We will never know the real reason why Raghuram Rajan chose to move on from his position as the Governor of the Reserve Bank of India. What we do know is that Rajan announced his intent to return to academia, a good 81 days before his official term expires on September 4 and suggested that he had been open to the idea of staying on. What we also do know are the facts in the public domain.
What stands out clearly is that the government – at least going by its representatives and friends – wasn’t comfortable with Rajan at all.
First, the various letters of Subramanian Swamy to Prime Minister Narendra Modi, filled with various allegations and accusations. Aside: in case you missed it, Swamy secured his berth in the Rajya Sabha in April 2016. Swamy in, Rajan out. Coincidence?
Second, the various statements made by ministers taking jabs at Rajan. Sample: Commerce and Industry Minister Nirmala Sitharaman who questioned Rajan’s “choice of words” when he said what was obvious to anyone of reasonable intelligence: “In the Land of the Blind, the one-eyed man is king." When the world is witnessing an economic slowdown, India’s growth stands out. In April 2016, the Coal and Power Minister, Piyush Goel said that Rajan was “only aggravating the problems and making it worse by increasing interest rates”.
Third, the term of every RBI Governor since 1992 (Subbarao, Reddy, Jalan, and Rangarajan) was extended. Till now.
Speaking his mind
Maybe Rajan knew his time was up. He gave so many speeches in the past where he came across as refreshingly outspoken and daringly different from all his predecessors that it seemed he knew he had nothing to lose. From explaining why corrupt politicians exist to invoking Hitler and pointing out that a strong government may not move in the right direction to talking against intolerance, right down to explaining inflation and interest rates with "dosanomics".
Ask yourself this: When was the last time an RBI Governor reached out to an audience beyond the boring Dalal Street and Mint Road types? Or ran a marathon?
Raghuram Rajan was born in 1963. His predecessors were born between 1932 and 1949. They were aged between 56 and 62 when they took charge of the RBI. Rajan is 53 years old today. Why is this important? Because Rajan is young and that matters when India’s largest demographic, supposedly its biggest strength, is the youth.
Rajan, with his speeches, with his honesty, reached out to an audience much bigger than his predecessors. In times when our freedom of expression is being curtailed by over-zealous protectors of morality, we need such young public figures who dare to speak out.
Beyond words
But enough about emotion, let’s move to merit. What did Rajan achieve at the RBI? For starters, he took charge in September 2013, when the markets were in turmoil following the taper tantrum – when the Nifty had fallen 13% and the Indian Rupee had fallen 15%, just before he joined (July 23 to August 28, 2013, to be specific). The day after Rajan took charge as the RBI Governor, the Nifty rose 3%. Sure, markets rise and fall everyday but they also send messages. And this was a strong message – finally a credible Governor, finally a technocrat and someone who – as an added bonus – had called the global financial crisis as far back as 2005.
As soon as he took charge, he opened a special concessional window for banks to attract foreign currency non-resident banks – or FCNR(B) – deposits. Once this was done, FCNR bonds flowed into India, mitigating the current account deficit crisis then. Three years later, these bonds are due for redemption in 2016, and the RBI is well equipped to handle these outflows.
In these three years, the RBI also moved to specifically – and not informally – targeting CPI Consumer Price Index inflation. This also meant that in his first year of office, Rajan raised repo rates by 75bps. And once the economic cycle improved, Rajan also reduced interest rates – 150bps since January 2015. This is probably where he made his enemies since the calls for a more aggressive reduction in interest rates grew louder.
Corporate India loves lower interest rates even if it doesn’t always pass them on to end consumers. Politicians love lower interest rates since it gives the impression that things are getting cheaper. Rajan might not be the first RBI Governor to be accused of being too aggressive – or conservative – or ahead – or behind – the curve, but in standing his ground, he showed his independence. Which is what the country needs: A strong, independent RBI. Rajan also opened up the banking sector to technology-based payment banks and called for more realistic recognition of non-performing loans. All of these are to his credit and will go a long way in transforming India’s banking system.
But for now, Rajan is gone. And no replacement will compare even half as good. But markets move on and – as the cliché goes – institutions are larger than individuals. Markets will continue to fall and rise again and soon a new RBI Governor will take charge. But, come September, Rajan will leave the RBI in a much better shape than what it was in when he took charge.
A man of his own mind, a free speaker and a brilliant thinker, he lived up to what he once said: “My name is Raghuram Rajan and I do what I do.”
Anupam Gupta is a Chartered Accountant and has worked in equity research since 1999, first as an analyst and now as a consultant. His Twitter handle is @b50.