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Rajan Will Not Continue, But Let Us Believe The Next Person Will Not Be A Doofus


Raghuram Rajan’s term will not continue after September 4, 2016 because he doesn’t want to. In his letter to RBI staff, he writes: 

I am an academic and I have always made it clear that my ultimate home is in the realm of ideas. 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. While all of what we laid out on that first day is done, two subsequent developments are yet to be completed. Inflation is in the target zone, but the monetary policy committee that will set policy has yet to be formed. Moreover, the bank clean up initiated under the Asset Quality Review, having already brought more credibility to bank balance sheets, is still ongoing. International developments also pose some risks in the short term.

While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016.  I will, of course, always be available to serve my country when needed.

This is currently doing a political twist everywhere – that he’s indicated he would have liked to continue, but after speaking to the government, he decided to head back. While he’s a great person to head the RBI, it’s a decision that has to be taken – after all, he is a nominee of the government and at some point, the government has to decide who runs the post. 

Rajan will be missed. His policies were way more clear than the attempts earlier, and his “fight” with banks on NPAs and regulations are legendary. He’s set up the fort for new banks – and from payment banks to small banks, we should see some in action soon. The BBPS – the India wide Bill Payment System – will change what customers can use to pay bills in a seamless way. The TReDS – a system that helps all companies factor their loans by discounting it with banks – will reduce bank influence in bill discounting, currently a huge pain  for discounters. And it will increase transparency of NPAs (since discounting increases the debt of customer companies) across the banking system.

The Asset quality review has ensured banks have been forced to recognize NPAs. And this will eventually help banks, though not the silly government banks that don’t want to recover NPAs under any circumstances (or write them off). 

Money supply changes were also moderated. Instead of senselessly buying USD and printing rupees, the Rajan led RBI cut down on rupee bonds held by the RBI in order to restrain monetary supply growth. Unfortunately this doctrine has been given up in the last few months, but the money supply growth control has been useful in keeping secondary level inflation lower. 

When Rajan came in, the rupee was crashing and he offset that by taking big chunks of NRI deposits, which have to be returned later this year. This is a large amount but apparently they have a game plan in place to return it peacefully. This will, in our opinion, be a problem – because no matter how you play it, the rupee is going to hurt again, especially if there is a global issue in Europe or such, simultaneously. 


But He’s Not The Only SuperHero

The RBI has had able leaders before and the next one will be as able. None of Rajan’s decisions were because of Rajan alone – he would have had a lot of support internally within the other top members of the RBI. If they value the institution, the members will continue the good work, and perhaps add to more pieces in there.

There’s things to be done. The rupee must be freed. The new banks must be encouraged. The NPCI’s move to UPI and a much cheaper payment interface is required. Inflation isn’t behind us yet either and we have to ensure rates are not reduced suddenly before we’ve broken the back of inflation.

There will be someone else to do this. Unlike the censor board or such, the RBI cannot afford to be a joke; and anyone with a brain cell understands this. India’s mature enough not to risk the likes of a Subramaniam Swamy at the RBI helm. Or, at least that’s what I hope.

It would mean great things for yellow journalism if the next RBI governor was a cartoon character, but I refuse to believe India is so immature that it would allow such a thing. There are smart, efficient people who are capable and won’t give in to government pressure, and this is the likely troop from which the next governor comes. 

Will markets tank?

We don’t think so, or it won’t last too long. Because it doesn’t really change anything and we don’t know who’s next. When we do know that, markets will show their real reaction. That will still take till September to play out.

When Rajan was appointed in 2013, the markets continued to crack a few more days, and then they reacted upwards on his first speech. 

Every good central banker has to go sometime. Volcker left the US Fed in 1987, after  years of bitter battles with the politicians who hated the fact that he pushed the US to two recessions. But to Reagan’s credit, he did reappoint him even through he was a Carter appointee – and it was truly when the US was truly over the inflation peak.  

Rajan isn’t a Volcker – inflation isn’t yet behind us and we continue to see money supply expand. He has been fortunate too, along with Modi, to have seen a massive crude collapse and thus a big drop in primary inflation. But he’s done his layer of good, and no matter what the political discourse, his work will be carried forward. 

Here’s wishing him the best, and to the next person at the helm as well. 

  • raj says:

    waah deepak bhai chaa gaye aap.
    You seem to be perfect choice of the next who??

  • Vamsy says:

    Thanks for the wonderful obituary. Now, come on, he works for IMF and WB. I have no good opinion of D Subba Rao, but the way the events transpired Rajan and how he was hurriedly made him RBI Gov looks suspicious.

  • Anonymous says:

    Notwithstanding the furore about Rajan’s second-term (presume another 3years?) – has there been any governor (in recent times – say last 16 years) who served 2 terms?

  • rkg says:

    1997 and 2008 crises were far too severe and we had seen them being handled quite well – one can always criticise with the benefit of hindsight. Rajan too had his highpoints – what is not acceptable is the manner in which he chose to convey his decision. Its become a Page3 moment. There is no dearth of talent. Markets didnt sell off or crash when Volcker or Alan Greenspan were leaving – so we hope we have normal markets in the coming days…

  • Raghav Rajaraman says:

    Many people seem to be looking at the issue as an institution vs individuals issue, a common comment being institutions are “larger” than individuals, thus somehow justifying the letting go of Raghuram Rajan.
    But to create an institution, you need to “institutionalize” your ideas, so that they become time and space invariant. It’s very few smart individuals who strengthen institutions so that they become long lasting. In that sense, those individuals come first, only then can come the long lasting institutions.
    Look at the main political parties themselves. The BJP and the Congress. Have they institutionalized their ideas? Or do they change when a new guy comes at the top? Congress party was born from an organization that fought for independence, and BJP used to be called the “party with a difference”: a party with move civil and disciplined behavior. But they have failed to retain their good ideas, because they failed to institutionalize them, they are being driven by whims of whoever is at the top.
    You need constant attention to strengthen an institution, you need a critical mass that reinforces those ideas every now and then. The idea of a central bank in India needs this re-inforcement. RBI is unfortunately not a strong institution in the sense that the idea of what it stands for (independent regulator and monetary policy overseer) is not as strong as it should be.
    One very ominous outcome of the goverment’s action to let go Rajan is actually about this “institutionalizing”. Rajan’s monetary policies are probably good for some, and bad for some. However, his main contribution was his many attempts to “institutionalize” good ideas. Take the example of creating the monetary policy committee. It would have made Rajan himself less relevant as the governer in setting the interest rates. It’s difficult to find a replacement of this quality.
    So it’s either the government’s intention to delay these proposals, or it will be an unintentional outcome, but the result is not good unless the next guy also tries hard to strengthen the institution: ie an entity that oversees monetary policy and bank regulation, that is independent of the government.
    So it’s not about whether we will find a competent monetary expert to replace Rajan, it’s whether we will find another person who will reinforce the weak institution at their own individual expense. There are not many of these people. So I doubt it.

  • Sanjeev B says:

    Well said Raghav, institutionalizing is so important. That is really what drives a country and a people. There are few who have the vision to create institutional changes, and fewer still who are fortunate to see them embraced within the system.