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Wednesday, September 14, 2016

Good Bye! Dr Raghuram Rajan

He came. He conquered. And he left.

I feel that is how his functioning as the Governor of Reserve Bank of India (RBI) for the last three years can best be surmised. He took over the reins of the RBI on September 4, 2013 when all was not that well with our economy: our growth had decelerated sharply, inflation was threatening from a double digit level, overtaken by the fear that the US Fed might turn off quantitative easing rupee depreciated against the US dollar by around 18% during the preceding three months, and obviously all this cumulatively subjected financial markets to massive volatility.
Over it, there was a lull looming large in the political decision-making process in the country, because of which many projects, particularly, infra projects were held up half the way, resulting in accumulation of bad debts in banks.

Immediately after taking over as Governor, he opened a swap window for banks—though an “idiotic idea” that was indeed known to Indian banks since the late 1970s—to attract fresh foreign currency deposits. And this, of course, paid the dividends, for banks could mobilize around $34 bn as fresh non-resident deposits, that too, within a short time which could ultimately arrest volatility in the forex market and ensure that rupee moved in a narrow band.

The notable contribution of Dr Rajan is however towards creating a creditable and dependable monetary policy framework. Despite there being a strong argument that inflation-targetting in a developing country like India which is bogged down by supply-side bottlenecks, particularly with regard to food items which incidentally have a large weightage in the index, is growth-retarding, Dr Rajan could succeed in convincing the political bosses to see the logic in the argument for a right balance in monetary policy between growth and inflation and between the interests of savers and investors and make the government sign an agreement with RBI on monetary policy targeting inflation at 4% plus or minus 2% on February 28, 2015. Simultaneously, he shifted the RBI’s policy of monitoring inflation based on wholesale price index to consumer price index—a practice that is considered by the developed world as a fit measure to manage inflation expectations. Finally, he could make the government constitute a monetary policy committee with equal representation from RBI and the experts nominated by the government to work for maintaining inflation at the targeted level. This shall reduce the conflicts between the government and the Central bank, which by itself enhances transparency of policy implementation and the overall credibility of the policy itself.   

Dr Rajan, the Govenor who has got a right perception of the ills that our financial system is facing today—as is well reflected in what he said in one of his interviews with FT, “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”—took active and right interest in making banks recognize stressed assets that have stood almost close to 9% of GDP and clean up their balance sheets by fiscal 2017. As a support mechanism to address this malady, RBI has introduced Strategic Debt Restructuring scheme, giving banks the power to change even the management.

He could thus succeed in stirring the system enough to notice the embedded malady and the urgency to clean it but has not paid attention to minimize their recurrence from time to time, for bad debts are bound to be there so long as banks extend loans, except to make a stray mention about significant skills gap among the banking staff, including that of the RBI. Perhaps, he was forced to leave this half-done job to his successor.

He has put in place a system to issue licenses on tap for establishing payments banks. During the fag end of his tenure, he issued a host of measures to deepen the bond and currency market.  Thus, with his known collegiate approach, his unfailingly affable persona and with his steadfast resolve to do the right things rightly at the right time, Dr Rajan, delivering what he has promised while taking over as Governor of RBI, signs off his tenure as a Governor with academic excellence.

We will miss you Dr Rajan but look forward with enthusiasm to hear more about your future academic accomplishments that must make the country feel proud of you.


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