Detailed Analysis Of Raghuram Rajan's

Tenure As RBI Governer

Introduction
Raghuram G Rajan is and Indian economist and financial expert. He was
serving as the 23rd Governor of the RBI (Reserve Bank of India) from
September 2013 to September 2016. Previously he was also the chief
economist at the International Monetary Fund (IMF) from 2003 to 2007.
Currently, he is serving as the vice chairman of the bank for international
settlements.

Dr Raghuram Rajan is known for his vast knowledge of global economy and his
intuitive analysis. His name was featured on the Time magazine list of 100
most influential people in the world. He has B. Tech in electrical engineering
from IIT Delhi. After that he went for his MBA from the IIM Ahmedabad and a
doctoral degree from MIT Sloan School of Management. He served as a
professor of finance at the University Of Chicago Booth School Of Business
from 1991 to 2013. Later he took a public service leave to become the RBI
governor in 2013. This article will help to highlight some of his prominent
works as the Governor of RBI.
Raghuram Rajan as the RBI Governor
Many experts consider the term of Raghuram Rajan as a power packed one
with priority given to cleaning up of Indian banking sector. He has his
signature style of quick decision taking and tackling issues.
The following parameters will help us understand the performance of his
tenure:-
INFLATION
When Dr. Rajan was appointed in 2013 Indias retail inflation was 10.70%. He appointed a
committee to review the monetary policy framework. The committee was headed by deputy
governor Mr Urjit Patel (Now the governor of RBI). The recommendation by the committee was
to adopt the consumer price inflation index as the nominal anchor for monetary policy in the
country. The RBI and the government of India made a new monetary policy which set an
inflation target for the center. After his 3 year tenure, he was able to bring inflation down by
almost half to 5.76% in 2016. The wholesale inflation rate was also lowered. The consumer price
inflation was at 10.62 percent in August 2013 and eased to 5.77 percent in June 2016.
The RBI's inflation target is at 4 percent, with a band of plus/minus 2 percent.
Retail inflationor consumer price inflationwas around 10% in 2013. Today,
it is around 6% and, with the RBI and governments official target in place, it
may not easily inch up. But then, there are factors such as deficient monsoons
that are beyond anyones control. In its policy reviews, the RBI has repeatedly
warned that bad monsoons could drive food inflation higher.
 INTEREST RATE
During his tenure RBI was involved in rate cutting. In 2015 the repo rate was
cut down by 1.5 % from 6.5 per cent.
In his maiden monetary policy review, Rajan stumped everyone when he hiked
the repo ratethe rate at which the RBI lends to commercial banksto 7.5%
looking to rein in high inflation. At a time when the economy was growing at
the slowest pace, Rajan was expected to cut rates and boost spending and
demand. But he stayed firm on his view that inflation is the bigger concern
that needs to be fixed.

Since that day, he hasnt given in to demandsbe it from the industry or the
governmentto go easy on rates. He has single-mindedly focused on the
sticky inflation situation in India. As a result, retail inflation came down to
5.77% in June 2016, compared to 9.5% in August 2013 when he was
appointed. Additionally, he put in place a formal inflation target with the
government, which will be continued even after his departure.
 FOREX RESERVES
In September 2013, when Rajan assumed charge, he had two related issues.
One, the rupee had weakened sharply against the dollar, hitting almost Rs. 69
to the dollar. Secondly, Indias currency reserves had hit a three-year low.

What the central banker essentially did at the time was offer discounted
currency swaps to banks in order to spur inflows: specifically, a scheme was
announced for FCNR (B) deposits raised by commercial banks that
incentivised them to sell those deposits aggressively. These banks ended up
raising a total of $34 billion in the three month swap window opened by the
RBI in 2013, which helped shore up reserves as well helped protect the-then
vulnerable rupee.

While the redemption of most of these deposits will happen in September,

which has sparked some amount of concern, Rajan believes that the RBI has
enough firepower to manage the deposit outflows.

In his three year tenure, foreign exchange reserves have risen from $249
billion in September 2013 to $359.76 billion as of April 1, 2016.
INDIA'S CURRENT ACCOUNT
DEFICIT IMPROVED
Current account deficit fell from $18.08 billion in March 2013 to $320 million
in March 2016.

Reuters data showed India's current account deficit in the three months to
June 30, 2013 was approximately $21.77 billion, compared to $320 million in
the three months that ended March 31, 2016.

To be sure, factors outside the scope of monetary policy have also helped to
narrow the current account deficit, particularly the steep decline in oil prices.
 RUPEE VS DOLLAR
Rajan's policies helped to steer the rupee higher against the dollar, after the
Indian currency hit record lows near 69 rupees to a dollar in the third quarter
of 2013.

Rajan set up a program where banks were given incentives to offer dollar
deposits to Indian citizens abroad in a bid to shore up India's foreign reserves
and restore foreign investor confidence. The RBI then exchanged those
dollars for rupees, said Reuters.

The rupee rose to as high as 58.36 against the dollar in 2014 before hitting
levels near 69 against the greenback in February.

The narrower current account deficit and stabilization of capital outflow

pressures in India seem to suggest, however, that the recent declines may
stem partially from the broad strength in the greenback.
INDIA'S STABLE STOCK
MARKET
India's stock market performance was relatively stable during Rajan's tenure,
with foreign investors drawing comfort from Prime Minister Narendra Modi's
reformist credentials as well as Rajan's steady handling of the economy.

However, concerns over the health of India's financial market remained due to
a growing number of top firms who have been struggling to make interest
payments on their debt.

Under Rajan's tenure, the RBI launched an asset quality review for India's
public sector banks to take necessary steps to clean up their balance sheets by
March 2017.

Under the guidance of Dr. Rajan the RBI provided a number of tools to tackle
the bad loans. It also enable the banks to turn over the management of a
company by using the debt restructuring rules.
GDP GROWTH
Despite intense political pressure to bring down interest rates, Raghuram
Rajan has been able to fend off calls to lower rates and still bring the economy
back to a fast growth trajectory. This is despite the fact that economic
fundamentals continue to remain weak and the economy still vulnerable to
external and internal triggers.

The best proof of the success of Dr. Rajans policies, especially during the NDA
regime, is the fact that GDP in the last quarter has grown by 7.9%, as per latest
figures released.

While it is true that he has been ably supported by a hyper-active PM and his
cabinet, who have collectively focused on reviving the economy and bringing
growth back to higher levels, as witnessed in earlier years.
INDEX OF INDUSTRIAL
PRODUCTION
Industrial production contracted 3.2% in November, 2015, the sharpest
decline in 4 years, mainly on account of dip in manufacturing activity.

RBI has lowered policy rate by 1.25% in 2015 to boost growth and may face
pressure to reduce it further.
 CRITICISM
Rajans early focus and battle with inflation earned him nicknames ranging
from inflation warrior to inflation hawk. There are a number of points to
consider here when viewing the criticisms against Rajans stance on inflation
and interest rates. The most important one is that Rajans stance is not new; if
anything, as a number of analysts have pointed out, he has more aggressively
expanded on his predecessors attempt at using interest rates to curb
inflation.

The arguments in favour of Rajan having erred, when it comes to interest rates
and inflation, are three-fold.

First, the central idea that the high inflation in the Indian economy was due to
excess domestic demand is flawed. As a handful of commentators have
pointed out, this inflation can be more attributed to global excess demand and
thus raising interest rates was flawed. If this is true, Rajans restrictive
monetary policy has been completely off the mark.
Second, even if Rajans initial stance of keeping inflation as the RBIs number
one goal was correct, he may have been too late in recognising when this goal
was achieved and therefore late in eventually cutting interest rates. In
September 2015, Rajan and chief economic adviser Arvind Subramanian (who
were both colleagues once at the IMF) issued apparently contradictory public
statements. Rajan at the time was still hesitant to cut interest rates even
though retail inflation had fallen to 3.8%. Subramanian, on the other, worried
that in terms of the prices measured by national income accounts, we are
closer to deflation territory.

The problem of different perspectives here whether India was undergoing

disinflation or deflation stemmed from the RBIs decision to look at retail
inflation (CPI) while deciding its monetary policy. So while the the wholesale
price index sat at negative 4% at that point of time, CPI was still at 3.8%.
CONCLUSION
ADDITIONAL STATS
 Made By:
Parang Mehta
20142043