Reserve Bank of India (RBI) governor Raghuram Rajan completes a year in office on September 4. Has he lived up to his rock star image? Before one answers that question, one needs to ask another: is a year long enough to assess the performance of a central bank governor?
Yes and no. Yes, because as with most RBI governors, Rajan has been appointed for three years. By that yardstick, he’s completed a third of his term. So, it’s not too short a period to assess his performance. No, because the full impact of any monetary policy, especially seminal shifts in policy, will never be played out in a year. The shift to inflation targeting, for instance, is a work-in-progress. Perhaps that’s the reason why chairmen of the US Federal Reserve and governors of the Bank of England are given tenures averaging 8-10 years, unlike RBI governors who seldom exceed five years in their job. So, any assessment of Rajan’s performance will have to come with a caveat: it’s much too early to say.
So, with that caveat in place, what is Rajan’s score? How have key macroeconomic variables fared a year after the change of guard at the RBI? Consumer price inflation at 7.96% in July 2014 is definitely lower than when Rajan took over in September 2013 (9.8%). Food inflation is lower (9.3%) compared to a year ago (11%), as is wholesale price inflation at 5.2% compared to 6.5% in September 2013.
Forex reserves are higher at $320 billion compared to $275.50 billion in August 2013, and the rupee is stronger at .`60.50 to the US dollar. Further, GDP growth in the first quarter of 2014-15 is 5.7% against 4.7% in the comparable period last fiscal year.
So Far, So Good
As far as numbers go, the economy is definitely in better shape than when Rajan took over. Does the credit for this go to the governor or to the improvement in the global macroeconomic climate and improved sentiment in India after the May election results? It’s hard to say. As Napoleon pointed out, you need luck, rather than good generals, to win battles.
Having said that, hard numbers show Rajan can’t be faulted. Of course he had an advantage. Through most of his first year in office, the UPA government was caught up with the impending elections while the NDA government is still finding its feet. That left him free to take decisions without having the finance minister breathing down his neck. But to the extent the economy is better placed today than in September 2013, Rajan must share some of the credit.
What about Rajan’ performance in areas that are exclusively the RBI’s domain? Here the record is mixed. The two broad areas of the RBI’s responsibility — apart from monetary policy formulation and being banker to government — are financial sector stability/development and bank supervision. On the first, there has been a flurry of activity. From issuing new bank licences and establishing guidelines for small and payments banks, to setting up committees to revise and strengthen the monetary policy framework (Urjit Patel committee), to look at financial services for small business and low-income households (Nachiket More committee) and to review the governance of bank boards (Nayak committee), it’s been a busy 12 months.
What of action on the ground? The verdict will have to wait. The new liquidity management framework — with greater reliance on term, rather than overnight, repos — is relatively new and untested. On bank supervision, the news is less upbeat. Nonperforming assets have increased.
A Welcome Change
A number of instances of misdeeds of senior bank officials, for which the RBI as the supervisory authority cannot disown responsibility, have come to light. And going by some of its recent circulars, the RBI seems to be reverting to form (read, trying to micromanage banks).
Only the wearer knows where the shoe pinches. So, on issues like regulatory architecture, public debt office and financial appellate tribunal, and Financial Sector Legislative Reforms Commission recommendations that Rajan favoured in his own report on financial sector reform, there has been a welcome shift in stance.
Challenges Ahead
Unfortunately, the same cannot be said of issues like inflation targeting, small and payments banks, financial inclusion and appointment of a COO, where there is a case for greater debate and introspection. Bigger challenges lie ahead. As the Fed normalises its policy and US interest rates rise, Rajan will need to think on his feet. That’s where the year spent on the job will come to his aid. At the end of the day, there’s nothing like being in the hot seat to keep one’s feet firmly on the ground.
The writer is consulting editor, ET Now, and senior consultant, NCAER
Yes and no. Yes, because as with most RBI governors, Rajan has been appointed for three years. By that yardstick, he’s completed a third of his term. So, it’s not too short a period to assess his performance. No, because the full impact of any monetary policy, especially seminal shifts in policy, will never be played out in a year. The shift to inflation targeting, for instance, is a work-in-progress. Perhaps that’s the reason why chairmen of the US Federal Reserve and governors of the Bank of England are given tenures averaging 8-10 years, unlike RBI governors who seldom exceed five years in their job. So, any assessment of Rajan’s performance will have to come with a caveat: it’s much too early to say.
So, with that caveat in place, what is Rajan’s score? How have key macroeconomic variables fared a year after the change of guard at the RBI? Consumer price inflation at 7.96% in July 2014 is definitely lower than when Rajan took over in September 2013 (9.8%). Food inflation is lower (9.3%) compared to a year ago (11%), as is wholesale price inflation at 5.2% compared to 6.5% in September 2013.
Forex reserves are higher at $320 billion compared to $275.50 billion in August 2013, and the rupee is stronger at .`60.50 to the US dollar. Further, GDP growth in the first quarter of 2014-15 is 5.7% against 4.7% in the comparable period last fiscal year.
So Far, So Good
As far as numbers go, the economy is definitely in better shape than when Rajan took over. Does the credit for this go to the governor or to the improvement in the global macroeconomic climate and improved sentiment in India after the May election results? It’s hard to say. As Napoleon pointed out, you need luck, rather than good generals, to win battles.
Having said that, hard numbers show Rajan can’t be faulted. Of course he had an advantage. Through most of his first year in office, the UPA government was caught up with the impending elections while the NDA government is still finding its feet. That left him free to take decisions without having the finance minister breathing down his neck. But to the extent the economy is better placed today than in September 2013, Rajan must share some of the credit.
What about Rajan’ performance in areas that are exclusively the RBI’s domain? Here the record is mixed. The two broad areas of the RBI’s responsibility — apart from monetary policy formulation and being banker to government — are financial sector stability/development and bank supervision. On the first, there has been a flurry of activity. From issuing new bank licences and establishing guidelines for small and payments banks, to setting up committees to revise and strengthen the monetary policy framework (Urjit Patel committee), to look at financial services for small business and low-income households (Nachiket More committee) and to review the governance of bank boards (Nayak committee), it’s been a busy 12 months.
What of action on the ground? The verdict will have to wait. The new liquidity management framework — with greater reliance on term, rather than overnight, repos — is relatively new and untested. On bank supervision, the news is less upbeat. Nonperforming assets have increased.
A number of instances of misdeeds of senior bank officials, for which the RBI as the supervisory authority cannot disown responsibility, have come to light. And going by some of its recent circulars, the RBI seems to be reverting to form (read, trying to micromanage banks).
Only the wearer knows where the shoe pinches. So, on issues like regulatory architecture, public debt office and financial appellate tribunal, and Financial Sector Legislative Reforms Commission recommendations that Rajan favoured in his own report on financial sector reform, there has been a welcome shift in stance.
Challenges Ahead
Unfortunately, the same cannot be said of issues like inflation targeting, small and payments banks, financial inclusion and appointment of a COO, where there is a case for greater debate and introspection. Bigger challenges lie ahead. As the Fed normalises its policy and US interest rates rise, Rajan will need to think on his feet. That’s where the year spent on the job will come to his aid. At the end of the day, there’s nothing like being in the hot seat to keep one’s feet firmly on the ground.
The writer is consulting editor, ET Now, and senior consultant, NCAER
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