The Reserve Bank of India seems to disappoint perceptions in most instances. When Duvvuri Subbarao, the previous central bank governor, came in, he was seen as a man from the finance ministry, one planted to toe the government’s line. But we saw him declare independence and act as the RBI Governor should – informed, independent and on technical rather than political considerations.

It’s been the same with Raghuram Rajan. He came into the office as a relatively young academic with an international perspective. Unlike his predecessors, he had a reputation that preceded him: he had authored a report on the reform of the financial sector in which his positions were well articulated.

So the expectations from him were known – or at least that is what we thought. He was expected to “put sex into the sensex”, take the economy to dizzying heights, be a much-loved markets man, cut interest rates and generally get on with action.

In his early days, he almost seemed to promise cowboy-like action, coming in and immediately setting up committees that would look into monetary policy processes and financial inclusion. In quick time, he was opening up fronts based on the recommendations of these committees. This was very much unlike his predecessors who were measured in their approach. That was the DNA of RBI and Rajan was trying some genetic engineering.

Taking stock

Looking back, how has he fared? Rajan’s ideology was with the markets and therefore he was naturally expected to be market friendly. But over time, there was a sense of frustration – both with industry and with the government – that this ideology was not translating into spectacular growth. So what was lacking?

Rajan believed that capitalism should be saved from capitalists. So being market-friendly does not necessarily mean being friendly with cronies. They are friends to socialise with but regulatory action should be taken strictly on merit. One of the reasons why the markets could not criticise him was that they did not have a technical argument against his actions. He was transparent and laid out roadmaps. He talked about positive action from the RBI if the government stuck to a manageable fiscal deficit target. He acted when that was delivered.

Here was a person who was frustrating a whole lot of people by being right. While the expectation was that he would deliver on big bang reforms on currency, on derivatives, deepening the markets, moving towards full convertibility of the rupee, Rajan did something else.

It appeared that he opened up the report he had written in 2009 on financial sector reforms and listed out the unfinished agenda that was within the realm of RBI. The report “A Hundred Small Steps”, had 35 specific proposals of reform and he seems to have started checking them off. They included:

  1. Making inflation-targeting the predominant function of the RBI.
  2. Open up banking to well-governed deposit-taking small finance banks.
  3. Liberalise the business correspondent network.
  4. Give the banks the opportunity to trade in priority sector obligations through priority sector lending certificates.
  5. Liberalise interest rates that institutions can charge, including for the poor.
  6. Create stronger boards for large public sector banks.
  7. Remove restrictions on banks opening branches and ATMs.
  8. Expedite the creation of a unique identification number with biometric identification.

All the above actions are market friendly. They create opportunities for deepening the markets. But these did not make crony investments easy, did not make leverage better, did not help one business group or the other to make a big bang investment and a super profit. It set up a framework on which business can operate, removing the secrecy around much of the decision making and also giving up the centrality of setting interest rates from a person to a committee (without a veto power). His belief was in setting up the structures in which market-friendly measures can work, than just take these measures without the structures that provided checks and balances.

Other plans

Not only did he pick these up, additionally he was restructuring RBI from within. Creating structures for empowering and upgrading the skills of officers, thinking of allowing for specialisation within the RBI staff, and reaching out to youth encouraging them to do internships and consider career options with RBI and much more. He looked like a man in a hurry, but somebody who drove without jumping the signals. He went about his task in the RBI much like his batchmates would have run a corporation: pressing for performance, laying deadlines and operating on data-driven informed and technically correct decisions.

Anybody very warmly welcomed by the business community (as Rajan was) should be viewed with much suspicion. Anybody who is overtly market friendly should also be seen with equal suspicion. But Rajan turned out to be a public intellectual who spoke his mind and was a welcome change.

He made it difficult to measure his performance as governor, by making inflation targeting a fetish. Governors are expected to deliver on a much larger agenda, but he allowed everybody to shoot at the inflation target which he pointed towards, while he happily was doing a whole host of things that were not being questioned.

There are instances that have gone without much of a scrutiny.
  1. The internal restructuring of RBI to keep in time with the changing times. We do not know what the basis was, what logic was applied and the effect it is going to have on the co-ordination between departments, the regulatory agenda and the morale. That is a black box.
  2. The institute promoted by the RBI, the Centre for Advanced Financial Research, has two power centres – one on the training side and one on the research side. What has this done to the effectiveness of the institution and its agenda is not known.
  3. The huff with which former RBI deputy governor KC Chakrabarty – a person who was passionately involved with the financial-inclusion agenda – left the bank before his tenure ended went largely unnoticed. Nobody seemed to dig up with Chakrabarty on what transpired.
  4. The Mohanty committee on medium-term road map for financial inclusion was a damp squib. It said many things (as did the Nachiket Mor committee report) but nothing seems to have come of it.
  5. The enthusiasm with which the recommendations of the Nachiket Mor committee was accepted – particularly on the Payments Bank space – seems to be posing more questions than Rajan would like to handle.

Of course, what could be scrutinised of Rajan's performance has not yet played out. We are going to have 17 new banks opening shop soon and possibly only one or two of the payments banks may be formally inaugurated before he steps down. There are questions on whether payments banks as an institutional form had been well thought-out (and are a good idea). Rajan will not be around to see how it plays out and take responsibility. Similarly, the internal reform and restructuring at RBI has not played out in entirety.

The next governor will have a challenge to deal with the ambitious initiatives and ideas at the initiation stage. If that turns out to be a mess, history may judge Rajan differently. However, he is leaving on a high after a breezy Twenty20 type of innings. What this does to the game of cricket is to be seen and that is as uncertain as the profile of the incumbent. If he was to be given an extension, it should have been on the technical grounds that he needed to take responsibility for all the initiatives that he started till the consolidation stage. That was not to be.

MS Sriram is visiting faculty at IIM Bangalore's Center for Public Policy.