Raghuram Rajan’s successor at RBI will have to first fight the perception battle

The RBI governor position is a high-pressure job. It’s obvious to any observer who would have seen the stints of previous RBI governors (and that of the outgoing governor Raghuram Rajan).

The RBI governor (so far there has never been a woman head) has to do a tough balancing act everyday in his office between the central bank’s policy priorities and North Block’s interests. By law, the RBI is not an independent organisation and the governor reports to the finance minister.

Besides, every RBI governor has had his own set of challenges during their terms. While it was the Asian currency crisis for Bimal Jalan, D Subbarao had to face the 2008 global financial crisis just ten days after he took over at the RBI and for ‘rock star’ Rajan, the immediate task was to rescue the rupee and bridge the huge trust deficit of investors in the economy.

This time, the job will be even more difficult for Rajan’s successor since he/ she will have to fight perceptions first. Besides the sharp attention that’ll fall upon the new governor succeeding one of the world’s most reputed economists, he/ she will also have to face closer media scrutiny every day for one simple reason: In the RBI’s 81-year history, never once has a governor selection process attracted so much attention for political reasons. Hence, the new RBI chief will command global attention from the Day 1.

If the new governor fails to uphold the independence and credibility Rajan symbolised for outside world and fails to carry on the baton of reforms Rajan pursued (bad loan clean-up, inflation fight), he/ she would be dubbed as a misfit. If the new chief engages in criticism on politically sensitive issues as Rajan did, he/ she will risk the wrath of the government and Subramanian Swamy-like hardliners in the BJP.

So why can’t the Narendra Modi government appoint a ‘friendly’ face from its stables who would never cross the line? Difficult, since the government is under pressure to appoint a person who would match Rajan’s repute and international acceptance.

A blend of all these qualities is rare.

Clearly, Modi cannot afford to settle for a low-profile RBI governor after Rajan. The prime minister will have to find someone who could bridge the trust deficit of international investors in the India story, which is what Rajan did.

Rajan has set very high benchmark for his successor and the responsibility to follow up on a few, politically sensitive high-risk calls. His successor will be watched for his/ her ability to continue with the reform-process in three areas after he took over as RBI governor — monetary policy, banking structure overhaul and the bad loan clean-up exercise.

Of these, the fight against cronies is the toughest to pursue. Rajan’s decision to put a deadline of March 2017 for all banks (mainly intended for public sector banks) to clean up their books has upset many traditional cronies forcing them either to pay up or pack up. Also, Rajan irked the cronies and crooks by stopping the practice of ‘RBI-aided restructuring’ that allowed banks to freely restructure loans and continue evergreen their loans forever without no major repayment.

The special RBI dispensation enabled banks make lower provisions (the money set aside against substandard loans) on rejigged loans. Rajan withdrew the special dispensation for fresh restructured loans that made banks treat all new restructured loans at par with bad loans in terms of provisioning ending the era of ever-greening of corporate loans. Banks can still do restructuring in genuine cases but only after taking a hit. But Mint Road sent a clear message to the cronies that the period of free lunches is over.

The bad loan clean-up is also a politically sensitive exercise since it simultaneously has capital implications to the government to repair their cracked balance sheets of PSBs. Government controls 70 percent of the banking industry through its ownership in 27 state-run banks.

In the period between January-March alone, banks have reported an additional Rs 2 lakh crore bad loans. This would mean banks need much larger amount of capital in addition to the requirement of meeting Basel-III norms and money needed for further credit expansion.

The recent inflation uptick and volatile financial markets in the aftermath of Brexit will only add to the task. In the September-November period, the Indian financial markets are also likely to witness a bout of volatility when $20 billion redemptions of FCNR(B) deposits are due.

The recent uptick in the CPI inflation too will pose risks. The last reading of the CPI, at 5.76 per cent, came at sniffing distance of central bank’s 6 percent upper target. Rajan himself had observed that the uptick in inflation justified his decision to hold rate in the last policy.

Who’ll be the next governor is purely a guess work at this stage. There are a few names doing rounds including one serving RBI deputy governor (Urjit Patel), two former deputy governors (Subir Gokarn and Rakesh Mohan), a banker (Arundhati Bhattacharya) and the current chief economic advisor of the government (Arvind Subramanian).

Of these candidates, possibilities of Subramanian and Patel appear higher than the rest. But, it’s anybody’s guess at this stage as to who will make the final cut. There is no final decision yet. Many consider Subramanin as someone who would match Rajan’s global reputation and experience at the North Block, while some others give more weight to Patel on account of his close familiarity with Rajan’s ongoing reform plans. It was based on the report a panel under Patel that Rajan initiated the monetary policy reforms including the new monetary policy committee (MPC) structure. Patel has been Rajan’s trusted lieutenant since September 2013.

Also, both Patel and Subramanian are known faces internationally and do not have records of ‘overstepping’ their mandate and speaking on issues sensitive to the government. Hence the Modi government shouldn’t have any concerns choosing one of them.

The unprecedented controversy surrounding the RBI governor’s reappointment, thanks to Swamy’s rapid fire, has made the job even more difficult for Rajan’s successor. There are many fights that await the new governor on the 18th floor of RBI headquarters in Mumbai. The first will definitely be the perception battle.