Raghuram Rajan has had a great first year in office
Given his impressive credentials, and the fact that he had a blueprint ready even before he took over his new job—he chaired the 2008 committee on A Hundred Small Steps—Raghuram Rajan was always expected to be an RBI Governor with a difference. But given how the rupee was in free fall when he joined the central bank, touching 68.825 to the dollar on August 28, 2013—Rajan joined as OSD, but took over formally on September 4, 2013—Rajan’s immediate task was to deal with the crisis. He began his work even before his first scheduled press conference by rolling back ill-conceived measures of August 14 that the markets saw as the beginning of capital controls in a country that was rapidly running out of foreign exchange. While Rajan was party to these controls since he was chief economic advisor at that time, to be fair to him, he began rolling them back once he realised the damage they were causing. Rajan, along with then finance minister P Chidambaram, encouraged markets to think the government was considering joining the JP Morgan bond index—considered a sure-shot way of attracting long debt funds—while then coming out with some deft moves that shored the rupee. The central bank taking over part of hedging costs ensured $34 billion came in through NRI deposits and banking capital and by allowing swaps for oil companies, he took out $8-10 billion of demand from the monthly markets—agreeing to settle the swaps in rupees, of course, took the speculators completely by surprise. A good general is, of course, a lucky one, and Rajan was helped by the fact that the BJP announced Narendra Modi’s candidature for PM—between January and now, nearly $30 billion of FII money has come in, ensuring Rajan’s task of protecting the rupee has become that much easier.
Though this newspaper disagrees with RBI’s veering towards CPI-based inflation-targeting as a single goal—the CPI is an imperfect index as yet, and the earlier multiple-target approach has worked well—as Governor, Rajan has several other arrows in his quiver. His five-pillar framework is critical for the future of India’s financial markets, containing as it does a more competitive banking system with differentiated licences—a beginning has already been made on this—deepening liquidity in financial markets and making existing banks financially sound. Rajan has made a good beginning by forcing banks to identify troubled loans with a new SMA and SMA1 categorisation though, as this paper has argued for long, he has been slow to lower excessive exposure of banks to single corporate/groups—RBI’s latest report makes a belated mention of the need to fix this, though it remains to be seen if the political system backs Rajan. So far, Rajan has also hit a blank with his innovative idea of a holding company to insulate banks from political pressure, and his attempts to hire Nachiket Mor—his pointsperson for work on inclusive banking—are also facing resistance from the finance ministry. Rajan still needs to do a lot more to complete ‘missing markets’—this includes not just corporate bonds but also converting trade receivables to an electronic and tradeable format to improve credit to MSMEs—but such is the nature of the job, most attention will remain focussed on the rupee and inflation levels, both of which are more determined by how the government behaves. By all accounts, it has been a great first year for Rajan.