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2nd term for Raghuram Rajan. To be or not to be?!

Four months before Raghuram Rajan’s term ends as the RBI governor (4th September), speculations are rife over his second term. The government has not yet made it clear whether he will get a second term. Rajan himself has said he has not been approached by the government as yet. And that’s really not a surprise, owing it to all the cross opinions Rajan has with FM Arun Jaitley regarding interest rate cuts and inflation being “under control”.

There are similar opinions in the market about Rajan’s performance as the central bank governor too. While he has been criticized as being too cautious by many, in reducing interest rates, especially by the India Inc, market economists have appreciated his restrained approach at a time when global markets were in turmoil.

CLSA’s equity strategist Christopher Wood has gone ahead (on 7th May 2016) and said that the biggest risk to the Indian bond and currency markets will be if Rajan is not given a second term. Wood has pointed out Rajan’s strict monitoring and actions in controlling non-performing loans (NPAs in all Indian banks, especially Public sector banks like SBI).

Those who have been criticizing Rajan for a delay in interest rate cuts should also know that banks are yet to keep pace with the series of rate cuts announced by the RBI governor over the past 18 months. Further cuts will be meaningless if banks are unwilling to pass on the earlier cuts to people who are more than waiting for something less to go out of their pockets. Otherwise, it’s just banks using the rate cuts to get rid off their NPAs and inability to make good lending decisions

Rajan has been at the striking end fighting from one crisis to another since the day he took over as the governor. He stepped in at the worst possible time a governor could wish for. The rupee was in a free fall almost touching the 70-mark against the dollar in August-September 2013. Rajan introduced two instruments that offered a short-term window for banks to swap fresh Foreign Currency Non-Resident (Banks) or FCNR (B) deposits and allowed overseas borrowing limit of Tier-I capital for banks to be raised from 50% to 100%. This move saw short sellers rushing to the doors. Outflows were not only stopped but nearly $10-15 billion of inflows were seen over the next few months.

It was under Rajan’s tenure that the central bank started following the much more meaningful Consumer Price Index (CPI) rather than the Wholesale Price Index (WPI). Partial slowdown in interest rate reduction can also be attributed to this change as CPI was at a much higher level than WPI and government actions in controlling inflation were not visible at the consumer level.

When banks were not willing to pass on interest rate cuts announced by RBI but were cutting deposit rates in order to garner profits to hide their non-performing loans, Rajan and his team introduced a change in methodology to marginal cost-based lending rate (MCLR), and at the same time giving banks liquidity to help them out of the crisis.

Banks were unwilling to disclose their toxic assets and needed to be arm-twisted in doing so. Rajan set a deadline for the banks to announce such assets. He also teamed up with the government in relaxing norms for loans in infrastructure sector which had been delayed on account of inaction by the previous UPA government.

What differentiate’s Rajan from his predecessors is his proactive steps in anticipating a problem and coming up with out-of-the-box solutions. At a time when the Indian economy is becoming an integral part of the global economy, the country needs a governor with international exposure to pre-empt the changing tides and act accordingly.

So, what with all the pros and cons, do you think he will / he should / he deserves to get another term? I guess we’re just mere spectators on this one. Only time will tell!

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