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Raghuram Rajan at the World Economic Outlook press
conference.WEO Press Conference, Washington DC, IMF Headquarters - photo courtesy
- Wikipedia
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Raghuram
Rajan completes two years as the RBI governor on 04th of September 2015. Rajan
is perhaps the only RBI governor who came with international experiences and
international qualifications. He has garnered accolades from all quarters.
The
famous Swiss investor Marc Feber described him like this "Mr. Raghuram
Rajan is an outstanding man who understands central banking. He is probably
only one in the world among the crowds of professors at central banks that
actually has a good grip on monetary policies and what you can or cannot
achieve with them."
As an
ardent follower of Mr. Raghuram Rajan, I think this is the best time to discuss
the various policies adopted by RBI under his leadership during the last two
years.
Let’s
explore this discussion in the following dimensions
1) What
was the prevailing macroeconomic environment when Raghuram Rajan took charge as
the central bank governor?
2) What
has been changed in the last two years?
3) What
are the contributions of RBI and Raghuram Rajan towards this change and what
can we expect from him in the coming years.
The
year 2013 was not a good year for our nation. We were exposed to a lot of
vulnerabilities such as political logjam, skyrocketing retail inflation, decade
low GDP growth, declining foreign investments, alarming current account
deficit, declining savings rate, over investments of people in physical assets
such as gold, pessimism in the stock market, declining foreign exchange
reserves etc. The decision from the US Federal Reserve to taper their bond
buying program, the so called QE3 worked as a strong catalyst to the already
vulnerable macro economic situation and the rupee witnessed a free fall,
depreciated sharply from 60 odd levels to a record low of below 68 levels as a
huge amount of flight of capital materialized.
Rajan
took charge as the 23rd and the youngest governor of RBI in this challenging
situation.
I still
remember after the announcement of his appointment as the new RBI governor,
Rajan said on August 06 2013 that "We do not have a magic wand to make the
problems disappear instantaneously, but I have absolutely no doubt we will deal
with them" following that in his first speech as the central bank governor
he told that his emphasis will be mainly on ensuring sustainability and
predictability, drafting the monetary policy by balancing the act between
inflation and growth, maintaining exchange rate stability and achieving
inclusive development.
All his
work in these two years was actually consistent with the statements that he has
made in the first speech. Let’s consider the various dimensions one by one
Monetary
policy and inflation - Corporate and markets were expecting that the newly
appointed governor will cut the policy rates aggressively in order to promote
growth and to revive the investment cycle. But in his first monetary policy
review, he raised the repo rates from 7.25 percent to 7.5. In the subsequent
monetary reviews he again increased it to 7.75 and eventually to 8 percent.
This was really a shock to the market. But his intentions were clear. He wanted
the retail inflation to come down to reasonable levels because he was certain
that in the medium to long run, sustainable growth is possible only if
inflation stays at a lower level. He started to reduce the interest rates in January
2015 only after getting clear indication that the CPI inflation came down to
controllable levels.
Regulation
of public sector banks & tackling the NPA problems - RBI has setup PJ Nayak
committee in order to review the governance in bank boards and the committee
has recommended several plan of actions such as reducing the government stake
in public sector banks to 51 percent, setting up of Bank Investment Company
(BIC) and providing BIC the autonomy and voting powers to appoint board of
directors in PSBs etc. I believe that these steps if implemented correctly will
help to resolve the current operational ineffectiveness of public sector banks
and will help them to compete at par with their private sector peers thereby
reducing the non performing assets issue. Adding to that RBI has set up CRILIC
(Central Repository of Information on Large Credits) database to collect, store
and disseminate credit data to lenders in order to bring more transparency
towards corporate lending. It is true that it may take time to percolate and
show the progress. But these steps can be seen as strong steps towards building
a transparent and competitive PSB regime.
Financial
inclusion - Financial inclusion can have large and significant effects on our
economy considering the fact that almost 50 percent of our population does not
have access to formal banking system. Unavailability of formal
banking systems make them vulnerable to informal alternatives. The
principal approval for 2 banks including IDFC and Bandhan finance with a strict
rural banking focus as per the report from Bimal Jalan committee and giving in
principle approval for 11 payments banks as per the recommendations from
Nachiket Mor committee can be seen as the bold steps towards achieving financial
inclusion and thereby achieving inclusive development.
Exchange
rate stability and foreign exchange reserve - Rupee became the best performing Asia
Pacific currency in 2014 after experiencing the free-fall against
dollar in 2013. Our foreign exchange reserves also witnessed dramatic
improvements in the last two years and it has been increased to 330 billion
from the 250 billion levels. In a nutshell we are very well prepared to face
any type of external shocks that may arise from the global front.
In the
last two years, a lot of things have changed. We are in a much stable and
better position compared to 2013. Our economy is in a very good shape and the
GDP growth rate expected to be in the 7.5 to 8 percent as per analysis from
various agencies, we have a stable government at the centre, government is focusing
on achieving fiscal prudence and trying to reduce the fiscal deficit by 3
percent of GDP by FY18. Our inflation dramatically came down to manageable
levels and the current account deficit is in manageable levels, thanks to the
falling crude oil prices and commodity prices. Stock markets delivered a
stellar performance in the last 2 years giving handful of returns to investors.
Investor sentiments have been improved dramatically and we are witnessing good
amount of foreign capital inflows. We have strong foreign exchange reserves
compared to the 2013 levels and the rupee is more stable compared to other
emerging markets currencies. We are better prepared to absorb the unanticipated
shocks that may arise from the global economic front.
Of
course all the improvements that we are witnessing are the result of the
collective efforts made by both RBI and government along with other agencies.
Considering all the initiatives and policies taken by RBI and governor we can
definitely say that the role of RBI was critical and vital in turning around
the macro economic situation of our nation in the last two years.
What
can we expect from RBI in the coming days? With the falling commodity prices
and retail inflation, there is a lot of room for the further rate cuts in the
near future. At the same time transmission of the rate cuts is also very
important. Even though RBI has cut repo rates by 75 bps, banks were reluctant
to reduce the lending rates in response to that. This is a cause of concern. I
think RBI should work with banks to tackle this issue.
When
can a nation achieve its optimal growth potential? It’s when the fiscal policy
as well as the monetary policy goes hand in hand. Till now the measures taken
by RBI towards achieving the long term monetary stability and predictability is
laudable. I'm sure that great minds like Raghuram Rajan can steer our nation to
greater heights.
Views are personal J
Comments always welcome
References
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