Where hawks rule

Many of us would recall from our childhood stories about the legendary King Vikramaditya. He was gifted a fabulous throne by Indra himself. The throne had magical properties that bequeathed great wisdom to those in its vicinity. The throne at the Reserve Bank of India is probably comparable to that of King Vikramaditya’s. Whoever sits on it as governor, be he a ‘dove’ or an ‘owl’, turns into a hawk instantly so far as fighting inflation goes.

Consider the circumstances in which D Subbarao was appointed RBI governor in September 2008. He was nominated by the UPA government when P Chidambaram was finance minister. Soon, the global financial crisis led to tepid growth in the Indian economy. ‘Animal spirits’ in the economy could have been rekindled only if the RBI cut interest rates aggressively.

The finance ministry did not conceal its preference for reduction in rates.

In October 2012, Subbarao, in the governor’s chair, had to balance rate cut expectations with the fundamental mandate of central banks to keep inflation under check. Contrary to the Government’s not too subtle messages, and under the influence of the magical seat, he did not deliver interest rate cuts in the monetary policy review, leading to the famous quip from the minister that if need be, the Government will walk alone to face the challenge of growth.

One would have thought that PC would have recommended a less hawkish person to the governor’s post, having learnt from past experience.

Alas, Raghuram Rajan, his nominee, having ascended the throne in September 2013, turned out to be as hawkish on inflation as any of the previous incumbents.

His refusal to cave in to demands from the industry to cut rates earned him tremendous respect from the international financial community for his independence, giving him rock star status in the world of finance.

On Rajan’s exit, in September 2016, came the self-confessed owl, Urjit Patel, an appointee of the NDA government.

Demonetisation under Patel’s watch, and it’s all too visible impact on growth, made it a no-brainer that the RBI would deliver massive interest rate cuts to offset the impact of the economy being starved of its lubricant for growth, cash.

On February 8, when the RBI announced its monetary policy review outcome, the magic effect of the throne was in full display. Patel/the Monetary Policy Committee did not cut interest rates. Patel now joins his predecessors in establishing his independence from the political masters and making it clear that the central bank will continue to target inflation as public enemy number one. The throne had indeed worked its magic and converted the owl into a hawk!

All the recent governors, despite having held previous positions in the Government and being their appointees, have demonstrated independence from their erstwhile political masters when they assumed the top position in the RBI.

It’s time that the political leadership of all hues accepted that the putative doves and owls will inevitably turn into inflation hawks the minute they step into the governor’s role.

The writer is a freelancer with experience in financial services

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