The RBI after Rajan

This article was first published by the Global Association for Risk Professionals on August 25, 2016;

https://www.garp.org/#!/risk-intelligence/detail/a1Z40000003K0bjEAC/deloitte-c-level-client-facing-risk-executive

Continuity, but a contrast in style, at India’s central bank

On September 4, 2013, the internationally prominent economist Raghuram Govind Rajan took charge as the 23rd governor of the Reserve Bank of India. He decided in June to depart at the end of his politically tumultuous three-year term, and with the August 20 announcement of his successor, deputy governor Urjit Patel, the book on Rajan is officially closing.

A former International Monetary Fund chief economist and University of Chicago finance professor, Rajan came in with a “rock star” image, a contrast to his predecessor, Duvvuri Subbarao, whose performance was the worst ever by an RBI governor, according to Arvind Panagariya, then professor of economics at Columbia University and now vice chairman of the government think tank NITI Aayog. Subbarao had kept the Indian economy relatively stable during the global crisis period. By the time he entered into the second phase of his tenure, in 2012, the economy was marred by nearly 10% inflation, a depreciating currency and low GDP growth.

Rajan dazzled with degrees from IIT (Indian Institute of Technology), IIM (Indian Institute of Management) and MIT (Massachusetts Institute of Technology) and a reputation for speaking his mind, was widely credited with predicting the 2008 crisis, and key economic indicators seemed to respond immediately to his moves.

Anticipated Criticism

When Rajan addressed the media after assuming office, he said, “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.’” He said he sought “to do the right thing, no matter what the criticism, even while looking to learn from the criticism” — words that turned out to be prophetic.

Over the three years that ended September 4, 2016, Rajan did mostly the right things. He brought inflation down, stabilized the rupee, and GDP was going in the right direction. Yet he could not escape criticism.

There was really no end to the tug of war between him and the government over interest rate cuts. The government continually pushed for greater cuts, while Rajan refused until inflation fell within the targeted range. But even when inflation was within the targeted range, Rajan did not cut the rates as much as the government would have liked, citing risks in the global economy, rising crude oil prices and uncertain monsoons.

Rajan was also quite vocal about issues that did not directly come under his purview. That did not sit well with the government, which needed to tread carefully due to Rajan’s positive image amongst industry, the media and general public.

Return to Academia

Subramanian Swamy, a Harvard University PhD in economics and member of the Upper House of the Parliament of India, stepped up as the central banker’s vocal public critic. He was allowed to rant against Rajan for a long time before Prime Minister Narendra Modi made his unhappiness over the entire issue known, subtly, in a television interview. By then, Rajan had already issued a statement saying that he would not be seeking another term and would return to Chicago’s Booth School of Business, from which he was on leave.

There was outrage. There were letters of support for Rajan, speculations about who would succeed him and how he or she would measure up to Rajan in stature, independence and ability to complete policy and regulatory changes in progress.

Modi’s choice of Urjit Patel was seen as a safe one. Patel has a doctorate in economics from Yale University, along with degrees from the University of Oxford and London School of Economics. He has done stints at the International Monetary Fund, World Bank, Brookings Institution, Reliance Industries and Boston Consulting Group, and has been associated with various central and state government task forces and committees.

Patel is known to be the architect of the current monetary policy framework of RBI, which focuses on inflation targeting. He is quieter and lower-profile than Rajan. The consensus is that continuity in policies will be maintained and that the government did well in appointing an “insider” to succeed Rajan.