Raghuram Rajan does well in his first 6 months
Six months ago, when Raghuram Rajan took over at RBI, the rupee was tottering—it almost touched 68 to the dollar a couple of days prior to his joining—and was the worst-performing emerging markets (EM) currency in the May-September period. At 61.85 today, it is now amongst the best-performing EM currencies, making the rupee’s stabilisation the Governor’s biggest success. Needless to say, the fact that the government got the current account deficit (CAD) in order played a very big role—from 4.9% of GDP in June 2013, CAD fell to 1.2% in September 2013—but Rajan’s role was equally important. For one, offering swaps to oil marketing companies potentially took out $160 billion of oil demand (in a full year) while not reducing forex reserves—which is what just opening a separate window for oil PSUs would have done. By later saying oil PSUs could settle the difference in swap rates in rupees, Rajan stumped speculators, who were also caught off-guard by the quiet re-introduction of oil demand in the forex market. Offering to fund half the hedging costs of FCNR deposits ensured India got $34 billion in forex and sent a signal that RBI had several tricks up its sleeve. Allowing banks to hold a larger portion of their bonds in the hold-to-maturity category, similarly, helped avoid large losses—the results of the sharp spurt in yields after RBI’s misadventure to cut liquidity to curb speculation in the rupee—which would have hurt their ability to lend; the flip side is that if you do it too often, it can be counterproductive.
A new category of Special Mention Advances was introduced to help banks locate potentially troubled assets faster. This is going to be Rajan’s acid test and it has to be seen how far he will go to be tough on banks—sadly, RBI has not moved in the direction of lowering group exposure norms, vital to prevent a contagion effect. And as the United Bank of India episode showed, RBI’s inspection is still not up to the mark. Overall, Rajan has acquitted himself well in banking functions, whether it is delicensing of bank branches or reiterating that banking licences will be on tap. The Nachiket Mor committee suggests the Governor would like to piggyback on the combination of Aadhaar and mobile phone networks to provide financial inclusion which is a good thing. Though nothing is visible as yet, Rajan’s talk of completing missing markets is well taken—we have, as yet though, seen no concrete success in opening up bond markets or on creating an electronic bill factoring exchange for MSMEs, and the move to reintroduce interest rate futures hasn’t really worked out; inflation-indexed bonds were a good idea, but haven’t taken off as the market has not been enthused with their features.
Rajan has done well to reduce the smorgasbord of inflation variables RBI was working with—including, if you please, the ‘output gap’. And, given how he promised policies would be data-driven, Rajan’s hiking rates when the data indicated he should, has helped make RBI talk more credible. This newspaper, though, disagrees on the move towards making RBI more of an inflation-targeter and using the CPI as the main variable given its trajectory is at variance with the facts on the ground and that it is putting India on a higher interest rate trajectory.