By Shubhangi Roy
Governor Rajan has made RBI interesting and the economy hot in more ways than one. But this article is not another sexual fantasy of a woman masquerading as an article on the economy; lest you be disappointed later on.
Those who continue to read further would realise that Rajan as an RBI Governor is a fresh and surprising change to the landscape of the troubled Indian economy for more reasons than his hotness. In the initial stages of the rupee depreciation and inflation crisis, many economists considered it to be a delayed form of the recession that hit the world earlier in the decade. Even those who did not consider it an extension of the world recession were still suggesting knee jerk responses similar to those taken earlier by the Federal Reserve of the United States. Perhaps, it is the intrinsic, innate habit of our nation to look west for guidance on all matters economic.
The interesting factor of Governor Rajans policies is that they might be inspired by the policies of the Federal Reserve but he is learning from their mistakes instead of following them. Many in the economic academia have considered the monetary policy trend of the Federal Reserve started under the chairmanship of Alan Greenspan as a contributing factor to the price bubble that ultimately led to the 2007 economic crisis.
Rajan believes in strengthening the economy for the long run and not necessarily initiating recovery by encouraging false optimism in the market. This sense of security where the central bank will rescue the market no matter how bad the economy will get is often referred to as the Greenspan put or the Greenspan syndrome. The investors often considered investment in the American market during the era of Greenspan or his successor Bernanke a win-win situation. Either the markets yield profitable returns or the Fed shall bail the investors out of trouble every time the economy fumbled. This sense of false security and such unsustainable public appeasing monetary policies fuelled a growth which defied the most fundamental concepts of economics. The growth was backed with no real increase in assets tangible or otherwise.
Rajan, on the other hand, realises that his position as the governor of Indias central bank is not to single-handedly rescue the economy and that the Indian economy is not in a situation so dire that there is no hope for improvement. The recent policy changes introduced by him have gained him some enthusiastic supporters (Yes, people who like him for his policy and not just his looks!) as well as some critics. But the truth is that neither side denies that his strategy aims for long term stability and reduction in inflation rates which will be propelled by a combination of factors like a good monsoon, moderate imports, domestic demand, supportive fiscal policies and monetary policies.
The most recent increase in repo rate and slashing of MSF declared by RBI gives the market a clear message that the central bank is attempting to reinforce its inflation fighting credentials.
Any economy is a complicated combination of numerous factors; many of which are beyond the control of a nations central bank. To pretend that a single institution or the man heading it can protect a market economy from all extrinsic changes like stricter US economic policies, lack of investment etc. would be both flawed and not one that would lead to any real growth. The best conclusion that one can draw from the RBIs recent take is that Rajan will do his job and coax the government to do theirs while the investors realise that an investment in equity or physical market with a 100% guaranteed return or no risk is an unattainable mirage. Perhaps this is a better time to get this dose of reality than after five years of recession, a severe unemployment crisis and innumerable bailouts as was the case with the United States of America.
Shubhangi is a third year student pursuing B.A. LLB. (Hons) at Gujarat National Law University. She is presently on the editorial board of two books and a few of her research papers are in the process of being published. She can be reached at shubhi.law@gmail.com