As Raghuram Rajan leaves, one chapter ends and another begins: Or does it?

 As Raghuram Rajan leaves, one chapter ends and another begins: Or does it?The author is a financial services professional based in Mumbai and has worked with Indian capital markets since 1994

 

 

As Mumbai waited for the rains to arrive on an overcast Saturday, we instead got news of Raghuram Rajan’s exit from the RBI. Showers of comments have followed since then, as has the rain!

What about markets? As I write this on Monday morning, the rupee is trading around 50 basis points (bps) weaker, the equity markets are down by around 30 to 40 bps and the benchmark 10-year bond yield is up by four bps. Where will they be at the close of the day, the week, the month and the year? I will not bother speculating.

Initial feedback appears to be that overseas investors are clearly much more disappointed than local investors.

To me, two key issues rise from this whole episode that has been a bit of a soap opera for the last few months. The quality of the debate and the manner of communication.

First, the debate. It is distressing to see the fixation with personalities rather than policies. Back in 2013, when Rajan took over as RBI governor, he was really up against it. India was reeling under the impact of an emerging market crisis, was part of the “fragile five” and had a lame duck government that was seen as just serving its time. In that environment, his very assured and articulate presence certainly helped pull India out of a mess.

File image of Raghuram Rajan. PTI

File image of Raghuram Rajan. PTI

He did take steps to shore up reserves. In doing so, did he plant a timebomb? I don’t think so, but people are entitled to their views on that.

Then came the whole debate on rate cuts amid his perceived obstinacy.

It is a fact that many analysts had correctly projected a much faster fall in inflation than the official RBI forecasts. The RBI itself
acknowledged the fall by cutting its own inflation target. But rate cuts came much slower than they perhaps should have. So was he overcautious? Perhaps so.

But to ascribe motives and agendas to this caution is uncalled for, in my view. At the same time, valid criticism should be taken on board.

Cut to his comments on diverse issues to the media — issues that were not really within his remit as RBI governor. Does he have the right to have views on such matters?

Of course, he does! All of us do.

Should he have articulated them in public or saved them for his memoirs?

Should he have realised that as RBI governor, every word he spoke was subject to minute scrutiny, as are the words spoken by his counterparts at the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan?

That is a personal call he took, and we must respect that call.

The last big issue for me was his handling of the bank NPA issue.

Critics are correct in pointing out that he was associated with the government in various capacities since 2008, prior to becoming RBI governor in 2013. So shouldn’t he have known more about the bank NPA mess? Many analysts have been writing about the problem for a long time and that these problems were known in 2013. So why wait till 2015 to launch the war on NPAs? His own articulation against crony capitalism had come long before this.

It can also be added that schemes like the 5/25 and the recent 'Scheme for Sustainable Structuring of Stressed Assets' to deal with NPAs are more versions of “extend and pretend” and/or create serious moral hazards. But having said all of this, it is undeniable that his actions like the Asset Quality Review and the sustained pressure on banks to clean up their act are also unprecedented in India.

The government amd the RBI have both shown strong resolve on this clean-up. Better late than never!

Now for the actual announcement and communication thereafter. There is no dispute about the prerogative of the government to levy taxes and make appointments. Both are often unpopular, but we have to live with both!

Whether right or wrong, it was abundantly clear that this appointment had become the most closely-watched event in Indian financial markets for the past few months and that it had taken centre stage for many investors — both local and foreign. Markets have their own way of attaching importance and even value to events. We can all debate the science behind that, if there is one!

It is clear from Rajan’s statement that his decision was taken in consultation with the government. So why was it a unilateral announcement from him? Why was it not a joint statement
made along with the Ministry of Finance that included the name of his successor?

We are told that a process is on to identify his successor. Why could the announcement not have been made after a successor had been identified? This is particularly so if the government had made up its mind to not extend Rajan’s term. Ideally, there should have been a joint statement from both him and his successor speaking about continuity and adherence to well laid-out norms like inflation-targeting, the monetary policy committee, a continued resolve to clean up NPAs etc. That would have certainly assured markets and taken the edge off what has become a very testy affair with rather polarised opinions.

The core issue is our seeming inability to debate policies and not personalities.

The latter is always more juicy and exciting, but also quite irresponsible. When we are talking about a critically important institution like the RBI and its governor, surely the debate should not be personal. The independence of that institution and its credibility are key for India and its markets.

It’s time we moved on to transparent, data-backed policy-making and a critical analysis of policy at all levels, rather than search for motives behind every decision and action.

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Updated Date: Jun 20, 2016 15:21:35 IST