2 Years of Dr. Rajan

The Indian economy is surely a much safer and secure place

When Dr. Raghuram Rajan took over as the RBI Governor in September 2013, India was in the midst of a major economic crisis. The CAD had crossed 4.5% and consequently the Indian rupee had plummeted from Rs.53/$ to Rs.69/$ in less than a quarter. The Nifty had crashed by over 20% and FPI outflows had brought the forex situation to a perilous level. It is in this context that Dr. Rajan took over and it is in this context that his last two years need to be examined.

Healthy forex chest…

One of the biggest achievements of the RBI governor has been to get the forex reserves to a comfortable level. At $355 billion, the reserves are sufficient to cover 9-10 months of imports and can cover the trade deficit around 2.5-3 times over. That is an extremely comfortable situation to have. The strong forex reserve position has enabled the RBI to manage the rupee in a stable band, which has created confidence and certainty in the minds of investors.

Building confidence in the INR…

That is surely a big achievement of Rajan’s tenure. Thanks to comfortable forex reserves and weak oil prices, the RBI has managed to maintain the rupee in a predictable band. That has largely contributed to the confidence of foreign investors, both in debt and in equity.

Using rates judiciously…

To the credit of Dr. Rajan he has upheld the independence of the RBI on the rates front. Despite strong demands from industry for rate cuts, Dr. Rajan has desisted from the same. For the RBI, the rates have been used to focus on two factors. Firstly, it has been used to ensure that price stability is foremost. That means rate cuts have been made contingent on low inflation. Secondly, rate cuts have also been made contingent on proper transmission of rate signals. It is to the credit of Dr. Rajan that the rates have been used as a key signal for the economy.

Managing the transition…

This is, probably, the biggest contribution that Dr. Rajan will be making in the next 1 year of his tenure. There are some structural changes that are in process. The responsibility for rate setting will be transferred to a monetary policy committee (MPC) and it will no longer be the sole prerogative of the RBI. Secondly, the RBI will have a lesser role to play in debt management. Lastly, the RBI may have a smaller role to play in regulating financial institutions that are not traditional banks.

This transition may be the biggest challenge for the RBI governor. As the RBI’s role gets re-defined, it calls for the maturity of a man of vision and sagacity. Dr. Rajan may be the man! ©

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