Millennium Post

Final dance

Raghuram Rajan will hold his last monetary policy review as the Governor of the Reserve Bank of India today. His three-year term will come to an end on September 4, after announcing last month that he will not seek an extension. Economists across the board have predicted that Rajan is unlikely to introduce further cuts in the short-term lending rates due to stubbornly high food prices. In the event of his final policy review, it is time one looked back at what Rajan has brought to the table.

When he took office in 2013, Rajan had his task cut out: inflation was rising untamed and the rupee was in freefall. The retail inflation measured by the Consumer Price Index stood at 9.52 percent. Inflation has come down to 5.77 percent in June 2016. Aided by the RBI’s prudent monetary policy decisions, the drop in inflation has been largely down to favorable international factors like low crude oil prices. However, with the price of crude oil gradually surging, inflation is raising its ugly head again. This has been exacerbated by upward pressure from food inflation- recorded at 7.79 percent in June 2016. Therefore if Rajan decides to keep the rates unchanged, it will once again illustrate his penchant for caution in the face of misguided optimism. Last Friday, the government formally backed the inflation strategy of the Reserve Bank of India (RBI) by notifying a retail inflation target of 4 percent as an anchor for monetary policy. Reports indicate that this figure is consistent with the agreement reached between the Central bank and the government last year. Overall, the numbers suggest that Rajan has brought the government to introduce stability to India’s monetary policy. Nothing pinches the common man’s pocket more than inflation.  

On the issue of fighting inflation, Rajan has also championed the establishment of a monetary policy committee (MPC). Until this year, the short-term lending rate was decided solely by the governor in consultation with a technical advisory panel within the RBI. The MPC’s sole task will be to target inflation. It will be made up of three members from the RBI, including the governor, and three selected by the government. It will meet at least four times a year and will publicise its decisions after each meeting. The governor will chair the committee and his vote will act as a tie-breaker. Under Rajan, the RBI has admittedly shown a great deal of independence from political and corporate pressures. But a model where the RBI governor is the sole arbitrator of a nation’s monetary policy will not leave the institution in good health. Under the revised MPC, the RBI Governor will have to consult the committee before a final decision is taken on lending rates, leaving the institution in a better shape.

One of the other major tasks that Rajan has undertaken is the proposed clean-up of the banking sector initiated under the RBI’s Asset Quality Review, much to the chagrin of wasteful major corporate borrowers. To the uninitiated, the RBI’s asset quality review covered 36 banks (including all those in the public sector). The RBI’s latest Financial Stability Report is full of bad news. Foreseeing a worsening situation of bad loans in the country, the Central bank recently announced that the gross non- performing assets of the banks can rise to as high as 9.3 percent in 2016-17, before any hopes of any improvement. One criticism of the Rajan-led RBI is that its call for “deep surgery” of the banks came late. However, one hopes that Rajan’s successor will continue with the reform impetus he has offered to the banking sector. If his successor fails, it could take the Indian economy a few steps back.
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