In his maiden speech as governor of the Reserve Bank of India, on September 4 last year, Raghuram Rajan produced a long list of must-dos. Two stood out: One, his resolve to "build a bridge to the future, over the stormy waves produced by global financial markets"; and two, he added "transparency and predictability" to the existing traditions of the RBI. One year on, he has taken major steps towards making both those promises a reality. When he took charge, the rupee had plunged nearly 28 per cent in five months and the current account deficit was 4.8 per cent of the gross domestic product or GDP. Both are distant memories now and the conversation has moved away from a potential sovereign ratings downgrade. Meanwhile, he sought transparency and predictability for the monetary policy framework through the recommendations of the Urjit Patel committee. The move towards inflation targeting (6 per cent by January 2016) by using the Consumer Price Index as a benchmark instead of the Wholesale Price Index is part of that endeavour. There has been a flurry of activity on other aspects of financial sector stability as well - from issuing new bank licences and guidelines for local area and payment banks, to the constitution of the Nachiket Mor committee to look at financial services for small businesses and low-income households and the P J Nayak committee to review the governance of bank boards.
Yet Dr Rajan cannot pause to congratulate himself. Inflation is still higher than in comparable countries - and, as the RBI's annual report says, a poor monsoon and external developments could turn the clock back in no time. Also, there is the prospect of higher US interest rates by the middle of next year. Though India is indeed better prepared for that eventuality than it was last year, any decision by the US central bank to raise rates - near-zero since December 2008 - will still have major implications. Another of Dr Rajan's big challenges is the financial health and governance of public-sector banks. Many of them are groaning under the weight of bad loans: The ratio of restructured assets to gross advances is already 5.9 per cent, as on March 31, and the gross non-performing asset ratio is at 4.1 per cent of gross advances. Also, RBI data show one-fifth of all the infrastructure loans are stressed and the share of such loans in overall stressed assets is nearly a third. Predictably, government banks accounted for 92 per cent of restructured assets. And the third challenge is the RBI's tension with the finance ministry. It may have been overstated of late, as the finance minister has publicly backed the governor in his inflation-control effort; but there are still creases to be ironed out. The latest example is the appointment of a chief operating officer of the rank of deputy governor at the RBI. Some suggestions of the Financial Sector Legislative Reforms Commission have also been openly criticised by the governor.
Dr Rajan deserves most credit for his publicly stated resolve not to look at quick-fix solutions, but to focus on correcting the larger structural issues. Given the Indian environment, achieving even a part of that mission before he leaves office would be a considerable achievement.
