‘Man with a third eye among the blind’

Recent trends across the world shows an interesting development- that central bank heads are chosen after intensive selection process. Couple of years back, England imported Mark Carney – an Irish Canadian for the Bank of England Governor post. Similarly, at the time of US Fed Reserve Chairman’s election, there were arguments that women cannot do the business of central bank head.

The job of the central bank governor is the most sophisticated professional one as monetary policy has emerged as the ‘only game in the town’.

In India, the RBI Governor is usually chosen from the civil services. But unfortunately, the Indian civil service is power without skill. Recent events in the world economy shows that monetary policy management need super-sophistication to understand, track and solve problems in an increasingly interconnected world.

Raghuram Rajan came into international limelight when he warned the then Fed Chairman Ben Bernanke about the disastrous effect of dumping the economy with bank sponsored debt. Rajan, an outsider of the US officialdom, questioned the logic of ultra-easy monetary policy when Bernanke was the god in the domain of central banking.

A year later, the world saw that what Rajan said was correct with the outburst of the global financial crisis.

Bernanke and Greenspan belongs to the top class of monetary economists who have confidently anchored the US FED. But Rajan with his comprehensive and quick wisdom with practical skill, excel them.  Nobody can turn their ears when Rajan brought the idea of collaborative monetary policy – that central banks in the West should implement monetary policy by considering the status of other countries as well.

Again Rajan has warned that the Fed can’t make exit form quantitative easing easily. Even now, the Fed is going through this difficulty and it was not able to make an exit.

In his tenure as the Governor of RBI, Rajan was invited to different forums to talk about the future management issues in the world economy. Few months back, he was invited to a task force set up by the Davos World Economic Forum to study about the future of global financial system. Accompanying him was the Bank of England Governor Mark Carney.

The era of Bernanke and Greenspan are over. Janel Yellen is doubtful about her ability to bring out the US economy from the QE mess. And now, if any person can explain, predict and suggest problems in the global economy in the most authoritative way – it is Rajan. Not because he belongs to the ultraorthodox monetary economists who were ‘born in Chicago’, but his comprehensive analytics were proved accurate.

Perhaps, if Rajan was born in the US or England they, would have been too happy to make him the Governor of their central banks. Many Indians are leading corporates in the US. But central banking is a different business and foreigners are not welcome; whatever may be their skill.

In recent years, extreme criticism is raised against Raghuram Rajan; interestingly, well timed at the end of his tenure. They argue that he has not made a rate cut that would have stimulated business and economic growth. Such people should remember what happened to Chinese financial market in recent years. Low interest rate, excess credit and government promoted stock market boom have brought catastrophe in the financial system.

Brining down interest rate by forgetting the macroeconomic fundamentals will amplify asset prices especially stocks and will increase debts and NPAs. This is simply feeding disaster (read: A Step in the Dark: Unconventional Monetary Policy after the crisis – Reghuram Rajan, BIS, Andrew Crockett Memorial Lecture). Financial stability is like dignity for a person; once lost, it will be very difficult to bring it back.

Of course some of the ideas of Rajan like inflation targeting and inflation management claims can’t be agreed in the Indian context. His stand that inflation is seasonal and not structural lacks credibility when he pitted against Surjit Bhalla. But we can console that a conservative monetarist is a fair choice.

I have gone through a large volume of literature in my research in monetary economics – that of Bernanke, Mishkin, Calvo etc. Many of them put theories and became central bank governors. Compared to them, Rajan is more accurate and practical in his approach while managing the frontier problems in global and Indian economy. Really, he is a class apart. Ridiculing him will be like spitting on our own face. The world is watching us and will laugh on our ‘ability’ to throw away the best because of our ignorance.


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