No second term for RBI Guv Raghuram Rajan: Top 5 key takeaways from letter to staff

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Updated: June 18, 2016 7:14:22 PM

Raghuram Rajan will not continue as RBI governor after his term ends in September 2016. In news that is likely to send short-term shock waves in the markets, Rajan in a letter to colleagues at RBI announced his decision to not take up a second term at the central bank.

I took office at a time when currency was plunging daily, inflation was high, and growth was weak. (IE)I took office at a time when currency was plunging daily, inflation was high, and growth was weak. (IE)

Raghuram Rajan will not continue as RBI governor after his term ends in September 2016. In news that is likely to send short-term shock waves in the markets, Rajan in a letter to colleagues at RBI announced his decision to not take up a second term at the central bank.

We take a look at 5 things Rajan wrote in his letter:

1) I took office at a time when currency was plunging daily, inflation was high, and growth was weak. India was then deemed one of the “Fragile Five”. In my first statement I laid out an agenda for action that I had discussed with you, including a new monetary framework that focused on bringing inflation down, raising of Foreign Currency Non-Resident (B) deposits to bolster our foreign exchange reserves, transparent licensing of new universal and niche banks by committees of unimpeachable integrity, creating new institutions such as the Bharat Bill Payment System and the Trade Receivables Exchange, expanding payments to all via mobile phones, and developing a large loan data base to better map and resolve the extent of system-wide distress. By implementing these measures, I said we would “build a bridge to the future, over the stormy waves produced by global financial markets”.

Today, I feel proud that we at the Reserve Bank have delivered on all these proposals.

Today, we are the fastest growing large economy in the world, having long exited the ranks of the Fragile Five.

2) We have done far more than was laid out in that initial statement, including helping the government reform the process of appointing Public Sector Bank management through the creation of the Bank Board Bureau (based on the recommendation of the RBI-appointed Nayak Committee), creating a whole set of new structures to allow banks to recover payments from failing projects, and forcing timely bank recognition of their unacknowledged bad debts and provisioning under the Asset Quality Review (AQR).

3) We have worked on an enabling framework for National Payments Corporation of India to roll out the Universal Payment Interface, which will soon revolutionize mobile to mobile payments in the country.

4) While all of what we laid out on that first day is done, two subsequent developments are yet to be completed. Inflation is in the target zone, but the monetary policy committee that will set policy has yet to be formed. Moreover, the bank clean up initiated under the Asset Quality Review, having already brought more credibility to bank balance sheets, is still ongoing. International developments also pose some risks in the short term.

While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016. I will, of course, always be available to serve my country when needed.

5) Colleagues, we have worked with the government over the last three years to create a platform of macroeconomic and institutional stability. I am sure the work we have done will enable us to ride out imminent sources of market volatility like the threat of Brexit. We have made adequate preparations for the repayment of Foreign Currency Non-Resident (B) deposits and their outflow, managed properly, should largely be a non-event. Morale at the Bank is high because of your accomplishments. I am sure the reforms the government is undertaking, together with what will be done by you and other regulators, will build on this platform and reflect in greater job growth and prosperity for our people in the years to come.

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