Initial indications from the new RBI governor Raghuram Rajan is that he will not follow his predecessor Dr Subbarao on inflation front. Dr Rajan said that he will reveal his stance on 20th of this month, when RBI makes the new monetary policy statement.
On inflation management front, Dr Subbarao was known for adopting ‘disguised’ inflation targeting policy during his tenure. In the conflict between growth and inflation, he took the side of inflation by producing growth slowing policies. The famous 13 times repo increase to contain inflation is one of the severe growth depressant in the history of central banking in the country.
Despite the hard inflation targeting policies, inflation in the country remained at its higher levels, bringing credibility questions over Subbarao’s stance. Finance Minister P Chidambaram made a famous statement about the adamant RBI policy that ‘the government will walk alone in the growth path.’
A comparison of the profile of the two people reveal that, Raghuram Rajan is well capable of managing monetary policy in a changing world than Dr Subbarao. Though both are hardcore Monetarists, Subbarao has not shown the skills to flexibly use monetary instruments by accommodating the fast changing open economy environments.
Monetary policy is changing because of the globalised monetary and financial cycles. This is what the continuous crisis shows. It can’t be implemented in a closed door format as done by Dr Subbarao. Dr Rajan is a person grown in the period of unconventional monetary policies. Similarly he well knows the credibility problem monetary policy is facing globally now. Inflation is not just a monetary phenomenon. It is more structural now. Hence, as Dr Joseph Stieglitz mentioned at the C D Deshmukh speech at RBI, central banks should think beyond inflation.