The nuances of RBI Governer Raghuram Rajan stepping down

Published: June 22, 2016 10:00:48 AM

RBI Governor released a press statement, about his return to academia, when his term ends on 04 Sep’16. As his term will end Government will appoint a new Governor. However, the question arises, is the event positive or negative for the economy or for the RBI as an institution?

Raghuram Rajan, Raghuram Rajan exit, Raghuram Rajan rbiIf we analyze the history of RBI in respect of managing price stability in the country since 1983, we find out that almost all the Governors gave prime importance to price stability. (Reuters)

RBI Governor released a press statement, about his return to academia, when his term ends on 04 Sep’16. As his term will end Government will appoint a new Governor. However, the question arises, is the event positive or negative for the economy or for the RBI as an institution?

Institutions are human creations that decide the rules of the game, they strive to create a Nash Equilibrium, minimizing the incentive for unilateral deviations. We believe, any institution is more important than individuals and ultimately what is important is credibility and independence of any institution and nothing else. Any other discussion apart from such is purely speculative and nonsense.
RBI as an institution has been extremely visionary, pragmatic and fairly independent throughout!

Going further, if we analyze the history of RBI in respect of managing price stability in the country since 1983, we find out that almost all the Governors gave prime importance to price stability. In fact, counter intuitively, the number of positive surprises in inflation were also significantly high in earlier decades compared to current scenario (interestingly, the number of net positive surprises were positive during Dr Jalan and Dr Subba Rao tenure, but turned negative in re-cent times, as RBI moved on to target CPI from WPI earlier). RBI thus has always been an enemy of inflation, and it is incorrect to say that this assumed primacy only in recent times.

We still maintain that CPI inflation, which is significantly driven by the food and primary articles’ price and more vulnerable to supply-side shocks, will not have a stable correlation with monetary policy instruments in short and medium time horizons. We recommend, even if we continue with in-flation targeting in the long run, the target needs to be revised upwards from 4% to 5% or so.

-Dr. Soumya Kanti Ghosh (Chief Economic Adviser & GM, Economic Research Department, SBI.)

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition