Au revoir, Mr Rajan

Raghuram Rajan's tenure at RBI was path-breaking

Alice M Rivlin, former vice-chairman of the Board of Governors of the Federal Reserve System in the US, had once said that “the job of the central bank is to worry”. And there was plenty to worry about when Raghuram Rajan took over as the Reserve Bank of India governor three years ago. Economic growth had decelerated sharply, retail inflation was in double digits and there was massive volatility in the financial market — the rupee had depreciated close to 18 per cent against the US dollar in the three preceding months because of the possibility of the Federal Reserve turning off quantitative easing. What added to the uncertainty was slow political decision-making in India that led to several projects being held up, even as banks accumulated non-performing assets. At the end of his tenure, it is clear that Mr Rajan not only ably dealt with the short-term crises — currency volatility and high inflation — but also succeeded in addressing the more long-term and structural deficiencies in India’s monetary management.

To arrest the slide of the rupee and shore up foreign reserves, Mr Rajan went ahead with his predecessor’s idea of opening a swap window for banks to attract fresh foreign currency deposits. While the rupee has stabilised, India’s foreign reserves have risen from $275 billion to $ 367 billion — a jump of 33 per cent. The increased reserves have put RBI in a comfortable position to deal with the maturity of such deposits now.

However, Mr Rajan’s most important legacy is the reform of the broader monetary policy framework. Four developments stand out. One, shifting RBI’s policy from mapping Wholesale Price Index-based inflation to Consumer Price Index-based inflation is a prudent shift because retail inflation has a greater impact on inflation expectations. Allied to this change is the new regime of an explicit inflation target. Two, the move towards a monetary policy committee, with equal representation from RBI and experts nominated by the government, is expected to bridge the divide between the central bank and the government. Mr Rajan has clearly ushered in a setup that will make monetary policy more “predictable” and “transparent” — two attributes he had promised to add when he started out at RBI. Three, he has forced banks, especially in the public sector which account for 70 per cent of Indian banking, to recognise bad loans by conducting an asset-quality review. The clean-up of bad loans is not only making all stakeholders aware of the systemic deficiencies but has set a healthy precedent. Lastly, Mr Rajan’s tenure has seen RBI transforming the way Indians bank — from enabling differentiated banking where licences are available on tap to initiating the unified payments interface that turns mobiles phones into mini bank branches.

Yet, there are a few aspects of Mr Rajan’s tenure that are debatable. For example, whether he should have focused more on institution-building, and whether he exceeded his remit by speaking on issues that had nothing to do with the central bank — the latter is believed to have led to straining of his relations with the government. Mr Rajan, of course, did not seem overly bothered by these debates. As he said last year, “I am Raghuram Rajan and I do what I do.”