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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