BJP leader Subramaniam Swamy is being his usual self declaring that Raghuram Rajan should be “sent back to Chicago” because his interest rates hikes have “damaged the country” and led to the “collapse of industry”. Others seem to privately agree with the sentiment.

The angst against Rajan is two fold. One, the NDA made it clear that it would like the RBI to effect deep rate cuts to stimulate private sector capex, but Rajan has been slow to oblige. He hiked policy rates to 8 per cent in 2014, before making gradual cuts after 2015. Two, bankers and their corporate borrowers would have liked the RBI to extend its ‘regulatory forbearance’ on restructured loans so that they could keep the loan mess well-hidden until the next upcycle. But Rajan has taken a hard line, forcing banks to come clean and act against wilful corporate defaulters. Lower interest rates cannot miraculously revive capex, when firms are weighed down by high debt and excess capacity.

Critics forget that the RBI’s main remit is not to maintain cosy relations with the Centre or India Inc, but to balance the conflicting objectives of moderate inflation, growth, strong capital flows and systemic stability. On these counts, the RBI under Rajan has made unquestionable strides. Tight money policies have helped moderate consumer price inflation from over 9 per cent in FY13 to 5.4 per cent now. Attractive interest rates have also kept foreign investors interested in India, with forex reserves rising from a precarious $275 billion in August 2013 to a record $360 billion now. PSB chiefs must not forget that Rajan’s efforts have helped bolster public confidence in banks and convinced a reluctant government to cough up funds to recapitalise them. As Rajan’s term comes up for renewal, it will be easy to find a more pliable personality to replace him. But will such a replacement also manage the tightrope walk required of the RBI?

Editorial Consultant

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