No sequel for Rajan
COMMENT India bank chief
in Mumbai, India “I am Raghuram Rajan and I do what I do.”
That was the head of the Reserve Bank of India six months ago. It may have been the greatest statement of independence ever uttered by a central banker. The Indian press had fun with it — too much fun, perhaps: Rajan was christened the “James Bond” of monetary policy. Like the fictional British spy, he had demonstrated a roguish side that pleased the masses as much as it irritated his political masters in New Delhi.
The country was an economic basket case when Rajan took over the RBI in 2013 — annual inflation was more than 10 per cent; it now is 5.7 per cent — and India has graduated from the “Fragile Five” to become the world’s fastest growing major economy. International investors would say, in private, that Rajan’s presence was the only reason they were willing to take a chance on India, a notoriously difficult place for outsiders to make money.
Yet despite all his success, the Bond of global banking has shut the door on any sequels. Rajan shocked India on the weekend by announcing that he had decided against seeking a second term. He had a good job waiting for him at the University of Chicago, he said Saturday.
But few believe Rajan truly wants to leave. It appears more likely that he was run off by a committed group of political opponents that disliked his policies and his celebrity. In his departure letter, Rajan said he was “open” to staying on but, after “due reflection” and “consultation with the government,” he had decided to go when his term ends on Sept. 4. “I will, of course, always be available to serve my country when needed,” he said.
The events in India raise questions about whether elected governments and celebrity central bankers can coexist.
Once considered the plumbers of the financial system, men and women such as Rajan, U. S. Federal Reserve chairwoman Janet Yellen and Bank of England governor Mark Carney are today household names.
The financial crisis and i ts aftermath forced them into the public’s consciousness. To varying degrees, they have taken on greater roles in debates over issues that are beyond their natural remits as plumbers.
From South Asia, to Europe, to Canada, politicians are beginning to show their contempt for this new the competition for hearts, minds and headlines.
Carney has come under attack by Brexit supporters for predicting a vote by British citizens this week to leave the European Union likely would result in a recession and financial havoc. European Central Bank president Mario Draghi is engaged in open combat with German politicians who loathe the radical policies that Draghi says are necessary to revive the European economy. Even Bank of Canada governor Stephen Poloz, an extremely cautious central banker, angered Conservative politicians last year when he described the country’s economic growth after the collapse of oil prices as “atrocious.”
To be s ure, Rajan courted trouble. He criticized the premise of Prime Minister Narendra Modi’s drive to turn India into a hub of factory exports and made comments t hat suggested he thought the country had become less tolerant of religious minorities under BJP rule.
When asked in April about India’s status as the fastest growing economy, Rajan quipped, “In the land of the blind, the one-eyed man is king.” New Delhi was not amused.
“Some of Rajan’s public pronouncements have raised eyebrows, as they have been beyond the remit of a central bank governor, who is not hired by the government to be a free- wheeling public intellectual,” said Vivek Dehejia, an economic professor at Carleton University and a senior fellow in political economy at the IDFC Institute, a think-tank in Mumbai.
Independence from political meddling is the foundation of monetary policy as it is practiced in most democratic economies. The trade-off for decades has been that central bankers will stick to the business of setting interest rates to control inflation.
But that quaint understanding between the monetary and fiscal authority may be out of step with the times.
Ben Bernanke, the previous Fed chairman, regularly challenged Congress to work with him to boost economic growth. British voters surely are better for Carney’s intervention, even if some politicians disliked what he had to say.
Earlier this month, Poloz used a lecture in Ottawa to make a case for a closer relationship between central bankers and finance ministers, arguing that the right mix of fiscal and monetary policy could help ease conditions that lead to the accumulation of either household or government debt.
“In the 21st century, good central- bank governors speak out,” said Mihir Sharma, an economist and writer in New Delhi. Sharma wrote those words before the events of the weekend.
He might have added that central bankers still do so at their peril.