Rajan, With His Four-Year Tenure Idea, Clearly Will Not Go Quietly Into The Night

The man does protest too much. Raghuram Rajan, the outgoing Governor of the Reserve Bank of India (RBI), told a meeting of the standing committee on Finance that a three-year term for the Governor was too short. To his credit, his answer came in reply to a question and he did not volunteer it, but for a man who is already in the thick of a controversy over his exit, he seemed to be blissfully unaware of the impact of his statement. In India, chiefs of regulatory bodies ought to speak with circumspection on what they say and how they say it, but Rajan seems unwilling to be careful about it. He is, thus, not a good choice for retention as RBI Governor. This job is not about upholding Article 19’s ‘Right to Free Speech’.

Let us be clear. The RBI as an institution matters much more than the individual who heads it. The institution’s innate conservatism in its policies is what protected us from financial chaos when gale force winds were blowing across the globe. So, the actual tenure of the Governor is not material, even though this is not an argument against a longer tenure for Governors.

Rajan’s reference to the U.S. Fed Chair’s four-year tenure is also irrelevant in the Indian context. The tenures we offer our key regulars are three plus two. Thus, the normal tenures tend to be five and not three years. That it was curtailed to one term of three, for Rajan stands as one of those exceptions unrelated to how well he did his job. Most probably, the decision to not give the extension was related to Rajan’s own quasi-political talk, which is now becoming even more frequent after the announcement of his exit. Clearly, the man will not go silently into the night and he has not endeared himself to anyone except the political opposition and a media looking for headlines. In hindsight, despite Rajan’s good performance, the government has taken a good call to let him go.

The comparison with the U.S. Fed is misleading for another reason too. In the United States, presidential tenures also tend to be four years, similar to that of the Fed, and it works for them. In politically volatile India, where parliamentary elections are held every five years, but state assemly polls happen almost every year, incumbent governments at the centre need to be seen to be delivering almost every year. So giving incumbent governments an opportunity to change RBI governors at least once in the first half of their elected time is not unreasonable.

Then there is the decision to decide monetary policy through committee (MPC). In this scenario, continuity can be ensured better since the terms of the members need not be coterminous with that of the Governor. The Governor in an MPC scenario will become a first among equals, and not the dominant voice on monetary policy.

Rajan should remember that independence of the RBI or the MPC comes from focusing on monetary policy and regulation and not from making political statements that irritate the government. When Governors talk to much, they compromise the institution’s innate autonomy. Tenure is not the basis of autonomy.