Thoughts on RBI Governor Dr. Raghuram Rajan’s departure By Dr. Bobby Srinivasan

June 30, 2016 | Posted by bobbysrinivasan << back to blog

It is seldom that we see the Governor of a Central Bank delivered his job with such insight and clarity as Dr. Rajan did during his tenureship at the helm of RBI which lasted 3 years. He was given a mandate to control the rate of inflation which he delivered with great aplomb. Currently our inflation rate is around 5 to 6%. His reasonably tight monetary policy and not succumbing to undue pressure from the government showed that he believed in his cause and wouldn’t compromise under any pretext. The Modi government was expecting a ‘Yes’ man. But he didn’t fit the bill. Of course, he didn’t take the inflation fight all the way like Dr. Paul Volcker, former US Red Reserve Chairman but accepted to cut the repo rate several times during his tenure.

Dr. Rajan was both surprised and bemused at the attitude of Indian Banks. They would not pass on the entire rate cut benefits to the borrower from them. Instead they kept a significant chunk of it to pay for the incredulous non-performing asset bill which they had accumulated over time Dr. Rajan served on ultimatum to these banks to come out with the accurate balance sheet by providing for all the NPA’s. According to some estimates nearly 13 trillion rupees of bank lending or 16 to 17% of lendable funds are locked in NPA’s. The government would have wanted him to keep lowering the interest rate to accommodate for the misadventure of these banks. Instead he forced the banks to come out with the true picture. There is no going back for these banks and all that was hidden under the carpet are currently coming to the surface. If at a later point in time transparency and governance became the hall mark of our banks undoubtedly the credit should go to Dr. Rajan’s efforts.

One of the complaints against Rajan was his tight money policy which according to some critics of him made many small and medium enterprises go bankrupt. This is more of an excuse than tact. If those enterprises were counting on the Reserve Bank’s generosity to survive then there is something wrong in their business model and management.

In the years to come Dr. Rajan’s management of RBI will be greatly appreciated. He always harped upon efficiency and improved productivity. This culture spread across the fiscal policy as well and the government is now keeping a lid on the budget deficit for the last couple of years. Dr. Rajan has always been championing this cause since he believed that fiscal irresponsibility will ultimately lead to asset bubbles and inflation.

The government will be taking steps a find a suitable successor to replace Dr. Rajan. They will need somebody who will support their cause of sustained economic growth and providing liquidity even if it is at the cost of higher inflation. Their argument would be that the Indian inflation rate is also a supply side problem and hence the monetary policy will not achieve anything independently. The global economic environment is very murky now with too many uncertainties. Whoever will replace Dr. Rajan, he will find the job highly challenging.

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