On September 4, 2016 the Reserve Bank of India (RBI) Governor Dr. Raghuram Rajan will end his term as the 23rd Governor of RBI and will return to academia. Dr. Rajan is often introduced as ‘Rockstar Central Banker’, ‘Inflation Warrior’ and the like. Apart from his academic records that include a bachelors degree in Electrical Engineering from Indian Institute of Technology, Delhi, a Post Graduate Diploma in Business Administration from Indian Institute of Management, Ahmedabad and received a PhD from Massachusetts Institute of Technology for his thesis titled ‘Essays on Banking’. One of his claim to fame was that he had predicted a global meltdown which happened in 2008 and had warned the United States Government in 2005 through his paper “Has Financial Development Made the World Riskier?”. Apart from this he has authored two books namely, Fault Lines and Saving Capitalism from Capitalists.
On August 10, 2012 Dr. Rajan was appointed as Chief Economic Advisor to India’s Ministry of Finance and on September 5, 2013 he took charge as the RBI Governor for 3 years. During his term, Dr. Rajan has been widely appreciated for stabilising the falling rupee and going after the banks to clean up their balance sheets through reducing influence on bad loans. He also set Consumer Price Index (CPI) as benchmark to assess inflation and did not lower the bank lending rates as well despite following huge criticism for everywhere.
Before we look into Dr. Rajan’s journey, let’s first look into the role of an RBI Governor :
1. Controlling the money and credit supply in the system
a. Repo Rate : when RBI lends its money to other central banks.
b. Reverse Repo Rate : when RBI borrows money from commercial banks
c. Cash Reserve Ratio : A percentage of total deposits that a scheduled bank has to be mandatorily deposited with RBI.
2. Monitoring of key indicators such as Gross Domestic Product (GDP) and Inflation
3. Issuing licenses to banks
4. Risk Management, Audit and Inspection of Banks
5. Controlling Foreign Exchange
Now let’s look at some of highlights of journey of Dr. Rajan during his tenure as RBI Governor :
1. Easing Inflation
As we discussed above that benchmark to assess inflation was changed to CPI from Wholesale Price Index (WPI). At the end of October, 2013 CPI was at 10.62% reaching a high of 10.9% in November 2013. Through strategic reforms over the years and a hawkeye to ease inflation we saw it eased to 5.77% in June 2016. RBI’s Inflation target is 4% with a band of plus / minus 2% which has been achieved to a great extent.
2. Improvement in Current Account Deficit (CAD)
India’s CAD had touched a peak of $21.77 billion a quarter before Dr. Rajan assumed office while it has significantly eased to $320 Million as of March 2016. Ofcourse apart from policies framed at the RBI even a steep decline in oil prices has had a major role in bringing India’s CAD down significantly.
3. Stabilising rupee against dollar
For a while, it had seemed as if rupee would almost slip to the levels of 85-90 while some financial pundits had even predicted 100. Then Dr. Rajan set up a scheme where banks were offered various incentives to offer dollar deposits to non-resident indians abroad which beefed up India’s foreign exchange reserves and restored confidence of investors in Indian markets.
Rupee hit a record low of 59.18 in May 2014 and till then has been on a gradual uptick but stabilised near 66-68 mark.
4. Growth in India’s stock market
India was considered as one of the ‘Fragile Five’ nations back in 2012-13. RBI then set up policies and effectively monitored them along with the help of Government, now India is one the strongest growing economies in the world. Both Domestic and Foreign Investor confidence has been restored in stock market too.
Taking benchmark as Nifty 50 index, it was 5471.80 as on August 2013 and reached a high of 9119.20 on March 2015 and now it is around 8575.30 as of August 2016.
5. Early detection and provisioning of stressed assets
When we bring something new to our house, we ensure that we make some space for it by cleaning out some of the old objects. Similarly, it was seen that a lot of loans were being distributed but the productivity of the country was not going up. In order to curb that and bring it to the notice of everyone, banks were directed to clean up their previous loans which had gone bad by detecting them and making a provision for them under stressed assets.
While the numbers for stressed assets with the banks has risen from approximately Rs. 2 lakh crores to Rs. 4.5 lakh crores which has added to worries of financial health of Indian banks especially Public Sector Banks.
6. Easy Banking
During his tenure, RBI came up with a number of reforms which included easier Know-Your-Customer (KYC) norms to check dubious accounts. Additionally, many payment banks were given licences which will increase the adoption of e-payments and keep a strong check on fake currency in circulation. Even Non-Banking Financial Companies (NBFC) were given licences to operate in semi-urban and rural parts of India where it was not feasible for bigger banks to operate, this added to easier availability of credit and a boost in productivity of those regions.
Apart from this, an incident happened at the RBI which gave a new name to Dr. Raghuram Rajan as ‘Rockstar Central Banker.’
A Class 5th student, wrote to Dr. Rajan that she would like to help the RBI with $ 20 as she overheard her parents discussing how weak the Indian economy was. Dr. Rajan was quick to return the letter with an invitation at RBI Headquarters. You may read the complete story.
With the reforms in place and a positive demographic situation in India, one would have expected for Dr. Rajan to continue in his current role and add immense value. Certainly, at this juncture of the economy where ground work is being done effectively for higher growth in coming years to come, Dr. Rajan is certainly an economist that India deserves!