Raghuram Rajan’s successor: Subir Gokarn, Urjit Patel and K V Kamath front runners

Who will be the new Reserve Bank of India (RBI) governor?

After current governor Raghuram Rajan’s surprise exit announcement last month, several names have been doing the rounds, with speculations initially strong on NITI Aayog vice-chairman Arvind Panagariya. According to people in the know, the front runners at this stage are Subir Gokarn, former RBI deputy governor, Urjit Patel, one of the serving deputy governors, and K V Kamath, BRICS Bank chairman.

 Raghuram Rajan’s successor:  Subir Gokarn, Urjit Patel and K V Kamath front runners

RBI governor, Raghuram Rajan. PTI

These names are understood to have come up before the government and Prime Minister Narendra Modi will take a final call in the next few days. Besides, these names, the government was also considering chief economic advisor Arvind Subramanian and economic affairs secretary Shaktikanta Das too for the post, in the initial stages.

However, there is no confirmation on who would emerge as the final winner to fill in Rajan’s shoes.

Rajan leaves in September

Rajan is to leave office on 4 September. Typically, the name of the new governor is decided a few days or weeks before the incumbent exits. In the case of Rajan too, three weeks before he took over the governorship from D Subbarao, the former chief economic advisor to the government and former chief economist at the International Monetary Fund had joined RBI as an officer on special duty (OSD) to familiarise himself with the central bank’s operations and functions. This time, with less than a month to go for Rajan’s exit, the government has so far not announced the name of his successor.

Both Gokarn and Patel are familiar faces in the central bank. Gokarn, a former chief economist with the global rating agency Standard and Poor’s, also had stints as director of research for Brookings India and the executive director of India’s mission at the International Monetary Fund (IMF). Gokarn has a PhD in Economics from the Case Western Reserve University. During his tenure at RBI, Gokarn was in charge of monetary policy and has played a crucial role to shape the central bank’s inflation-fighting strategy under then governor D Subbarao.

In his recently released book, Who Moved My Interest Rates?, Subbarao has said he had sought an extension for Gokarn at the RBI but that wasn’t granted by the government. Gokarn’s international reputation and experience in domestic economy, would come handy if he is chosen as the new governor.

Patel is the key aide of current governor Rajan and has also been the chief architect of his war strategy to control inflation in the last three years. It was based on the recommendations of a panel under Patel that the RBI accepted consumer price index based inflation (CPI) as its core price indicator to formulate the monetary policy. Besides that, the central bank was also prepared to move on to a joint monetary policy committee (MPC) mechanism based on the broad contours laid out by the Patel panel.

Patel, thus, is familiar with functioning of the central bank and his appointment will ensure continuity of the central bank’s policies under Rajan. This is critical, given that the central bank is going through a transitional phase both in terms of monetary policy reforms and banking structure overhaul.

Compared with these two, Kamath is seen as a visionary banker, who was among the founders of one of the largest banks in the country and credited for its growth from a non-banking financial company to India’s largest private sector lender having international operations. Kamath’s stature and acceptance in the government circles, industry and financial world would be a major positive if he is chosen as the new governor.

Reform era

Rajan’s three year term is being seen as reform era in the Indian banking sector and was also controversial because of his comments and criticism of the Narendra Modi government. The governor was attacked heavily by his critics and the charge was spearheaded by BJP MP Subramanian Swamy.

Rajan’s stardom as an international economist and his outspoken nature turned out to be his biggest drawback during his term as governor. This is because in India, technocrats are supposed to toe the government line and ‘keep their head down and work’. Besides wearing his hat of the RBI governor, Rajan often morphed himself into his alter-ego of an academician, a professor and spoke his heart out on a range of issues that often meant criticism of the incumbent Narendra Modi government. This irked the government and BJP-sympathisers.

Rajan's contributions

Rajan has done a commendable job in his role as the governor. His biggest contribution, probably, is beginning the much-needed exercise of bad loan clean-up in public sector banks, followed by overhauling the monetary policy structure and initiating banking structure reforms process. He set a deadline of March 2017 for banks to disclose all their bad loans, including the ones masqueraded as restructured loans. Much before that, Rajan had put in place a mechanism for early-recognition of bad assets.

Most experts agree that a bad loan bomb was building in the banking system and no one knew the exact size of it until then since the banks were smartly hiding much of it in the rejigged loan basket. Rajan’s call was politically sensitive too since it meant huge additional capital implications for the government that owns 70 percent of the banking system through state-run banks.

Secondly, banking structure reform process was begun with letting entry to small finance banks, payments banks and, recently, laying out norms for continuous licensing of full-service banks. Known as ‘on-tap licensing’, this will change applying for bank licences as in-a-decade affair to a continuous process based on merit.

The third part of the reform, revamping the monetary policy structure is currently underway. Under this, a joint monetary policy committee that will have equal number of members from the government and RBI (with a casting vote for the governor) will henceforth determine the inflation target for the RBI.

Last week, the government has agreed to the 4 percent (2 percent plus or minus) target set by the RBI. This showed the central bank has support from the government on inflation-targeting. This shift in policy-focus has been welcomed by international rating agencies.

However, the big question is whether Rajan’s successor will be able to carry out the reform process and defend the autonomy of the central bank.

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Updated Date: Aug 19, 2016 06:24:09 IST