Dr. Raghuram Rajan, the ‘Banker on The Move’

A year back to this day, to be more precise on September 4, 2014, Dr. Raghuram Rajan, an academician with a “superstar’s reputation” of spotting the 2008 global financial crisis, took over as the 23^rd Governor of Reserve Bank of India when the foreign investors were fleeing the country and Rupee was in free fall—it touched an all-time low of 68.85 to the dollar on August 28, 2013—with a proclaimed manifesto: “Our task today is to build a bridge to the future, over the stormy waves produced by global financial markets. I have every confidence we will succeed in doing that...”  

Now the question is: Has he lived up to his manifesto? The answer is: “Yes”, he had a flying start. Immediately after assuming the charge, he at once introduced a special swap window—a painful but a right measure indicating that he, a topnotch academician, is willing to be pragmatic and compromise with ground realities—to attract foreign capital. This had resulted in a gush of foreign capital which along with the ban on gold imports narrowed down the current-account deficit. He then raised policy interest rates—thrice in the last year, each time @25 basis points—that too, at a time when the economy was still losing momentum, and could thus let the market know that the RBI is essentially focusing on inflation targeting. Indeed, Dr. Rajan made his intention amply known to the market when he said that “growth will be most benefited if we disinflate the economy”.    

Cumulatively, these measures yielded the much desired results: Consumer price inflation has come down to 7.96% by July 2014 as against 9.8% in September 2013; food inflation has come down to 9.3% from 11% in 2013; and wholesale price inflation has come down to 5.2% from 6.5% in September. Forex reserves stood at $320 bn as against $275 bn in August 2013 bringing in an element of stability in balance of payments position.  Rupee became stronger at Rs. 60.50 to the US$. Similarly, GDP growth stood at 5.7% in the first quarter of 2014-15 as against 4.7% in the corresponding quarter of the previous financial year.  The macroeconomic fundamentals are thus looking to be in better shape than when he took over the reins at the RBI last year.

On the policy front, he took a bold initiative to modify the mechanics of monetary policy: he replaced Wholesale Price Index (WPI) with Consumer Price Index as the ‘inflation yardstick’ to set policy interest rates without, of course, any mishaps in RBI communicating its intentions to the market, which is a laudable accomplishment.  The RBI had also granted ‘in principle’ approval for banking licenses to IDFC and Bandhan financial services. It had also framed draft-guidelines for setting up differentiated banks, such as payment banks, to give a boost to financial inclusion. It also made its intention to henceforth grant banking licenses on tap.

Coming to the two other important domains, namely, financial sector development and supervision of banks for which RBI is accountable, the outcome appears to be mixed. There was, of course, quite an amount of action in terms of appointing a few committees—Urjit Patel Committee to revise monetary policy framework; Nachiket More Committee to work out an effective mechanism to offer financial services to small businesses and low-income households; and Nayak Committee to review the functioning of bank boards and propose changes to improve the level of governance—to improve the functioning of financial sector but nothing much in terms of concrete action had happened. And, coming to the supervision of banks, all is not that hunky-dory: non-performing assets of banks, of course, mostly of the public sector banks, have gone up to 10% of the assets. Except making ‘Central repository of information on large credits’ operational to disseminate credit data to lenders so as to reduce information asymmetry among the lending banks, RBI did little precious in this direction. On the other hand, a few disturbing instances where senior executives of banks are found to be involved in misdeeds have come to light recently.    

In this regard, it is intriguing to read governor’s response to an interviewer’s question (Times of India, August 31, 2014) on bad loans: “Is it of concern? Yes. Is it scary? No. If you look at the distressed loans in the system—it’s about 10% of assets, largely in the public sector but not entirely… Unlike the banking crisis in the west where the worry was who would pony up the money, here there is no uncertainty. The government will do it. It has never let any bank it owns go under.” This, no doubt, sounds pretty assuring to the depositors of the banks, but certainly not the right answer to the malady, for it would only be a drain on tax-payers kitty. The hard reality is, RBI, being the supervising authority, cannot disown its responsibility to ensure that the banking system has its wherewithal right and in place—assessment of business viability vis-à-vis risks embedded in the project, prompt identification of bad loans and immediate action to salvage the bank from the probable losses—to keep its credit portfolio healthy.

That said we must also appreciate the fact that Dr. Rajan has got a right perception of the ills that our financial system is facing today, besides being bold enough to put across that understanding candidly. For instance, recently, when the correspondent of Financial Times, drawing Dr. Rajan’s attention to his speeches of the past wherein he attacked India’s corruption problems and his warning of the risks of the Russian-style ‘Oligarchy’, questioned him, “Does this still worry him?” Dr. Rajan was forthright in his reply: “Why do we tolerate the venal politician?” He then guardedly elaborated it thus: “the answer lies in India’s threadbare public services. Because, the state is weak, voters demand that local politicians help them secure benefits from government. For this, the politicians need funding. ‘So it’s sort of an unholy nexus, so to speak. Poor public services, politicians fill the gap. Politician gets the resources from the businessman, politician gets re-elected by the electorate for whom he’s filling the gap. And electorate turns blind eye to the deals done with the business man’” (FT, August 16/17, 2014). As a sequel to this he also said, “Many business groups [of India] treat public sector banks as their equity kitty… And I want to change that.”

Now, the big question is: Will he be able to cure this age old malady? Knowing his penchant for right action at the required time and his technical competency to act rightly, we may hope that he would succeed in his moves. Nevertheless, it must be admitted that Dr. Rajan cannot alone fix the economy. The government must come forward with matching macroeconomic and structural policies to ensure its happening. But Modi’s government, though indicated its intentions enough, appears to be shy of launching far-reaching reforms. On the other hand, it appears to be in a great hurry to accomplish financial inclusion through ‘Jan Dhan Yoiana’ that sounds similar to ‘loan melas’ of the past. 

With all these complexities playing their own role, it would be interesting to watch how Dr. Rajan would  steer through during the rest of his tenure to upgrade the RBI into “a first-rate Central bank to take care of the macroeconomic challenges” that India is likely to encounter once, “we grow into one of the top few economies” and “represent India at the international fora” by bringing top-class  talent from outside and also to empower banks to assert that “company promoters do not have a divine right to stay in charge when they have badly mismanaged an enterprise, nor do they have the right to use the banking system to recapitalize their failed ventures.” 

Hope is that his known collegiate approach, his unfailingly affable persona and importantly his steadfast resolve to do right things rightly at right time gives him ample scope to succeed on his own.  Amen!