RBI governors: Continuing the reforms storyline : Financial Express: 18th June 2007

RBI governors: Continuing the reforms storyline

The RBI governors are celebrities today. The visual media goes behind the "pause made by the governor in the speech when the issue of inflation came up" or the "smile which accompanied the same", and even have coined the term "hawkish" to reflect the tone. Their proclivities to tinker with interest rates or CRR and focus on growth or inflation lead to conclusions that the RBI governors are anti-inflation or pro-growth. The purpose here is to examine ex post the economic environment under which past governors have operated and the tools used to conduct monetary policy.
The governors we looked at are S Venkitaramanan, C Rangarajan, Bimal Jalan and YVR Reddy. The economic environment as well as monetary actions taken by these governors have been juxtaposed with their tenures. The governors normally move in and out during December and it has been assumed that the governor in charge up to this point of time operates in the economic environment for the entire year, while their actions have been looked at as per their tenures.
Three facts emerge from the table. The first is that GDP growth has been rising progressively in the time periods associated with change in governors.
The second is that inflation has simultaneously come down having more than halved between the early ‘90s and contemporary times even though it has risen in the last period.
And lastly, monetary policy direction has been almost unidirectional—although there have been contrarian movements during certain time periods.
The profiling of the governors shows that Venkitaramanan was in charge in the pre-reforms period and actually operated in a regulated set-up. Therefore, the benefits which came from reforms were missing. His era was typified by low growth and high inflation. Banking was extremely regulated and there was limited flexibility in monetary policy. There was hence little scope for innovation. Double digit inflation was not something new. At the time of his exit we had the Narasimham Committee Report just being brought in.
Rangarajan had the most interesting phase where reforms were introduced and the economy had to be lifted to better heights. His actions hence were on all fronts. The SLR was lowered only during his regime and came down to 25%. The CRR was reduced as was the bank rate. The challenge was really to control inflation while bringing about higher growth. Growth was to be brought about by the overall series of economic reforms and monetary action was to support this process. His actions were actually gradual and became pronounced in 1996-97 when the CRR was reduced by 4% and bank rate by 3%.
With there being spare capacity, it was the ideal situation to push for high growth without inflation.
Jalan came in at a time when consolidation was needed and while policy was accommodative, inflation was the primary target. This was the first time that the policies emphasised the concept of growth with stability. This was also the period where the globalisation impact was first noticed and reinforced and the US Fed actions had an influence on domestic policy.
There was also the critical Asian crisis to be dealt with and while the CRR was raised to begin with to 11%, he continued with reforms to bring down the CRR to its lowest level by the time he exited. The bank rate was raised but then lowered to 6%. He had also brought in the concept of the ‘repo’ to control liquidity and interest rates and used the repo rate as an effective tool of monetary policy from 2000-01 onwards. Again the focus was on lowering of the repo rate to 7% from 9.5%.
Reddy inherited an economy which was poised for higher growth with most of the reforms in place and hence could boldly go ahead and move in the direction of financial liberalisation. Higher growth and low interest rates have typified his regime until last year, when inflation has become a worry. This has caused a reversal in interest rate and CRR movements with the idea being to ensure that the economy does not overheat. This is understandable given that industry is operating at near full capacity utilisation today.
The significant point here is that inflation at 5.4% in the last period is not acceptable while a double digit inflation accompanied by low GDP growth was acceptable at that time.
The overall picture gotten here is that the RBI governors have, in general, followed an accommodative monetary policy over the last 15 years or so.
They have used a mix of interest rate (bank rate and repo rate) and CRR changes to control the overall supply of money in the economy. While inflation targeting is the major concern, in the medium-term, the focus has been on GDP growth.
And more importantly, all of them have performed exceedingly well in continuing the story line which was laid down in 1992 when reforms were introduced.