'Rockstar' Rajan begins well, but it's going to be a very long haul

Well begun, they say, is half done. Unfortunately, the phrase may be a tad too optimistic when viewed in the context of the current economic situation in India. But even so, the 50-year-old Raghuram Rajan, who took charge as the 23rd governor of the Reserve Bank of India (RBI) on 4 September, has surprised everyone with his fresh approach to the office.

His ‘first steps’ - really a slew of moves he plans to put in place in the days ahead - signal an honesty of purpose and a desire to get on with the task at hand in a positive frame of mind, rather than fall prey to the gloom and doom all around.

[caption id=“attachment_1086225” align=“alignleft” width=“380”]  Well begun is half done: PTI image[/caption]

The lengthy statement he made immediately after taking over from his predecessor Duvvuri Subbarao is quite unprecedented and a first for any RBI governor. But then, Rajan has also justified it by saying he wants to ‘underscore communication’ by his statement on his first day in office, a signal that under him, the RBI could be expected to be more transparent and less Kremlin-like.

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If one were to draw first signals from Rajan’s statement, it would be a mix of reform, resolve and a firmness to deal with the several problems RBI needs to fix, and that does not only mean the turbulence in the currency markets or the growth-inflation dilemma. Rajan reiterated his earlier stance, talking about financial inclusion as a key tool to spur economic growth and many of the steps he announced can be seen in that context.

“Rural areas, especially our villages, as well as small and medium industries across the country, have been important engines of growth even as large company growth has slowed. But access to finance is still hard for the poor, and for rural and small and medium industries. We need faster, broad based, inclusive growth leading to a rapid fall in poverty,” he said. Simply put, inclusive growth will be high on Rajan’s agenda.

Rajan’s first steps dwell in detail on both the immediate and the medium-term. While former RBI governor Bimal Jalan, under whose term the banking sector saw some momentous developments, notably the reverse merger of ICICI with ICICI Bank, will head a committee to scrutinize the applications for new banking licenses, Nachiket Mor, a well-known name in the world of banking and financial inclusion, will chair another panel on all aspects of inclusion and suggest a way forward. Equally, Rajan’s RBI will nudge foreign banks to set up local units to enable greater regulatory supervision on their operations.

He has also announced significant steps on financial markets, calling them a ‘symbolic down payment’ on RBI’s part to address the current market turmoil. This includes allowing both exporters and importers to cancel and re-book forward exchange contracts, introducing cash-settled 10-year interest rate futures and interest rate futures on overnight interest rates. Steps to internationalize the rupee have also been announced to help banks bring in ‘safe money’ to fund the current account deficit (CAD).

Tough talk

That Rajan will not hesitate to take tough decisions was also clear. Sample these lines from his statement: “Some of the actions I take will not be popular. The Governorship of the Central Bank is not meant to win one votes or Facebook “likes”. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism..” Non-performing assets (NPAs) of banks will, consequently, be under close scrutiny with debt recovery tribunals and reconstruction/recovery processes on the radar for improvement.

The new governor’s first message to India Inc - which has, of course, hailed his appointment as is routine - wasn’t a very soft one. “Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalize their failed ventures,” he said, making clear his intentions.

Several steps on using technology and making mobile payments and access to money easier figure prominently on Rajan’s agenda, with the governor saying RBI was keen to make “payments anywhere anytime” a reality.

Big Picture

Rajan’s first statement as governor showed he had a bird’s eye view of what RBI needed to do in key areas, but also had the immediate task firmly in mind. His to-do list, therefore, was a mix of both.

The big signal the financial market is bound to take away from his words is that he means business and is someone who is already well-apprised of the problems and the tools he has at his command. Significantly, Rajan said nothing about his stance on whether he would go for growth or to tackle inflation, saying he did not want to pre-empt the mid-quarter monetary policy review, the date of which he has shifted from 18 September, when the US Federal Reserve meeting ends, to 20 September.

But the very fact that the date has been shifted indicates governor Rajan will be keenly following the developments in the US and taking them on board while formulating his policy review.