2 years of Raghuram Rajan: Many hits but some misses, too

He has completed two years and met with some success, but many of his projects are yet to yield desired results

Raghuram Govind Rajan who took charge as the 23rd governor of Reserve Bank of India on September 4, started his journey by making several big-bang announcements and promised to change the Indian financial sector landscape completely.

He has completed two years and met with some success, but many of his projects are yet to yield desired results.

Business Standard tracks the journey of the former International Monetary Fund chief economist at the Mint Road and what more he can do in the remaining one year of his tenure.

Within a week of the rupee hitting its lowest level, Raghuram Rajan, credited for predicting the global financial crisis of 2008, took charge of the central bank.

The currency’s fortunes started improving on the back of some innovative policies announced by him on the very first day.

INFLATION

After seeing the currency stabilising, Rajan took the attack to inflation.

In his first monetary policy review, he raised the policy rate, which shocked the financial markets.

“Some of the actions I take will not be popular.

"The governorship of the central bank is not meant to win votes or Facebook likes,” was his  famous comment on the first day.

After changing the main inflation gauge from wholesale price index to retail inflation as the latter hurt the common man more, he virtually announced a war on inflation.

And, from a double-digit level two years earlier, retail inflation is now at a new low, with the July number at 3.78 per cent.

Is that battle over? One of the main factors contributing to this sharp fall is a global one, dwindling crude oil prices.

A country which imports a third of its crude requirements will benefit from a drastic fall.

The question doing the rounds is what will happen, if energy prices change the trajectory.

In the latest monetary policy review, the governor said: “Most worrisome is the sustained hardening of inflation, excluding food and fuel.”

He also noted  some food prices, particularly of protein-rich items pulses and oilseeds, had risen sharply in recent months.

In addition, supply-side bottlenecks remain, a crucial element to curb rising prices.

INTEREST RATES

After maintaining a hawkish stance through 2014, January 2015 saw the first rate cut by the central bank, followed by two more, resulting in a cumulative reduction of 75 basis points.

Yet, monetary transmission remains a problem, as banks are reluctant to cut lending rates.

While HDFC Bank reduced its base rate (the benchmark to which all loan rates are linked) by 65 bps, including a 35 bps cut  earlier this week, others have reduced their base rate by just 25-30 bps. 

RBI has now asked banks to consider the marginal cost for base rate calculation but it is to be seen if that prompts banks to cut more.

MONETARY POLICY

The Urjit Patel Committee was set up to review the monetary policy structure.

After its report, a rule-based policy is in place, rather than a discretion-based one. RBI has entered into a historic agreement with the government, with inflation targeting as a stated objective.

A formal monetary policy committee is to come but this needs lawmakers’ approval.

GOVERNANCE IN BANKS

A committee under P J Nayak was set up to review governance issues in banks.

The government has split the post of chairman and managing director in public sector banks and started hiring people from private banks, too.

However, the key Nayak recommendation for the government to give autonomy to PSBs and cut its own equity stake below 51 per cent has not happened.

And, the government and RBI continue to be a part of the chief executive’s selection process in PSBs; it is not left, as with private banks, to their   boards of directors.

Also, the government and RBI continue to be on the boards of PSBs.

BAD LOANS

Many steps were taken by RBI to tackle the issue of rising non-performing assets.

Regulatory forbearance for restructuring of loans were ended, norms for early recognition and resolution of stressed assets were announced, the so-called 5/25 scheme was unveiled in which a loan can be given by a lender and refinanced by other lenders every five years for four times.

However, asset quality pressure has not eased.

And, some of these norms haven’t been implemented in the true spirit.

ON-TAP LICENCING

Rajan has also awarded new banking licences, a process started by his predecessor.

RBI has now also given licences to entities for starting operations as payments banks and will issue licences for small finance banks by the end of this month.

This was the first time that  the central bank issued differentiated banking licences.

The next step is to move towards ‘on-tap’ licencing -- meaning, entities can apply any time. How fast RBI can move to such a system is to be seen.

CUSTOMER SERVICE

Rajan’s tenure also saw a rather controversial decision that a bank customer will have to pay for withdrawing cash from automated teller machines, beyond a certain number of transactions.

While this was a long-standing demand from banks, customers are not happy for being charged to withdraw their own cash.

PRIORITY SECTOR

RBI decided to revamp priority sector norms.

Banks will have separate targets for small and marginal farmers and for micro industries.

Foreign banks with more than 20 branches will have targets in line with those for India-based counterparts.

The definition of priority sector lending was also widened to include medium enterprises, social infrastructure and renewable energy.

INTERNAL HR

Rajan initiated internal restructuring by organising RBI central office departments into five clusters -- regulation and banking services, supervision and risk management, monetary stability, financial markets and infrastructure, and operations & human resources.

Another idea, to induct a chief operations officer with the rank of a deputy governor, was not approved by the government.

RAJANSPEAK

“The central bank is not a cheerleader for the economy. . . It is not the role of the central bank to elevate sentiments unduly, to deliver booster shots to the stock market so that it can soar for a while only to collapse when reality hits”
At FIBAC, Mumbai. August 24, 2015

“An important difference from the historical experience of different countries is that elsewhere typically strong government has emerged there first and it is then restrained by rule of law and democratic accountability.

In India, we have the opposite situation today. . .necessary government function is hard to distinguish from excess”
At DD Kosambi Ideas Festival, Goa. February 20, 2015

“We cannot have escaped from the Licence Permit Raj only to end up in the Appellate Raj!”
At DD Kosambi Ideas Festival, Goa.February 20, 2015

“There is a danger when we discuss Make in India of assuming it means a focus on manufacturing, an attempt to follow the export led growth path that China had followed.
I don’t think such a specific focus is intended”
At Bharat Ram Memorial Lecture, New Delhi. December 12, 2015

“We need a change in mindset, where the wilful or non-cooperative defaulter is not lionised as a captain of the industry but is classified as a freeloader on the hardworking people of this country”
At the 3rd Dr Verghese Kurien Memorial Lecture at IRMA, Anand. November 25, 2014

Image: Raghuram Rajan. Photograph: Danish Siddiqui/Reuters