a governor based on his performance, Rangarajan says the recent monetary policy framework signed between the RBI and the government is an important landmark in the evolution of monetary policy in our country. “It gives way greater autonomy to the RBI. It clarifies the objective of monetary policy therefore consistent with the need to control inflation,” he told CNBC-TV18.
On lowering policy rates further, he believes going ahead with the changes that have already happened perhaps there is scope for reduction in policy rates further.
Rajan has recently come under a lot of pressure to lower rates. India Inc as well as politicians believe in his fight to curb inflation, Rajan is overlooking growth. But Rangarajan says there is no conflict between growth and inflation. He adds there may be a conflict in the short run, but in the medium and long term there is no conflict between the two. Explaining his point further, he says: “Over the medium term, it is only low inflation that can provide the environment in which growth can be sustained at high level.”
Gita Gopinath, Economics Professor, Harvard University too rates Rajan very high up. “Nobody is perfect, but he would be pretty close to as good as it gets,” is how she chooses to describe him.
She adds that Rajan will be remembered as a person who was in charge when inflation came down, almost halved.
Marc Faber, veteran investor and author of Gloom, Boom and Doom too believes Rajan has done an outstanding job as a central banker. “For a typical Indian, it doesn’t matter whether the stock market goes up or down. For the typical Indian more important is price stability and currency stability and so the way he has conducted the monetary policy has benefited the majority of Indians and not just the tiny minority,” he says.
Below is the verbatim transcript of C Rangarajan, Professor Gita Gopinath & Marc Faber’s interview with CNBC-TV18’s Latha Venkatesh
Q: Let me first ask you to rate Raghuram Rajan on the most important job of a governor; making monetary policy? How would you rate him?
Rangarajan: I would rate him very high. The stance adopted by the RBI under the leadership of Dr Rajan has been most appropriate and I also think that the recent monetary policy framework signed between the RBI and the government is an important landmark in the evolution of monetary policy in our country. It gives way greater autonomy to the RBI. It clarifies the objective of monetary policy therefore consistent with the need to control inflation, the policy actions have been taken and I would endorse in a big way what he has been doing.
Q: That is well said but India Inc and Indian politicians often complain that the victory over inflation is coming at a very high price in terms of growth, you would agree?
Rangarajan: This has been an old argument. Whenever a tight monetary policy has been put in place it is always said that it has affected growth but the real point is that over the medium term it is only low inflation which will provide the environment in which growth can be sustained at high level. I don’t see this conflict, sometimes there may be a conflict in the short run but in the medium and long term there is no conflict between the two.
Certainly, we had high inflation and the need to control inflation and bring it within reasonable limits. Therefore, these actions have to be taken. I certainly think going ahead with the changes that have already happened perhaps there is scope for reduction in policy rates further.
Q: On another plane how will you rate Rajan on financial inclusion, on expanding the contours of banking? He has given licences to a dozen entities for setting up payment banks and some of them are conglomerates, some of them are start-ups; financial inclusion, how would you rate him?
Rangarajan: It is certainly a step in the right direction. We do need mechanisms or institutions which transfer money or transmit money as quickly as possible. After all Western Union has become an institution by itself. Therefore, we need corresponding institutions in our country. I do not know whether such institutions should be entrusted with having savings deposits but the scheme does provide for these institutions to take savings deposits but certainly I believe there is a need for a network of institutions for quick transfer of funds.
Q: Now how will you rate Rajan as a market regulator, regulating the FX market, the rupee, money markets and debt markets?
Rangarajan: The impact and the volatility in the exchange rate has been much less for India than for many other emerging markets. That is partly because of the current account deficit being kept at a more modest level. Just contrast it with 2013, in 2014 we had exactly the opposite situation when there was a shock, the shock was felt much more in India than elsewhere because we had a high current account deficit. So, over a period of time, we have managed to bring it down and that is an important factor in moderating the volatility in the exchange rate. Therefore, the RBI and the government also to some extent can take credit for maintaining the current account deficit at a low level which in a sense contributes to less volatility in the foreign exchange market.
Q: Rajan completes two years in office this week. How would you rank him first and foremost as a monetary policy maker?
Gopinath: He would be very high up there. Nobody is perfect but he would be pretty close to as good as it gets. In terms of monetary policy, Rajan will be remembered as a person who was in charge when inflation came down, almost halved. Though there was a combination of factors that affected inflation including the world commodity prices coming down, inflation has been reigned in and that was a struggle for a while. So, he definitely deserves an import part of the credit for that.
The second thing as a monetary policy maker, the biggest issue is to convey credibility and Rajan has conveyed credibility not just domestically but even internationally. He is a person who people look to for advice, not just on the Indian economy but also on international economy. So, the combination of factors makes him a very successful central banker.
Q: But corporate India and politicians charge him with sacrificing really too much growth to get that inflation number. Do you think that is a fair charge?
Gopinath: That is unfair. Firstly people need to realise is that when we are talking about growth for a country like India and we as one aspires for growth rates closer to China in its heydays which is around 10 percent that kind of sustainable 10 percent growth is not driven by monetary policy. So, you have to recognise that portion of the bet. Monetary policy is mainly for cyclical business cycle phenomenon. India requires a trend change in its growth rates not just sort of a temporary downturn that we are thinking of getting out of. It is all about having sustainable growth for many years, 10-20 years and that comes about through structural reforms that comes about through raising productivity, through improving the ease of doing business.
So, those are really the go to variables if you think of how countries like China or Korea or Japan grew, I mean how the other East Asian economies grew, they grew because of very good economic reforms. It is not monetary policy that has generated high growth. So, people should absorb that fact. So, I am not very persuaded by those who complain about high interest rates as being the main factor for low growth in India.
Q: As a monetary policy maker in the last two years?
Faber: As you know different people have different views but in my opinion Rajan has done an outstanding job as a central banker. All over the world central bankers have been drinking money and this leads asset prices and it leads also to rising wealth inequality. Now we know very well from statistics in the US that over the last 10 years or so but especially in the recovery of 2009 it was not even one percent that made a lot of money, it was 0.01 percent of the population. So, a very small part of the population.
Now in the case of India, I would estimate that there are 40-50 million shareholders on the population of 1.2 billion. Of these, there are only very few large shareholders, probably 10,000 or 20,000. Now, these people are all the ones that would like interest rates to come down and stocks to go up. But for a typical Indian it doesn’t matter whether the stock market goes up or down. For the typical Indian more important is the price stability and currency stability and so the way he has conducted the monetary policy has benefited the majority of Indians and not just the tiny minority.
Q: Let me pursue with this central banker performance of Rajan. He has convinced the government to sign a monetary policy agreement with the RBI and this pact agrees that Reserves Bank’s main goal or maybe even only goal will be to get inflation down to six percent first and then to four percent in the medium term. Would you say this itself is a big plus?
Gopinath: Firstly, I am not sure if that memorandum basically means that India is exclusively on inflation targeting regime. I think what has been accomplished is to say that there is some level of inflation above which we might have zero tolerance. And that number is fairly high. I mean six percent is a high inflation number. So, we were talking about targeting inflation of two percent or one percent, then we might say that sounds a bit unreasonable and that is going to compromise a growth agenda. But that number does not seem to convey that, so I think that he can accomplish. I think whoever comes in after him in the future too should be able to bring about both stability and keep inflation low with this target in mind.
Q: While Rajan will be estimated on inflation control, he is frequently accused on poorly estimating inflation. As of now, almost every time, every year inflation has been under-shooting his estimates. So, is that a fair charge that he is wrong in his estimates?
Gopinath: Not really. This is what happens. We had a period not so long ago where it looked like inflation was always overshooting the desired value. And now, there is a small phase where it looks like relatively recently that it has been undershooting it. But, one has to be very careful with interpreting one or two or even three quarter numbers on inflation and linking that to monetary policy because monetary policy works with long lags and so, this kind of volatility that you might see inflation has typically more to do with commodity prices. That does have an effect even on core inflation if not directly. And so, I am not going to say that this is not, if you go through two years or two and half years of undershooting your target, then that might set the flag off. But the question is whether that is a big deal. I mean I do not think that this undershooting is a big deal for India.
Q: how would you rate Raghuram Rajan on the manner in which he has managed the exchange rate, generally, the markets?
Faber: I would rate him on a scale of one to ten at ten and Ms Yellen and Mr Bernanke at minus 20.
Q: Internationally, Rajan has repeatedly told all the big central banks not to take on too much on their plate, not try to energise their economies, but just to leave it their respective governments. Is that a position you agree with?
Faber: Yes. I think he is 100 percent right. Unfortunately, he is talking to a brick wall of essentially professors and academics that know nothing else but to print money and they will continue to do so and not listen to him.