A worthy Governor of RBI

A worthy Governor of RBI

FPJ BureauUpdated: Thursday, May 30, 2019, 01:26 PM IST
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Reserve Bank of India Governor Raghuram Rajan is candid enough to admit that he wanted a second term, but on being denied one he is set to go back to the academia when he demits office early next month. That is the graceful way to go.

Regardless of the avoidable public controversy, the Government did not deem it fit to re-hire him for another three- year term. No, he is not fired. It is merely that the NDA Government would like to have its own candidate in Mint Street.

NDA   persisted with Rajan who was an appointee of the previous government. Seen from such a perspective, there ought to be no controversy over the denial of the second term to Rajan. Undoubtedly he was an excellent governor who did a good job stabilising the currency from the time he took over in 2013 when the rupee had come under severe strain.

 Rajan performed creditably on inflation as well. At the time of his leaving, consumer inflation, especially prices of essential food articles, might be rising a bit but overall Rajan did keep inflation under control. Wholesale price index was in fact subdued for much of the time Rajan was at the helm of the central bank.

Rajan can have the satisfaction that he succeeded in both arresting the slide of the rupee and in containing inflation. As for growth, well, that is not entirely the function of the central bank, though governments, all governments, tend to shift blame for the lack of growth by pointing the finger at the high interest rates. Because there is a direct co-relation between the prime lending rate and inflation, central banks use monetary policy as a major tool for containing inflation.

For boosting growth, however, the bank rate is one of the many factors. Therefore, it is not correct to hold central bank responsible for poor growth. Rajan’s predecessor, D. Subbarao, has had the courage to record it for posterity how Finance Minister P. Chidambaram made his life difficult.

 In his recently released autobiography, Subbarao has provided graphic account of Chidambaram’s arrogant and churlish conduct merely because he prioritised inflation over growth and would not cut the interest rates as sought by the then finance minister.

In sharp contrast, Rajan had had a smooth relationship with Finance Minister Arun Jaitley, despite the ill-mannered intrusion made by the maverick Subaramanian Swamy.  Whether or not it was a good thing, there is no denying that Rajan raised the public profile of RBI Governor.

Before him, RBI Governors were barely seen or heard in public. But Rajan enjoyed his celebrity status, with an airy-fairy commentator even calling him a rock star governor. But, without doubt, the lasting contribution of Rajan would be the institutionalisation of the monetary policy framework. The RBI will now have the uppermost task of keeping consumer price inflation within a set band of four percent, minus or plus two percent. Should it vary sharply from the prescribed band it will have to provide reasons for the slip.

 Further, instead of the largely opaque process of determining policy rates, which at present allows the RBI Governor a greater say, Rajan has had the foresight to make the process more representative and participatory. The proposed monetary policy committee which will also have representatives of the Finance Ministry will determine policy rates. The committee will further reduce causes for tension between Mint Street and North Block.

Meanwhile, Rajan’s tenure will also be known for the way the banks were made to clean their books, recover long overdue money from big borrowers and for unhesitatingly launching criminal proceedings against willful defaulters.

 Given that the banking sector was groaning under the weight of huge non-performing assets, largely due to reckless lending during the previous UPA decade, his stern action did put up the backs of the moneyed class, which had all along fattened itself on bank funds without ever bothering to repay. It did not make Rajan the darling of the corporate world.

 In fact, Subbarao has candidly admitted that one of his regrets was the lack of oversight on big lending and the absence of a concerted effort to recover dues from big borrowers. With full backing of the Government, RBI under Rajan has pushed the lending banks to recover their long-standing dues at the pain of even ejection of existing managements.

This is an extraordinary achievement in a country where collusive lending and default have been the norm rather than an exception. That ever-greening of loans as a stratagem to hoodwink the system has virtually ended. There is a lot that Rajan achieved, though he did attract adverse notice for often commenting on subjects which were not part of his remit.

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