First year as RBI governor: Raghuram Rajan has delivered on most counts with courage of conviction

Economists are renowned for the use of phrases, 'On the one hand' and 'On the other hand' to shield themselves from criticism if their views turn out to be wrong. On one such occasion, former US president Harry Truman seems to have screamed in frustration, "Can I get an economist with one hand?" Could someone coming from a crowd with such a reputation be assertive, express an opinion with conviction and above all, wade through the maze of Indian bureaucracy to fix an economy and a financial system in shambles? When Raghuram Rajan arrived at the finance ministry as an advisor in 2012, his reputation as an economist was flying high, thanks to the 2008 credit crisis that he foresaw three years before.
Economic forecasts will be remembered both when they go wrong, as in the case of Irving Fischer who predicted a permanently high level for stocks weeks before the Great Depression set in, and when they turn out to be right, as it happened with Rajan.

But forecasting weather sitting from the comforts of an air conditioned cabin with advanced tools is a different game, than cleaning up the mess left behind by a cyclone.

It was a perfect storm when Rajan, the former professor of finance at the Chicago University’s Booth School of Business, landed in RBI — currency at a record low, inflation was stubbornly high, current account deficit maligning the economic reputation, untrustworthy fiscal numbers, and above all, the taper tantrums of the Federal Reserve.

In such a situation, Day One in office should have been limited to pleasantries and thanking everyone under the sun 'for giving him an opportunity to serve the nation.'

But that was not to be with this Rudyard Kipling fan. At the appointed time on September 4, 2013, he read out his 3,065-word manifesto for the Indian financial sector.

This was the message: "Our task today is to build a bridge to the future, over the stormy waves produced by global financial markets. I have every confidence we will succeed in doing that."

A year later, what has he delivered? "His three main achievements in his first year have been: stabilising the external sector; giving the RBI a firmer commitment to inflation control and communicating that effectively; and clearly and crisply setting his agenda for his term as governor," says Duvvuri Subbarao, Rajan’s predecessor whose relationship with the government turned frosty due to his defiance to play ball with the government on interest rates.

The rupee, which was the worst performer till Rajan took charge, turned out to be the best after he drew $35 billion under the special swap arrangement with banks for deposits from overseas Indians.

"Forex reserves are higher and the rupee is stronger," says Shikha Sharma, chief executive at Axis Bank. "This has not only revived investor sentiment, but will also contribute to investment recovery and higher financial savings."

Holding Strong

It is this courage of conviction that has been the feature of Rajan’s 365 days at Mint Street. Declaring that he would use interest rates to battle inflation, even if popular opinion was against it, and that robber barons do not have space in his scheme of things were at that time taken as grand standing.

But his three interest rate increases, and a merciless drive to prevent bad loans and recovery show he means business. There was something in his manifesto for the financial markets, as well as the common man in the form of inflation indexed bonds.

The human tendency is to get into a shell in times of distress, but Rajan did the opposite by declaring his intention to internationalise the financial market. His communication exhibited this belief.

"This might be a strange time to talk about rupee internationalisation, but we have to think beyond the next few months," said Rajan, who, all his life, has studied how a few can abuse the markets.

Then came the warning: "That is not to say we will never surprise the markets with actions. A central bank should never say 'never'!" Pragmatic, some would say. But for others it was an un-Chicago way of conducting economic policies.

Does he fit into a definition? "I would say the markets sort of had a different view of me, based on my coming from Chicago," said Rajan. "This is a free market nut who’s gonna do A, B, C, D... If you look at my writing over the past few years, it’s always a nuanced position. It’s always picking up the pros and cons of everything. I don’t think I have changed substantially."

As an economist he is not wedded to any one school of thought, and that provides the flexibility to adopt the conservative economic stream of inflation targeting, and an active intervention in the market to keep traders on leash.

The Barriers

For an economist to deliver on quite a bit of his manifesto proves that he does not stop at theorising, but goes beyond to execute what he wants done. Just three months separated outsider Rajan’s appointment as RBI chief and Canadian Mark Carney as the chief of the Bank of England.

Rajan’s achievements with the Indian bureaucracy pale in comparison with what the Canadian has managed with the Whitehall. Carney has managed to bring in a Goldman Sachs alumnus as chief operating officer and has overhauled the monetary policy framework to provide forward guidance.

Something similar attempted by Rajan has turned vicious, with vested interests putting up obstacles in the form of trade union activism. His decision to have a COO at the rank of deputy governor, though approved by the RBI’s central board, is stuck for want of legislative changes.

It may also be a long wait to operationalise the Urjit Patel committee recommendations on monetary policy framework as it requires government support. Then comes the conflict between the bureaucracy and the RBI in the form of recommendations of the Financial Sector Legislative Reforms Commission, which places a bigger role for the already strained judiciary.

Rajan has called some of the ideas 'schizophrenic.' The man who put communication as the cornerstone of his monetary policy making left some room for confusion when he appeared to be rolling back in August his signal of beginning a downward cycle in interest rates.

"The crux of the communication is that evolving market conditions will have a say in policy direction, but inflation will remain the primary goal," says Radhika Rao, economist at DBS in Singapore.

"While there were some surprises in the December and January policy meetings, by and large, the governor’s communication has been consistent." Rajan’s next big task is to make the government buy his programme.

A decisive government may provide a platform for Rajan to attempt a wholehearted push for the reformation of the financial system. "He has very high credentials and in his own field, he is rated very high," says Arun Jaitley.

"He is doing his job to the best of his ability and his emphasis appears to be on the management of inflation, which is a legitimate effort." The certificate from the finance minister means Rajan is free to do his job with the determination and decisiveness with which he has delivered on currency and bad loans in the first year.

Surely, Truman would have clicked a like on Rajan’s Facebook profile. Will Modi do so?