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5/25/2016 Ra Ra About Raghuram Rajan? The Quint
http://www.thequint.com/business/2016/05/21/raraaboutraghuramrajan 1/12
Raghuram Rajan, Governor, Reserve Bank of India. (Photo: Reuters)
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Ra Ra About Raghuram Rajan?
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5/25/2016 Ra Ra About Raghuram Rajan? The Quint
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Alex Mathew, BloombergQuintMay 21, 2016, 8:37 pm
1
Mumbai Singapore
“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?
- Ajay Shah, Economist and Researcher, National Institute of Public
Finan
I’m disappointed.
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
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Mumbai Singapore
“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 䂧怀nancial 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
in婅ation 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.
5/25/2016 Ra Ra About Raghuram Rajan? The Quint
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The Rate Debate
Finance Minister Arun Jaitley (L) and RBI Governor Raghuram Rajan. (Photo: Reuters)
5/25/2016 Ra Ra About Raghuram Rajan? The Quint
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Rajan has been criticised for both sharply raising rates when he entered o䛻諫ce in order to
combat in婅ation, and for the pace at which he has reduced rates once in婅ation was brought
under control. The economists we spoke to broadly felt that Rajan’s decisions were justi㞤첾ed.
Rajan, at his very 㞤첾rst 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
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- Jehangir Aziz, Chief Asia Economist, JP Morgan
be gently reminded that not too long ago, in 2013, India was facing
a near external crisis because of macroeconomic instability despite
higher growth.
- Ashima Goyal, Professor, IGIDR
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
The Campaign Against Bad Loans
The ripple e旗赒ects 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 o旗赒 in October last year was Rajan’s move to get banks to identify bad
loans that were previously hidden.
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- Ajit Ranade, Chief Economic Advisor, Aditya Birla Group
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.
- Madan Sabnavis, Chief Economist, Care Ratings
One could have done things di쁱缠erently in terms of NPA recognition.
It could have been spread over a period of time to avoid a panic
situation.
Transparency, Predictability of Monetary PolicyMeasures
This was one of the 㞤첾rst objectives Rajan outlined in his maiden speech. He stressed the
importance of e旗赒ective communication.
Unlike other modern central banks, RBI uses multiple instruments
for doing monetary policy. Now there is a statement coming out
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- Ajay Shah, Researcher, NIPFP
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.
- Madan Sabnavis, Chief Economist, Care Ratings
Things have not been predictable as policy actions have been
di쁱缠erent to unchanged underlying conditions like in쀺㏀ation,
in쀺㏀ation 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.
- Devendra Kumar Pant, Chief Economist, India Ratings & Research
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.
Deepening the Bond Market
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In his address on 4 September 2013, Rajan said, “For our 㞤첾nancial markets to play their
necessary roles of providing risk, absorbing long term 㞤첾nance, and of generating information
about investment opportunities, they have to have depth.” This is a goal successive RBI
governors have worked towards.
- Jehangir Aziz, Chief Asia Economist, JP Morgan
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.
- Devendra Kumar Pant, Chief Economist, India Ratings & Research
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 di䂽俿cult 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.
Financial Inclusion to Spur Rural Growth
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11 payments banks, 10 small 㞤첾nance banks, and 2 fully 婅edged 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 e旗赒orts to widen the
ambit of the Indian banking system, thereby improving the rate of 㞤첾nancial inclusion.
- Devendra Kumar Pant, Chief Economist, India Ratings & Research
Good performance. The idea of di쁱缠erential bank licences is good,
but chances of ‘on-tap’ licencing in the near future appears low.
- Jehangir Aziz, Chief Asia Economist, JP Morgan
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.
American economist Edgar Fiedler once said, “Ask 㞤첾ve economists, and you’ll get 㞤첾ve di旗赒erent
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 satis㞤첾ed
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.
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Raghuram Rajan RBI Governor
May 23, 2016, 12:43 pmMet Narendra
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Reading the comments made by the economists, I am amazed at the depth of their knowledge (or lack thereof). Notone has commented on the adverse impact of undertaking a short term expansion in forex reserves using borrowedfunds. This is in reference to the FCNR scheme expansion done by the RBI for which we will pay in the next 6months.
5/25/2016 Ra Ra About Raghuram Rajan? The Quint
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