Brief look: Performance of RBI governor Raghuram Rajan
According to the latest news, Mr. Rajan (RBI Governor) has decided that he will return to his academic study at the University of Chicago after his term comes to an end in September 2016. This news has come amidst the Brexit referendum (to be held in next few days) and the Fed rate hike on the charts.
Here is a quick look at Raghuram Rajan’s performance.
On 4th September 2013, the Reserve Bank of India (RBI) received its new governor in the form of Rajhuram Rajan (with lots of credentials) who succeeded D Subbarao. The reputed IMF (International monetary fund) advisor, who predicted the 2008 financial crisis was extremely sound in financial knowledge and academics. He was appointed amidst unprecedented macro-economic challenges, most visible in the rupee, which had lost over 12 percent since the beginning of the fiscal year 2013-2014. Amidst external sector risks, the domestic economy was facing a widening current account deficit, high consumer price inflation and slowing growth. The Indian rupee was nose diving, the forex reserves of the country were going down, growth was nearly stagnant. So what did the RBI governor did to bring the Indian growth story back. Here are the insights..
Amidst external sector risks, the domestic economy was facing a widening current account deficit, high consumer price inflation and slowing growth. The Indian rupee was nose diving, the forex reserves of the country were going down, growth was nearly stagnant.
Stabilizing the slipping Rupee- When Raghuram Rajan took over as RBI governor, the rupee was going down the hill. There were predictions that it may even cross Rs 70 vs 1 USD. But look at the situation, the rupee has been trading in the range of Rs 67-69 vs 1 USD which is a result of various banking reforms that he undertook. He promised on day one that he will restore the faith of foreign investors and he has been successful in doing so. The Rupee was the best performing currency in September 2013, the month when Raghuram Rajan joined.
One of the most significant reforms that the governor was successful in implementing is the Marginal Cost of Lending Rate (MCLR), as the constant decrease in the repo rate by the central banks was not fully passed on to the customers. This introduction to the marginal based lending rate has helped the customers who are the most important concern of the bank and the government. Another reform introduced by him during tenure is the tackling of the issues of Non-performing assets (NPAs) which has been the nightmare of the banks for quite a long time but also has made him un-popular among the bankers due to the stress faced by them on their balance sheets.
Rajhuram Rajan has come out and openly discussed and has not run away in reforming the Indian Banking System which could otherwise become a major concern for a crisis and slowdown in the future years to come had it not been tackled today.
On his first day at work, he announced several measures to liberalize the Indian banking system. Rajan introduced a changed banking license regime with payments and small finance banks. These models will enable financial inclusion and have the potential to change India’s banking landscape. RBI is also working on “on tap” banking licenses.
He was also the first person to publicly suggest that India should stick to its fiscal deficit target, at a time when there was a growing news to increase spending and slip on the fiscal deficit target. The advice that finance ministry clearly took very seriously and managed to win the confidence of investors across the world.
The most important change that Rajan administered as the RBI’s governor was to effect a swift transition from being a central bank that loosely targeted both GDP growth and WPI inflation to one that is now only focused on targeting CPI inflation. Shifting to inflation targeting with the CPI inflation (rather than WPI) as the nominal anchor has been one of the most significant reforms in the history of India’s central banking.
He then administered repo rate hikes of 75 bps over the first 12 months of his tenure and CPI inflation fell from the 22 month high of 11.5% in November 2013 to 3.3% in November 2014. From January 2015 till date, Rajan then cut rates cumulatively by 150 bps as inflation began to tend towards to reach 5%. As of now, the inflation is very much in control.
The above performance of the maestro who once said “My name is Raghuram Rajan I am what I am” clearly slows that how dedicated a person can be while on nation’s duty. His performance and the growth trajectory of the country can be perfectly aligned and should renew his term as the governor of RBI.
The sudden exit of Mr Rajan has come as a shock to the money market and the primary markets. Now, the government has a task to fill the boots of highly appreciated man and also regain the trust of the foreign investors in order to make India a hub of investment. In the list, there are names like UK Sinha (Sebi Chairman), Arundhati Bhattacharya (MD of State Bank of India) along with others. How things shape up when Raghuram is no longer RBI governor- only time will tell !
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