Within a month of assuming charge as RBI Governor two years ago, in 2013, Raghuram Rajan demonstrated he was neither too young nor inexperienced to run the country’s central bank. Thanks to a series of measures—rolling back his predecessor’s ill-conceived capital controls and defraying part of the hedging costs for NRI deposits and banking capital—initiated by him when the rupee was in free-fall, the currency crisis was contained. The record reserves of $355 billion are an indication of how far the country has traversed from what was possibly the worst currency crisis since 1991. Rajan was, of course, helped by the strong mandate for the BJP in the 2014 Parliamentary elections, and the sharp fall in the price of crude oil, without which the current account deficit would not be at 0.2% of GDP or wholesale inflation at sub-zero levels.
While the government’s performance has been disappointing, the central bank has done well under Rajan, though this newspaper believes he is behind the curve on cutting interest rates. Having restored investor confidence, Rajan set about strengthening the pillars of the financial system. The monetary policy framework is now almost in place and, rightly or wrongly, inflation-targetting based on the CPI is a reality. With two new universal lenders, 11 payments banks and a few small finance banks, differentiated banking has been ushered in; while it is early days yet, payments banks are expected to bring about a revolution of sorts by enabling the large unbanked population in the country to transact more safely. That Rajan chose to allow such a large and diversified set of players into the arena speaks for his willingness to experiment without subjecting the system to any risk. It is possible, payments banks could help further financial inclusion, a priority the Governor spoke about in one of his early speeches.
Rajan’s toughest task has been to figure out how to restore the financial health of banks at a time when the rise in bad loans has been aggravated by the slump in the economy. More than any Governor before him, he has backed the banks but not pampered them. While he has been firm on not extending forbearance and in early recognition of potential NPAs, he has put in place measures that will help banks recover loans from errant borrowers. Above all it is the moral support he has given them that will be remembered—he is probably the first Governor to have lashed out openly at large borrowers saying too many of them insist on their ‘divine right to stay in control despite their unwillingness to put in new money’ and called them freeloaders—RBI has goaded the government to strengthen the DRT process and to come up with a bankruptcy code. The change in the tone at RBI is refreshing.