Reasons why Rajan should be given a second term at RBI

Recently, speculations have been rife about whether the government would let the RBI Governor Raghuram continue for another term. Though Rajan has not given any direct statement on the matter, he expressed an interest in continuing for the second term in a recent interview to a business news channel saying, ‘there is always more to do’. But one cannot ignore the fact there have been calls from some sections of the ruling BJP against any extension for him. Let’s take a look at why it’s important to give him a second term.

1. Globally Renowned Economist
There is no parallel to Raghuram Rajan’s calibre and the vast wisdom he brings to the table. The status quo is required more so because of the economy passing through a difficult period. There are global headwinds, which are quite unpredictable like the Chinese slowdown and consequent commodity crisis. And the man who predicted the global meltdown of 2008 is the most appropriate to guide the Indian economy. His clinical approach to many of the issues in banking and finance will go a long way in creating a robust financial system. Rajan, whose term ends in September this year, has said in an interview that ‘much has been accomplished during his ( first ) tenure but there is ‘more to do.’ There is certainly more to do for restless Rajan at this juncture where many of his own initiatives in the banking space would roll out. In fact, many of his initiatives requires nurturing, monitoring and mentoring.

2. New Monetary Policy Framework
Rajan has worked on the new monetary policy framework for targeting inflation and creating a monetary policy committee (MPC). This was one of his first decisions when he landed at the RBI headquarters. While RBI has already been following an inflation targeting approach with CPI inflation down from 10 per cent to below 6 per cent on an average, the MPC will finally kick off in August -September this year. Rajan has strongly negotiated with the Government for the constitution of MPC and it would be worthwhile to see an independent Rajan leading the committee in for next three years.

3. New Banking Models
In a path-breaking move, Rajan has introduced a differentiated banking licensing regime with payments and small finance banks. There are already close to two dozen such banks making their debut in the next two years. These new models are being created as against full scale banks to achieve financial inclusion as the traditional model has failed miserably to bring people in the rural and semi-urban areas under the formal system. There are more initiatives in terms of wholesale banks and also ‘on tap’ banking licenses in future. This new regulatory regime needs the man who created the architecture for such a system to monitor and nurture them in order to create better regulations for such entities in future.

4. Rewriting Banking Regulations
The banking regulations have not kept pace with the changes that are happening in the global financial system. There are many areas where Rajan has brought fresh thinking. The notable among those are in the areas of non-performing loans. Rajan has not only introduced new regulations for early recognition of stress, but also created a framework for taking over the management of these companies through special debt restructuring (SDR) mechanism or completely sell the assets to asset reconstruction companies (ARC). There are also measures like cleaning up the books by making accelerated provisions for stressed accounts by March 2017. Similarly, Rajan is nudging the banks for not transmitting the policy rate cuts to final borrowers like retails and corporate. He has introduced a new marginal cost of funding method for calculation of base rate to immediately pass on the interest rate cut benefits to new borrowers as well as old borrowers subsequently.

5. Reforming RBI’s Organisation
Rajan has already set in motion many initiatives to reform the RBI’s 81 year-old organisational structure. There have been minor changes earlier, but Governor Rajan is making the organisation more nimble footed in tune with the changes that are happening around. He is creating new organisational capabilities in the areas of cyber security, legal and forensic auditing and market intelligence. He is also unleashing human resources initiatives like creating domain expertise, performance based culture, training and development. “The idea is to break up management from development. Management is more day to day and development is enhancing the quality of human resources. They feed into each other,” Rajan told BT in a recent interview. The far reaching changes that institutional builder Rajan is bringing about in a 81 year old organization requires a man of his calibre to nurture it for three more years.

The Prime Minister Narendra Modi himself has praised Rajan in the past for making things simple to understand when it comes to economic issues. “He must have been a very good teacher in the past,” Modi had said. In fact, many of Modi’s colleagues want Rajan to go back to school. Last week, BJP Rajya Sabha MP Subramanian Swamy openly said about sending him packing.
If Rajan, who is on leave from the Chicago Booth School, leaves, it would certainly be a great loss not only for the RBI, but also for the country.

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