Prime Minister Narendra Modi sank Union finance minister Arun Jaitley’s plans to strip powers of the RBI last week thereby showing evidence of a new-found respect for Governor Raghuram Rajan and recognition that Modi needs his reassuring influence on markets.
When Modi came to power, the position of Raghuram Rajan, an appointee of the outgoing Congress government, looked very shaky. Senior members of Modi’s BJP chided Rajan for his tough stance on interest rates, and Rajan in turn cautioned the government against putting too much faith in exports through its ‘Make in India’ policy.
But when Jaitley, one of Modi’s closest allies, dropped plans on Thursday to remove the RBI’s authority to regulate the government bond market and manage public debt, an official privy to the discussions said the decision “came from the very top”. A senior BJP figure said Modi had intervened on Rajan’s behalf.
Jaitley now plans to consult the RBI and bring out a detailed roadmap on the issue and the process might take a year.
Changing tones in the relationship between Rajan and Modi came up when the PM praised Rajan his perfect explanation of economic issues to him in regular one-on-one meetings. And his intervention last week was hard evidence of the fact.
“We must be careful while handling the apex bank as it is ridden with imperfect institutions,” said Indira Rajaraman, an economist, also a director of the RBI’s central board. She had also criticised the finance ministry’s plan as a hasty one.
Meanwhile, foreign investors have been irked by the Indian tax department’s efforts to recover tax it says is owed on years of previously untaxed gains, prompting a sell-off in India’s share and bond markets.
And with poor summer monsoon rains in prospect and threatening higher US interest rates, New Delhi is reluctant to spook investors by cutting the bank’s wings.