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5/25/2016 Ra Ra About Raghuram Rajan? The Quint http://www.thequint.com/business/2016/05/21/raraaboutraghuramrajan 1/12 Raghuram Rajan, Governor, Reserve Bank of India. (Photo: Reuters) BUSINESS | 6 min read Ra Ra About Raghuram Rajan? LOGIN WITH Search stories

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Raghuram Rajan, Governor, Reserve Bank of India. (Photo: Reuters)

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Alex Mathew, BloombergQuintMay 21, 2016, 8:37 pm

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Mumbai Singapore

“My name is Raghuram Rajan and I do what I do,” said the RBI Governor to a packed room of

journalists during a recent interaction after a monetary policy review meeting. But is what

Rajan’s done enough for him to get a term extension in September?

- Ajay Shah, Economist and Researcher, National Institute of Public

Finan

I’m disappointed.

Ajay Shah, economist and researcher at the National Institute of Public Finance and Policy is not

too impressed by Rajan’s performance so far. He says India’s central bank governor has

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Mumbai Singapore

“disappointed” him.

Ashima Goyal, Professor at Indira Gandhi Institute of Development Research takes a more

generous view. “Good overall. His performance in reducing vulnerabilities and in building

foundations for future growth is better than in managing the current cycle,” she said.

So what exactly has Raghuram Rajan done for India’s monetary policy? When Rajan took charge

as RBI Governor in September 2013 he laid out his key agenda in an opening address. It read

something like this:

Addressing the non-performing asset problem Reviewing the monetary policy framework Improving transparency, predictability of monetary policy Deepening the bond market Improving the rate of 䂧怀nancial inclusion

Interestingly, in the two years and seven months since then, Rajan has attracted a large fan

following in India and abroad as well as been censured by some trenchant critics, not the least

Subramanian Swamy.

Swamy, a Rajya Sabha MP and BJP politician, doesn’t want Rajan to get an extension when his

three-year term ends in September. He argues that Rajan erred in relying on consumer price

in婅ation and moderated interest rates too slowly. Of course Rajan’s monetary policy stance is

not the only thing Swamy has taken issue with. He’s also called into question Rajan’s Indian-

ness. But that’s not the subject matter of this story. Instead we asked well known economists to

assess Rajan’s performance so far.

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The Rate Debate

Finance Minister Arun Jaitley (L) and RBI Governor Raghuram Rajan. (Photo: Reuters)

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Rajan has been criticised for both sharply raising rates when he entered o䛻諫ce in order to

combat in婅ation, and for the pace at which he has reduced rates once in婅ation was brought

under control. The economists we spoke to broadly felt that Rajan’s decisions were justi㞤첾ed.

Rajan, at his very 㞤첾rst monetary policy review raised the policy rates by 25 basis points to 7.5%.

It didn’t stop there. Between then and February, he raised them by another 50 basis points.

Then, rates were held at 8% for nearly a year. On 2 December 2014, Rajan cut rates by 25 basis

points, leading many to proclaim that Christmas had come early. Since then, he’s cut rates by

125 basis points.

Rate changes by the RBI since September, 2013 (1 bps = 0.01%) (Source: Bloomberg)

Those who are arguing for substantially lower interest rates should

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- Jehangir Aziz, Chief Asia Economist, JP Morgan

be gently reminded that not too long ago, in 2013, India was facing

a near external crisis because of macroeconomic instability despite

higher growth.

- Ashima Goyal, Professor, IGIDR

In July 2013, there was too sharp a rise in interest rates, in the

middle of a softening cycle, in response to the Fed taper tantrum.

They were not reduced enough after that partly due to the

transition to CPI monitoring. The transition could have been more

gradual

The Campaign Against Bad Loans

The ripple e旗赒ects of the Reserve Bank of India’s asset quality review – an audit aimed at

identifying bad loans in the banking system – were felt most recently on 18 May, when Punjab

National Bank reported a net loss of Rs 5,367 crore for the quarter ended 31 March.

This was the worst quarterly loss in the history of Indian banking, and a direct outcome of

higher reported non-performing assets, which in turn led to accelerated provisioning. The asset

quality review that kicked o旗赒 in October last year was Rajan’s move to get banks to identify bad

loans that were previously hidden.

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- Ajit Ranade, Chief Economic Advisor, Aditya Birla Group

There is a tendency to either postpone the recognition of bad loans,

or to evergreen bad loans. In banking lingo it’s called the art of

‘extend and pretend’... It is to his credit that he has chosen to tackle

the bad loan problem head on. The current purge will stand the

sector in good stead. 

- Madan Sabnavis, Chief Economist, Care Ratings

One could have done things di쁱缠erently in terms of NPA recognition.

It could have been spread over a period of time to avoid a panic

situation.  

Transparency, Predictability of Monetary PolicyMeasures

This was one of the 㞤첾rst objectives Rajan outlined in his maiden speech. He stressed the

importance of e旗赒ective communication.

Unlike other modern central banks, RBI uses multiple instruments

for doing monetary policy. Now there is a statement coming out

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- Ajay Shah, Researcher, NIPFP

about the repo and reverse repo, but all the other instruments are

cloaked in opacity. As an example, RBI trades the currency market

every day, but there is no clarity on objectives and actions.

- Madan Sabnavis, Chief Economist, Care Ratings

Things have not been predictable as policy actions have been

di쁱缠erent to unchanged underlying conditions like in쀺㏀ation,

in쀺㏀ation expectations, forex situation, and global uncertainty. Just

look back at the last three to four policies. At times no action was

taken, while at others there was a decrease in rates.  

- Devendra Kumar Pant, Chief Economist, India Ratings & Research

Good performance. In successive monetary policies, the RBI is

articulating its stance for monetary policy and its next policy action

to some extent can be assessed with reasonable degree of success

on the basis of prevailing domestic and global conditions and their

future trajectory. However, the surprise element is always there. 

Deepening the Bond Market

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In his address on 4 September 2013, Rajan said, “For our 㞤첾nancial markets to play their

necessary roles of providing risk, absorbing long term 㞤첾nance, and of generating information

about investment opportunities, they have to have depth.” This is a goal successive RBI

governors have worked towards.

- Jehangir Aziz, Chief Asia Economist, JP Morgan

The progress on this front has been glacial at best. The fault

perhaps does not lie with the RBI, but with the government. We

haven’t seen any material capital market reform or liberalisation in

the last several years. Most glaring has been the continued lack of

any meaningful depth in secondary corporate bonds. 

- Devendra Kumar Pant, Chief Economist, India Ratings & Research

This is one area which successive governments and regulators are

working without much success. Problem of Indian bond market is

lack of depth. It is very di䂽俿cult for any issuer to raise money if the

rating is not in ‘AA category’. Deepening of bond market will take

time. This is work in progress for current and next governor. 

Financial Inclusion to Spur Rural Growth

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11 payments banks, 10 small 㞤첾nance banks, and 2 fully 婅edged banks. No, they’re not yet

operational, and two aspirants, Cholamandalam Investment and Finance, and the combination

of Dilip Shanghvi, IDFC Bank and Telenor, have already returned their payments bank licenses.

The increase in the number of players and the move to ‘on-tap’ licenses are e旗赒orts to widen the

ambit of the Indian banking system, thereby improving the rate of 㞤첾nancial inclusion.

- Devendra Kumar Pant, Chief Economist, India Ratings & Research

Good performance. The idea of di쁱缠erential bank licences is good,

but chances of ‘on-tap’ licencing in the near future appears low.

- Jehangir Aziz, Chief Asia Economist, JP Morgan

There has been clear and substantial progress on this front. But, we

still have seen only two new banks operational in the last 25 years.

More have been promised, especially payments banks and mobile

banking, but one has to wait and see how these fare. 

American economist Edgar Fiedler once said, “Ask 㞤첾ve economists, and you’ll get 㞤첾ve di旗赒erent

answers – six if one went to Harvard.” Surprising then that there is near consensus on Rajan’s

overall performance. Five of the six economists that we spoke to said they were broadly satis㞤첾ed

with Rajan’s leadership over the past three years. We didn’t ask them whether they thought he

should get an extension. That, of course, is entirely up to the NDA government.

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Raghuram Rajan RBI Governor

May 23, 2016, 12:43 pmMet Narendra

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Reading the comments made by the economists, I am amazed at the depth of their knowledge (or lack thereof). Notone has commented on the adverse impact of undertaking a short term expansion in forex reserves using borrowedfunds. This is in reference to the FCNR scheme expansion done by the RBI for which we will pay in the next 6months.