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Mint Road's loss is Chicago's gain

June 19, 2016 12:44 IST

This is the first time in the RBI’s history that a governor is leaving without willing to renew his contract

Barely a few days after expressing his interest to go back to academia in the long term, Raghuram Rajan has walked the talk.  Putting an end to all the speculation about his continuance in the central bank, the Reserve Bank of India (RBI) Governor on Saturday said he would not seek an extension of his three-year that ends on September 4, 2016.

Instead, he said in a letter to RBI employees, that he would go back to his ultimate home in the “realm of ideas” at the University of Chicago, but would be available to serve his country when needed.

In a subtle hint that all was not well, Rajan said there was still some unfinished agenda and he was open to “seeing these developments through,” but he decided to step down after “consultation with the government” and after “due reflection”.

“The approaching end of my three-year term, and of my leave at the University of Chicago, was therefore a good time to reflect on how much we had accomplished,” Rajan wrote in a surprise communication, which the central bank put on its website.

This is the first time in the RBI’s history that a governor is leaving without willing to renew his contract.

Finance Minister Arun Jaitley reacted to Rajan’s resignation on twitter, stating the government “appreciates the good work done by him (Rajan) and respects his decision. A decision on his successor would be announced shortly,” Jaitley tweeted.

Others were effusive in their praise.

“Dr Rajan is a person of very high calibre, who has built ably on the reputation of our Central Bank and given it a very large measure of credibility,” said State Bank of India Chairman Arundhati Bhattacharya.

Mahindra Group Chairman Anand Mahindra said Rajan greatly enhanced the credibility and bankability of India and he hoped that his successor would continue and enhance the great work.

HDFC chairman Deepak Parekh said: “It’s a pity to lose him. I’m wondering what has precipitated this action by the governor.”

Speculations on Rajan’s successor have been going on for some time and quite a few are betting on Bhattacharya and economic affairs secretary Shaktikanta Das.

Rajan’s achievements as RBI governor in the last three years are many, the most important being bringing stability to the currency, reining in a runaway inflation and bringing more credibility to the central bank’s monetary policy, at a time when India was counted among one of the ‘Fragile Five’ nations.

Rajan took over as the 23rd governor of the central bank at a time when the country was facing a currency crisis of sorts with the rupee falling sharply to record lows. On August 28, 2013, the local currency fell to its record low of 68.87 a dollar. Rajan took charge of the bank and boldly initiated a number of measures, including stabilising the currency and fixing the bad assets problems of India’s public sector banks.

Steps taken by Rajan, including introducing a new deposit scheme for non-resident Indians in the form of FCNR (foreign currency non-resident) bonds, stabilised the rupee and zoomed it back to a narrow band of Rs 60-62 a dollar.

The rupee remained in the band for a good time and showed all signs of getting strengthened fast. But the central bank took advantage of the strength in rupee to accumulate dollars to shore up India’s falling forex reserves too.

The rupee stabilised, depreciating only gradually to maintain export competitiveness, reserves reached record levels of $360 billion plus in three years, from about $270 billion at the start of September 2013, and India was firmly established as an “island of stability in turbulent seas”.

However, all these achievements did not cut ice with some vehement critics of Rajan in the government, the most vocal being Rajya Sabha member Subramanian Swamy, who openly called for the governor to step down a number of occasions, and alleged that the FCNR (B) deposits worth $35 billion that was raised was a “ticking time bomb”, which, Rajan said in his letter to the staff would largely be a “largely be a non-event”, if managed well.

“Colleagues, we have worked with the government over the last three years to create a platform of macroeconomic and institutional stability. I am sure the work we have done will enable us to ride out imminent sources of market volatility like the threat of Brexit,” Rajan said in his letter, adding “we have made adequate preparations for the repayment of Foreign Currency Non-Resident (B) deposits and their outflow, managed properly, should largely be a non-event. Morale at the Bank is high because of your accomplishments.”

Listing his unfinished agenda, Rajan said while inflation, below six per cent, was in the target zone, the monetary policy committee that would set the policy was yet to be formed.

The bank clean-up initiated under the Asset Quality Review, having already brought more credibility to bank balance sheets, was still ongoing. International developments like Britain’s potential exit from euro zone and its resultant global economic volatility also posed risks in the short-term.

“I am confident my successor will take us to new heights with your help,” Rajan said.

Economits said with Rajan’s departure, the future of the monetary policy committee was uncertain.

The committee would be responsible for bringing down inflation within four per cent with a band of two per cent. Inflation has started inching up, thanks to the rise in food and commodity prices and with Rajan’s departure, the committee may find it hard to effectively hold on its ground to keep rates unchanged.

As proposed by the government, the committee will have now equal members from the government and the central bank with the governor having the casting vote. According to the mandate of the committee, if it fails to meet its objective for thrice in a row, it will have to abandon the framework altogether.

The busy road

Raghuram Rajan’s three years at the RBI have been eventful — a look back

NPA management

  • Released Framework for Revitalising Distressed Assets in the Economy
  • Launched the 5/25 scheme that allowed banks to reset and roll over project loans after every five years, match the repayment schedule with the cash flow of the company\
  • Ended forbearance in April 2015 and started the Asset Quality Review to clean up banks’ balance sheets; tightened wilful defaulter norms
  • Introduced Strategic Debt Restructuring (SDR) Scheme, which allows banks to convert a defaulting company’s debt into equity and take majority control
  • Gave banks a deadline to clean their balance sheets by FY 17 as a result of which lenders reported huge losses and spike in bad debts in two subsequent quarters
  • Introduced a scheme for sustainable structuring of stressed assets, which allows banks to do deep restructuring of stressed projects without changing the management

Rupee crisis

  • Introduced a fixed rate swap for FCNR (B) deposits to attract NRI deposits that shored up the currency
  • The FCNR (B) deposits dollar fund also boosted foreign exchange reserves

Inflation management

  • Set up a panel under Urjit Patel for inflation targeting

Rate cuts and transmission

  • Introduced the Marginal Cost of Fund based Lending rate for pricing of loans to ensure faster transmission

New banks

  • Granted universal banking licence to Bandhan and IDFC, introduced small finance banks and payments banks; announced on-tap licensing
Anup Roy in Mumbai
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