Dr. Raghuram Rajan, the RBI governor, will address his last monetary policy review on the 9th of August 2016. Dr. Rajan became RBI governor in August 2013 and will not stand for a second term once his term ends this month. The fact that the government dithered on extending his term and did not fully come and support him on his performance when he was accused of failing the economy is speculated to be the reason for him announcing that he would not take up a second term, even if offered.
The government clearly seems to have got it wrong. The markets have given him thumbs up on his performance as the RBI governor since he took over from D. Subbarao at a time when India was facing a global sell off due to both global and domestic issues. Fed had started hinting at QE withdrawal and that prompted a strong sell off in global markets on risk aversion. India bore the brunt of the sell off at it was running a record high CAD, high Fiscal Deficit and high inflation. The INR fell to all time lows of Rs 68.80 to the USD.
The ten year government bond yield rose by 150bps from lows during that period on FII selling of Indian bonds. Sensex and Nifty too turned weak on global risk aversion.
Since the time Dr. Rajan came on to the hot seat, the markets have turned distinctly bullish. Ten year bond yield is down 150bps from highs, the INR is stronger and has not crossed the record low level over the last three years and Sensex and Nifty are up by 55%.
Dr. Rajan brought in the much needed global flavor to RBI. He shifted focus on inflation target from WPI to CPI, in line with most of the global countries. He was critical of the QE of global central banks and its repercussions on the EM world. He called in Dr. Urjit Patel as Deputy Governor and gave him the task of streamlining RBI’s monetary tools such as the LAF (Liquidity Adjustment Facility).
He had a clear path on policy, with inflation and the internal value of the INR being the primary targets. Policy rates were changed based on inflation expectations and the government was told firmly that as long as it keeps its twin deficits in check, inflation and rates would come down.
Dr.Rajan also addressed the banks’ NPA issues firmly. Banks were dragging their feet on NPA recognition and that was placing a problem for both markets as well as for policy transmission. He made banks forcefully address their NPA issues and recognize the problems for more transparency. The government could then take a clear step on recapitalizing the banks rather than stay in the dark for amount of recapitalizing required.
Obviously, Dr. Rajan got the goats of bankers who saw the value of their banks fall sharply, industrialists who owed money to the banks and the government that was keen on economic growth at all costs.
Luck also favours the brave and Dr. Rajan was lucky in achieving his inflation targets. CPI fell from over 10% levels to 5% levels during his term. Collapse in oil and commodity prices held bring down CPI but a lot still needs to be done to bring down elevated household inflation expectations.