Is Raghuram Rajan walking ex-Federal Reserve chief Paul Volcker’s talk?

MUMBAI:A week after taking charge, Raghuram Rajan was being portrayed as a “saviour” of Indian markets who would take the sensex to new heights. This was despite his warning that “the governorship of the central bank is not meant to win one votes or Facebook “likes” but I hope to do the right thing, no matter what the criticism”.

Having stunned markets with an unexpected rate hike, Rajan is now being compared to Paul Volcker, the dourfaced chairman of the US Federal Reserve between 1979-87 . Volcker is credited with bringing the US out of stagflation by increasing rates to a record high. In his fight against inflation, Volcker had completely sacrificed growth allowing the economy to slip into recession. This is in sharp contrast to the perception in some quarters that Rajan is a finance ministry man who would be willing to go along with policies that were in line with populist goals.

The reason for the markets perception is not difficult to fathom. Former RBI governor D Subbarao, who chose to hike rates through tentative ‘baby steps’ and was reluctant to cut them, had come under sharp criticism from the finance ministry . Since it is the finance ministry which has the main say in choosing the head of the central bank, it was expected that the new governor would be on the same wavelength as the FM on facilitating growth.

As a result, a day before the policy, economists and analysts across the board were unanimous in forecasting that Rajan would hold rates.

“We think today’s communication makes it clear that India’s central bank is not willing to risk its battle against inflation . The RBI’s policy statement subtly hints at a potentially larger role for the government in reviving growth, as it flags the role of infrastructure investments and/ or the Cabinet Committee on Investment (CCI) in reviving growth,” said Siddhartha Sanyal of Barclays.