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How should the appointment of the new governor of Reserve Bank of India at this critical point for the economy be read?
Continuity was not seen as an advantage in a phase of fragility. Unless deputy governor Michael Patra, whose term ends next month, is given an extension, the six-member monetary policy committee is all set to have five new members. Its three external members were appointed just weeks ago in October. Of the three RBI members, the governor is set to be replaced. In his long years, Patra–he was executive assistant to governor Bimal Jalan two decades ago—has served as an important bridge between RBI’s research department and successive governors, the board and in recent years the finance ministry.
The nearly brand-new monetary policy committee will be up against challenging times ahead: India’s post-covid recovery may have entered a phase of fragility already, going by the government’s latest estimates of GDP that showed a sharp slowdown in growth and Donald Trump’s second presidency promises to be a period of disruption and uncertainty.
The new governor must hit the ground running without the advantage of an overlap with the outgoing governor. As governor-designate, Raghuram Rajan, worked in the RBI along with the outgoing governor, D. Subbarao, before succeeding him subsequently. Rajan even got to attend meetings of RBI’s board in this overlap phase as governor-designate.
Arun Jaitley used to say two things about the RBI. First, the government sees the central bank as an extension of the ministry of finance. Two, gravitas is the quality most critical to be RBI’s governor. But the third unstated qualification seems to be that governors must be from the IAS. Globally, central bank governors aren’t necessarily economists. The US Federal Reserve’s Jerome Powell is not an economist. He worked in the financial industry and a think tank before joining the Fed, and even had a stint in the US treasury in the George Bush administration.
It appears that in India, the government’s choice has become restricted–perhaps permanently–to bureaucrats. Bureaucrats are generally skilled at making allies and forging consensus, which gives them an edge in managing the fault lines between the central banks and governments, such as over lowering of interest rates, transferring surplus profits as dividends and regulation of banks. Lately, managing these tensions has become the more significant of the governor’s job responsibilities. The government has, thus, come to demonstrate a preference for picking bureaucrats over economists with domain expertise who don’t usually have prior exposure to the ministry or experience of working with it.
The Economic Survey in July suggested that government could improve farmers’ incomes by changing RBI’s inflation target. More specifically, by asking RBI to control inflation minus food prices. The outgoing governor, who, as the economic affairs secretary had steered the amendments in the RBI Act for introducing the inflation targeting monetary framework, said he did not agree with the survey’s recommendation. It remains to be seen if the finance bill in February’s budget will amend the RBI Act again to change the RBI’s inflation target, going by the survey’s recommendation.
The author is consulting editor, Mint, and the author of ‘The Lost Decade (2008-18): How India’s Growth Story Devolved into Growth Without a Story’.
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