It is normal procedure for new governments to appoint their own people to top positions.
However, in the case of RBI, the BJP chose to stick with Raghuram Rajan, a UPA appointee for three reasons:
One, Rajan was obviously well qualified and two, weeks into the job, he gave the impression of being a no-nonsense guy who would do the right thing in the best interests of the banking system rather than something to score a few brownie points. And lastly, the position of RBI Governor is too vital to be played around with and the NDA wisely choose to provide stability to this key role.
But of late, Rajan’s style has been putting the NDA under a lot of pressure and finally resulted in an open tussle between RBI and finance Minister, Arun Jaitley.
While, traditionally, the government and RBI have always been rivals in the sense with the former looking for ways to ease inflationary pressures and the latter playing a sort of regulator to government, rarely have they gone public with their grievances as in the present instance.
It all started with RBI deciding to appoint a full-time Chief Operating Officer. The government and RBI differed on appointing a chief operating officer, which the central bank had sought to push through a board resolution on the Budget day the day when finance ministry officers would have missed the board meeting.
Subsequently, the finance ministry made it clear that the issue could only be dealt with by amending the law.
Rajan was definitely at fault here! He was clearly trying to bypass the government in the appointment of such a key functionary. And recently, Rajan at a public meeting made some comments which are definitely valid but insensitive for the simple reason that they showed lack of tact and hit the Government directly on its belly.
Earlier this month, Rajan had suggested that the government should focus on “Make for India”- in other words, shape manufacturing that is targeted at the domestic market rather than the global market where demand was growing limp.
The apparent caution sounded on the government's key initiative obviously didn't go down well in New Delhi.
As if this were not enough, Rajan responding to Arun Jaitley’s call for the Central Bank to cut interest rates said, “The message I have been sending is that we don't want to flip-flop back and forth. This month inflation was 2%, therefore, I will cut this much. Oh! It went up to 5%, maybe I should increase it. That's not how a central bank operates.”
Angered at this Arun Jaitley has now said that the RBI's insistence on keeping high interest rates was the ‘singular factor’ responsible for the slowdown in the manufacturing sector.
He also rebutted Governor Raghuram Rajan's critique of Narendra Modi's `Make in India' initiative, setting the stage for a fresh round of tussle between the central bank and the government.
What Rajan should realize is one thing: Modi has been touring the globe with the ‘Make in India’ mantra and trying to attract foreign investment. However, if the RBI governor himself criticizes this policy publicly, it paints a poor picture of Modi and sends out the wrong signals! Rajan could have voiced his concerns in private on such an important issue.
He should learn to balance the bank’s priorities along with the realities of working with the government and its allies.