He always ruled out being a ‘cheerleader for the markets’, but it was the multiple rate cuts by RBI Governor Raghuram Rajan and his ceaseless efforts to keep inflation under check that turned out to be the biggest cheers for the Indian financial markets in 2015.
It was one of his most famous oneliners — “I am Raghuram Rajan and I do what I do” — that eventually summed up the year 2015 for the central bank and the same is expected to hold true in the New Year as well when RBI cracks its whip on banks to clean up their balancesheets and also compete with the financial markets when it comes to being source for funds.
Rajan’s term ends on September 3, 2016 and whether the outspoken Governor gets an extension, like his most of his predecessors, or not is something that will be keenly watched in the New Year.
It would be interesting in the context of the public postures he has taken on many issues ranging from ‘Making in India’ to his reference to Hitler and on intolerance, which have been interpreted in various quarters as being against the current regime.
At the same time, there have been words doing the rounds that Rajan is personally liked by the Prime Minister and there have been rumours about he being in race for some larger roles including the next head of International Monetary Fund, where he has served in the past as the Chief Economist.
Looking back at 2015, the year will also be remembered for cutting short the wider powers of the central bank, including the Governor’s own prerogative to set the rates or moving the public debt management out of the Mint Road.
During the year, RBI became an inflation-targeting central bank, while Rajan also kick-started the era of differentiated banking by giving out in-principle approvals to 11 payments banks and 10 small finance banks.
While the aspirants of small finance banks are populated largely by microfinance institutions, the payments bank licencees are storeyed names from the corporate world such as Ambanis, Birlas, Mahindras as also the telecom biggies like Airtel and Vodafone.
With certainty around achievement of the near-term inflation objective of 6 per cent increasing, Rajan made a dramatic shift in his policy stance early in the year towards being accommodative and announced a surprise rate cut on January 15. He followed it up with three similar moves during the year, cutting rates by a cumulative 1.25 per cent in 2015.
All his rate cuts were welcomed by the stock markets with huge rallies, while inflation remaining under check gave the government much-required legroom in its policy moves.
The 6-per cent headline inflation target for January 2016 is part of the ‘glide path’ suggested by the deputy governor Urijit Patel-led Committee, and for RBI the tougher task of yanking it down to 4 per cent in next two years starts now.
The shift to becoming the 27th inflation-targeting central bank, joining the league of the US Fed, Bank of England and the Bank of Japan, has not been easy for Rajan and his core team, as people from across the board, including his colleagues and former RBI top officials and North Block mandarins initially opposed the move or cautioned against it.
Under the framework, the RBI brass is required to explain in the event of non-achievement of targets to the government and Parliament, and also risks of being dismissed. However, monetary policy specialists insist that adopting the new model will help in the policy becoming more predictable and transparent.
The move may help end the loneliness of the Governor on the eve of the monetary policy announcements which have a bi-monthly event now as it will be a majority call.
Like the past years, run-ins with North Block continued in 2015 as well, with newer areas of disagreements like the composition of the Monetary Policy Committee (MPC) which will set the policy and shifting the responsibility of managing the government finances as well as the secondary market for government bonds, to the Ministry over fears of conflicts of interest.
Rajan has hinted that he is fine giving up the veto power in rate-setting currently enjoyed by the Governor, but wants a majority of the MPC panel members from the central bank while the government wants the majority in the panel.
Even after a protracted debate around it, an end is not in sight with both sides sticking to respective stances, though many media reports said the government has given in to Rajan’s demand.
However, on creation of PDMA to regulate the government securities and government finances, North Block and the Mint Road seem to have found a workable solution, under which North Block seems to have had its way and is moving ahead with an executive order in the face of the Parliamentary deadlock to get the RBI Act amended.
The NPA management, for which Rajan has set a March 2017 ultimatum, will be one of the key focus areas for the RBI in 2016. In the year gone-by, it has given a series of leeways to help the lenders.
Towards this the RBI is also learnt to have identified as many as 150 top defaulters, who collectively defrauded banks, mostly public sector ones, a whopping Rs 64,000 crore and asked lenders to make additional provisions for these dud loans, which will lead to an unprecedented spike in NPA ratio in 2016.
Among the concessions given is a facility to take over majority ownership in defaulting companies under the strategic debt restructuring scheme, the 5/20 scheme for ensuring fund flows to the infrastructure sector, creation of joint lenders forum for every asset above a certain size and focus on early recognition of stress building up.
The release of official data pointing to a 0.50 per cent jump in the gross NPAs between April and September to 5.1 per cent, and a jump in stressed loans to 11.1 per cent only points out to the formidable task that lies ahead.
Rajan has also been cautioning banks not to misuse the leeways which have been offered in managing bad loans. He was also visibly annoyed with banks for not passing benefits of his rate cuts to borrowers, which dent the policy transmission process, and forced him to change the rules regarding opaque base rate calculation.
As the year drew to a close, the RBI formulated the new marginal cost of funding-based formula for determining lending rates, and promised that it will help in faster transmission of the policy actions.
With so many issues on the table, Rajan held an off-policy meet with bankers earlier this month, a practice which has been discontinued for having one-on-one meets since he has assumed charge.
In a welcome departure, the RBI brass started speaking about the currency and acknowledging that it intervenes in the market to prevent excessive volatility. Against a slide in the rupee against the dollar in the run-up to the December 16 Fed meeting, the central bank had to take special efforts to impress the fact that the rupee was one of the best performing ones as it gained against many other currencies.
As against the heavy reverses following the talk of the Fed tapering, RBI under Rajan was successful in managing the actual event of a hike by the Fed in December. And the impact was visible enough as the rupee closed the year as the best performer among it EM peers with over 2.6 per cent gains.
One of the biggest factors of satisfaction was the space created by the record high forex reserves which touched USD 355 billion in the middle of the year and have been trending above the USD-350-billion-mark throughout the year, which is being credited to Rajan’s astute handling of the external accounts.
This offers a 12-month import cover, another first in many decades.
But many a posturing of Rajan-the-public-intellectual involved his views critical of the government at many times, and many consider this as denting his second-term prospects.
At the peak of the debate on intolerance triggered by the killing of a Muslim man on the outskirts of the national capital by a frenzied mob for allegedly eating beef, Rajan jumped in batting for liberalism, saying tolerance is essential for the progress.
“Should ideas or behaviour that hurt a particular intellectual position or group not be banned? Possibly, but a quick resort to bans will chill all debate as everyone will be anguished by ideas they dislike. It is far better to improve the environment for ideas through tolerance and mutual respect…
“Actions that physically harm anyone, or show verbal contempt for a particular group so that they damage the group’s participation in the marketplace for ideas, should certainly not be allowed,” Rajan, the academic, rued at IIT Delhi, one of his alma maters.
Similarly, on the day of signing of the inflation targeting framework which understandably came after strong negotiations, Rajan cited Hitler in questioning the efficacy of a strong government, while delivering the KD Koshambi memorial lecture in Goa in February.
“Hitler provided Germany with an extremely effective administration-the trains ran on time, as did the trains during our own Emergency in 1975-77… His was a strong government, but Hitler took Germany efficiently and determinedly on a path to ruin, overriding the rule of law and dispensing with elections…It is not sufficient that the trains run on time, they have to go in the right direction at the desired time,” the Governor said.
At the 80th anniversary celebrations of RBI, Rajan capitalised on the presence of the Prime Minister and the Finance Minister to drive home the importance of protecting the national institutions, where he received a big thumbs-up from none other than Prime Minister Narendra Modi.