Transcript of Podcast
Hi I am Arjun Parthasarathy speaking and this podcast is on “RBI Governor’s Job is the most Difficult one in the World”
The job of the RBI Governor is definitely the most difficult one in the world and the reason is the pressure placed on the governor by the government and the industry to cater to their needs.
In the case of Dr. Raghuram Rajan, the present RBI governor, who has indicated that he will not be taking up a second term, which usually all governors do, there was the added issue of politically motivated personal barbs by government party members, which could continue for incoming governors as well.
RBI, until recently did not have any set monetary policy objective like the Fed and the ECB. The Fed has objectives of maximum employment and stable prices while the ECB has the objective of an inflation target. RBI henceforth will have the primary objective of an inflation target.
RBI also did not have a policy committee unlike the Fed and the ECB. The governor had the sole authority to set policy rates. Henceforth, RBI will have monetary policy committee that will vote on policy rates.
RBI manages the borrowing program of the government and the government runs a fiscal deficit. Hence the government always wants interest rates to be lower to make its borrowing cheaper. The government also wants lower interest rates, as it believes that lower interest rates push up growth in the economy. At the same time, given public sensitivity to higher prices, the government does not want inflation even though it causes inflation by subsidising goods and services.
Obviously keeping down inflation even while helping the government borrow and spend by keeping down interest rates and pushing up economic growth makes the governor’s job extremely difficult.
The industry, which is closely tied with the government in many areas, wants interest rates to be kept down as it leads to lower cost of borrowing for investments. The end result of low cost of borrowings is seen in the NPA’s being run up by the banking system, which is regulated by the RBI.
The government and the industry falsely believe that low interest rates solve many problems, but the fact is that low interest rates create more problems than solving them. The RBI governor is stuck right in the middle of this false belief.
Given that the exit of Dr Rajan has caused so much of media attentions, almost all of which is unwanted, the next in line for the RBI governor job may not be too excited on landing the job, which was once seen as a highly coveted job.
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