Ra Ra About Raghuram Rajan?

Has RBI governor Raghuram Rajan done enough for him to get a term extension in September?

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

“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?

I’m disappointed.

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

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 “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 financial 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 inflation 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.

The Rate Debate

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

Rajan has been criticised for both sharply raising rates when he entered office in order to combat inflation, and for the pace at which he has reduced rates once inflation was brought under control. The economists we spoke to broadly felt that Rajan’s decisions were justified.

Rajan, at his very first 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 be gently reminded that not too long ago, in 2013, India was facing a near external crisis because of macroeconomic instability despite higher growth.

Jehangir Aziz, Chief Asia Economist, JP Morgan

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

Ashima Goyal, Professor, IGIDR

The Campaign Against Bad Loans

The ripple effects 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 off in October last year was Rajan’s move to get banks to identify bad loans that were previously hidden.

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. 

Ajit Ranade, Chief Economic Advisor, Aditya Birla Group

One could have done things differently in terms of NPA recognition. It could have been spread over a period of time to avoid a panic situation.  

Madan Sabnavis, Chief Economist, Care Ratings

Transparency, Predictability of Monetary Policy Measures

This was one of the first objectives Rajan outlined in his maiden speech. He stressed the importance of effective communication.

Unlike other modern central banks, RBI uses multiple instruments for doing monetary policy. Now there is a statement coming out 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.

Ajay Shah, Researcher, NIPFP

Things have not been predictable as policy actions have been different to unchanged underlying conditions like inflation, inflation 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.  

Madan Sabnavis, Chief Economist, Care Ratings

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. 

Devendra Kumar Pant, Chief Economist, India Ratings & Research

Deepening the Bond Market

In his address on 4 September 2013, Rajan said, “For our financial markets to play their necessary roles of providing risk, absorbing long term finance, and of generating information about investment opportunities, they have to have depth.” This is a goal successive RBI governors have worked towards.

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. 

Jehangir Aziz, Chief Asia Economist, JP Morgan

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 difficult 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. 

Devendra Kumar Pant, Chief Economist, India Ratings & Research

Financial Inclusion to Spur Rural Growth

11 payments banks, 10 small finance banks, and 2 fully fledged 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 efforts to widen the ambit of the Indian banking system, thereby improving the rate of financial inclusion.

Good performance. The idea of differential bank licences is good, but chances of ‘on-tap’ licencing in the near future appears low.

Devendra Kumar Pant, Chief Economist, India Ratings & Research

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. 

Jehangir Aziz, Chief Asia Economist, JP Morgan

American economist Edgar Fiedler once said, “Ask five economists, and you’ll get five different 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 satisfied 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.