One year on, RBI Governor Rajan going strong

On assuming charge as Governor of the Reserve Bank of India on September 4, 2013, Raghuram Rajan said: “I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism.” And buttressed his statement with a line from Rudyard Kipling’s poem ‘If’: “If you can trust yourself when all men doubt you, But make allowance for their doubting too..”

Well aware of the pitfalls ahead, he said that any central bank governor probably starts at the height of their popularity and added, “Some of the actions I take will not be popular. The Governorship of the central bank is not meant to win one votes or Facebook ‘likes’.”

On Wednesday, when Rajan completes a year in office, even critics will acknowledge that he has steered monetary policy, development and regulation of financial markets, as well as regulation and supervision of banks and non-banking finance companies, with aplomb. If his baptism was by the fire of a crisis of confidence, he came through it well. The 23rd RBI Governor took charge in the backdrop of the rupee coming under severe pressure (it touched an all-time low of 68.85 to the dollar on August 28, 2013) after the US Federal Reserve signalled in May 2013 that it would gradually scale back its purchases of securities which, in turn, led to outflow of money from emerging economies to the US.

Rajan took up head on the challenge of propping up the weak domestic currency by announcing that the central bank would offer a forex swap window (September 4 to November 30, 2013) for banks’ overseas borrowing and non-resident deposit funds, resulting in capital inflows of over $34 billion.

The opening of the forex swap windows, coupled with gold import curbs, helped the rupee stabilise to 60.50 now.

Coming to monetary policy, Rajan has emphasised that it is important to break the spiral of rising price pressures and inflation expectations in order to curb the erosion of financial savings and strengthen the foundations of growth. Despite the clamour among India Inc and Government functionaries to cut interest rates, the Governor has stood his ground.

He raised policy rates (the interest rate at which RBI lends short-term money to banks) thrice — by 25 basis points each — to 8 per cent over the last year as he felt bringing down inflation would create the best conditions for sustainable growth.

Rajan has clearly outlined that the central bank remains committed to the disinflationary path of taking retail inflation to 8 per cent by January 2015 and 6 per cent by January 2016.

“We are not against growth but we do think that growth will be most benefited if we disinflate the economy and we don’t have to fight this fight again.

“Let’s fight the anti-inflation fight once and let’s win; that will create the best conditions for sustainable growth,” he told the media, after announcing the last monetary policy statement.

Meanwhile Rajan has not lost sight of the development measures that are part of the RBI’s remit. He has outlined five development pillars to improve the financial system: Clarifying and strengthening the monetary policy framework; strengthening banking structure through new entry, branch expansion, encouraging new varieties of banks, and moving foreign banks into better regulated organisational forms; broadening and deepening financial markets and increasing their liquidity and resilience so that they can help absorb the risks entailed in financing India’s growth; expanding access to finance for small and medium enterprises, the unorganised sector, the poor, and remote and underserved areas of the country through measures to foster financial inclusion; and improving the system’s ability to deal with corporate distress and financial institution distress by strengthening real and financial restructuring as well as debt recovery.

On each of these pillars, the RBI has made some headway. For example, it granted “in-principle” approval for banking licences to IDFC and Bandhan Financial Services in April. Going forward, the central bank intends to use the learning from this licensing exercise to revise the guidelines appropriately and move to give licences more regularly, that is, virtually “on tap”. It has also come up with draft guidelines for setting up differentiated banks, such as payments banks and small banks, to further financial inclusion.

Under the framework for revitalising distressed assets in the economy, the RBI set up the Central Repository of Information on Large Credits (CRILC) in April 2014 to collect, store and disseminate credit data to lenders. CRILC’s objective is to enable banks to take informed credit decisions and recognise asset quality problems early by reducing information asymmetry.

However, the utility of banks constituting a joint lenders forum for distressed borrowers engaged in any type of activity, with aggregate fund-based and non-fund based exposure of ₹100 crore and more remains to be seen.

When it comes to recovery of loans, Rajan has told bankers that company promoters do not have a divine right to stay in charge when they have badly mismanaged an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures.

Rajan, like his predecessor D Subbarao, pulled no punches when it came to expressing his views on the recommendations of the Financial Sector Legislative Reforms Commission.

In one of his speeches, the Governor said: “Not everything the regulator does can be proven in a court of law. Courts do not interfere in the specific decisions of a corporate board – using the business judgment rule, they do not second-guess business decisions, and only pull up boards when there is a violation of the legal process of arriving at a decision. In the same way, there is a range of regulatory decisions where regulatory judgment should not be second-guessed.”

One reading of the FSLRC, according to the Governor, is that almost everything the regulator does, not just the framing of regulation or the process by which decisions are reached but also the exercise of regulatory judgment as well as policy decisions, is to be subject to legal appeal. For that, it wants to create a Financial Sector Appellate Tribunal.

“The intent is to place more checks and balances on regulatory actions. Note that the process by which the regulator reached a decision, as well as the conformity of the decision with basic principles such as natural justice, can already be challenged through a writ petition in High Courts. Even now, some regulatory decisions can be appealed against with the Central Government. But how much checking and balancing is enough? Do we want even policy decisions to be appealable? Can legal oversight become excessive?” he questioned.

51-year old Rajan has two more years to go as RBI Governor, going by the tenure given to him last year. It is expected that the under his leadership, the central bank will become more dynamic, responding quickly to meet the needs of the emerging economy, which is seeing green shoots of recovery under the new Government.