ECON/044

IBS Center for Management Research

ST
PO
R
Imperatives for Reserve Bank of India – Agenda for Raghuram
O
Rajan

P Y
This case was written by Hepsi Swarna, under the direction of G V Muralidhara, IBS Hyderabad. It

O
was compiled from published sources, and is intended to be used as a basis for class discussion
rather than to illustrate either effective or ineffective handling of a management situation.

C
T
O
N
O
D
 2014, IBS Center for Management Research. All rights reserved.

To order copies, call +91 9640901313 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally,
Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: info@icmrindia.org

www.icmrindia.org
 ECON/044

Imperatives for Reserve Bank of India – Agenda for

INTRODUCTION
Raghuram Rajan

ST
O
On August 28, 2013, the value of the Indian rupee vis-à-vis the US dollar plummeted to a record

P
low of INR68.80.The stock market took a plunge and on the same day, the BSE SENSEX touched
an intra-day low of 17,720, down a whopping 13.6 % from January 2013’s high of 20,500. Foreign
investors pulled out an staggering INR620 billion (USD10.5 billion) from the Indian capital
market during June-July 2013 amid concerns over the depreciating rupee. Inflation in India had

R
been running high at above 7% since December 2009; current account deficit had expanded to
record levels (4.8% of GDP in 2012); and several projects were reportedly stalled due to policy

O
bottlenecks.1 The investment climate was not seen as encouraging by corporates.
In the first quarter (April-June) of the fiscal year 2013-14, India’s economy grew at its slowest in
the previous four years and recorded a growth rate of 4.4%.2 In October 2013, the World Bank

1991.

P Y
revised India’s economic growth forecast for the fiscal 2014 to 4.7 % against the earlier estimate
of 6.1%.3 Experts pointed out that the Indian economic condition in 2013 was the worst since

At a time when India was facing its worst financial and economic crisis in decades, with slowing

C O
economic growth, high inflation, a record high current account deficit, and the rupee hitting record
lows, Raghuram Rajan (Rajan) was appointed as the 23rd governor of the Reserve Bank of India
(RBI) on September 04, 2013, for a period of three years. The day after he was appointed, Rajan
outlined a reform plan focusing on boosting investor confidence and stabilizing the falling rupee.
As a result, the rupee and stocks strengthened. On September 05, 2013, the rupee gained 1.58%,

T
going up to INR66.01 against the dollar and the stock market closed up by 2.22% to 18,979.76.4
By October 16, 2013, the rupee recovered by almost 9% since September 2013, to INR61.83

O
against the dollar.5 Rajan was described as a person with the Midas touch and was portrayed as a
rock star governor, both in the national and international media, for stopping the rupee fall.

N
Questions were, however, raised about Rajan’s capacity to bring India out of its economic crisis,
given that he had control over only the monetary policy. Economists and analysts kept a keen
watch on Rajan’s moves to see if he could contain the crisis in India and bring it back on growth

O
path. The answer to this question was expected to matter not just to India but also to other
emerging economies embroiled in a similar crisis.

D
1

3
“Economic Survey 2012–13”, http://indiabudget.nic.in, 2013
“Estimates of Gross Domestic Product for the First Quarter (April-June) of 2013-2014”, Press
Information Bureau Government Of India, http://mospi.nic.in , August 30, 2013
K R Srivats, “World Bank lowers India’s GDP growth forecast for 2013-14”,
http://www.thehindubusinessline.com, October 16 , 2013
4
“Raghuram Rajan comes in as RBI governor, rupee and stocks rise”, http://www.hindustantimes.com,
September 05, 2013
5
Sachin Kumar, “The Rajan effect: rupee rises again”, http://www.hindustantimes.com, October 16, 2013

1
 Imperatives for Reserve Bank of India – Agenda for Raghuram Rajan

BACKGROUND

In 1926, the Royal Commission on Indian Currency (Hilton Young Commission) recommended
the establishment of a central bank to be called the Reserve Bank of India (RBI). On March 05,
1934, the Reserve Bank of India Act, 1934, (II of 1934) was passed which provided the statutory
basis for the functioning of the RBI. On April 1, 1935, the RBI commenced its operations with Sir
Osborne Smith as its first Governor. The Bank was constituted as a shareholders' bank6.7 In one of
the major events at the RBI, in 1938, the first RBI notes were issued. The RBI was formed to:

T
regulate the issue of bank notes; maintain reserves with a view to secure monetary stability; and to
operate the credit and currency system of the country to its advantage.8
The RBI’s monetary policy throughout its history focused primarily on inflation control and
expansion of bank credit to support economic growth.9 By 2008, with the development of a broad-
S
O
based financial market with closer global inter-linkages, financial stability was included as another
important objective of monetary policy in India

POST INDEPENDENCE EVENTS

P
R
A major milestone in the history of the Reserve Bank was its nationalization in 1949. The RBI was
nationalized with the passing of the Reserve Bank of India (transfer to public ownership) Act in
1948. In terms of the Act, all the shares were transferred to the central Government on payment of

O
compensation to the shareholders.10 Thus, after January 1, 1949, the Reserve Bank of India
functioned as a state-owned and state-controlled (nationalized) bank. The nationalization of the
RBI was also supplemented by the passing of the Banking Regulation Act, 1949, conferring on the

P Y
central bank the vast power to control the activities of the commercial banks. In the same year, the
Banking Companies Act (later renamed as the Banking Regulation Act) was passed, which
required the banks to maintain liquid assets for the first time. On September 19, 1949, the rupee
was devalued by 30.5% as a defensive measure, due to devaluation by other ‘sterling area’
countries.11

O
After 1951, there were major changes made in India’s economic and monetary policies. In 1951,

C
five-year plans were launched, which took India toward a more planned economy. The State Bank
of India was formed in the year 195412, to bring rural credit to the center stage of central bank
activism. On October 6, 1956, to meet the expanding currency requirements of the economy, the

T
system of note issue changed from the Proportional Reserve System (PRS) under which the RBI
was required to maintain 40% gold and forex reserves against note issue, to a Minimum Reserve
System (MRS)13.

O
N
6
Initially, the RBI was established as a shareholder’s bank. Its share capital was INR50 million, divided
into INR0.5 million fully paid up share of INR100 each. Out of this, shares of the nominal value of
INR0.22 million (2200 shares) were allotted to the Central Government. The remaining share capital was
owned by the private individuals. Thus, the control on the policy of the RBI remained with the

O
Government.
Reserve Bank of India, “Chronology of Events: The Early Years – 1935 to 1949”, http://www.rbi.org.in

D
8
Reserve Bank of India, “Chronology of Events: Brief History”, http://www.rbi.org.in
9
Amaresh Samantaraya, “Monetary Policy of the Central Bank:Simplifying the Mystique”,
http://cab.org.in, April-June 2008
10
“Role of RBI in Indian Economy”, http://www.scribd.com
11
Reserve Bank of India, “Chronology of Events: The Early Years – 1935 to 1949”, http://www.rbi.org.in
12
“Glimpses of RBI’s history”, http://www.bankbazaar.com, January 21, 2010
13
Minimum Reserve System means that the RBI can issue any amount of currency notes provided it keeps
the minimum statutory limit of INR2 billion in gold and government securities, of which INR1.15 billion
should be in gold.

2
 Imperatives for Reserve Bank of India – Agenda for Raghuram Rajan

In 1960, the policy of reconstruction/compulsory amalgamation of banks was introduced to

consolidate the banking sector.14 Around 200 banks were merged or liquidated between 1960 and
1982.In 1962, H V R Iyengar, RBI governor from 1957-1962, identified four areas of conflict
between the RBI and the government –interest rate policy, deficit financing, cooperative credit
policies, and management of sub-standard banks. 15 Under his leadership, the monetary policy for
the very first time used the variable Cash Reserve Ratio (CRR)16 and selective credit controls. In
December 1967, social controls over banks were introduced in India to align the banking system
with the needs of the economic policy. As a result, 14 major Scheduled Commercial Banks (SCB)

T
with deposits of INR50 million, were nationalized for the development of the economy. After the
nationalization of the banks in the late 1960s, monetary policy in the form of credit planning17

S
assumed a lot of importance.
During the early 1970’s, inflationary trends in the country led to the initiation of strong measures

O
by the RBI. To tame inflation, the RBI increased the Statutory Liquidity Ratio from 25% to 28%
and hiked the bank rate18,19 In 1973, there was an oil shock, wherein oil price quadrupled, resulting

P
in double digit inflation and recession in the country. To deal with this, the RBI implemented a
series of measures to contain the expansion of bank credit. Another major development was that
the Foreign Exchange Regulation Act, 1973, came into force on January 01, 1974, to conserve

R
foreign exchange. To increase its focus on rural development, the RBI set up Regional Rural
Banks (RRB) in 1975 as alternative agencies to provide credit to rural people. 20

O
In the 1980’s, the monetary policy regime which was heavily regulated, was constrained by a high
level of deficit financing, priority sector lending, controlled interest rates, and an outdated financial
sector. It was against the backdrop of these obstacles that the Chakarvarty Committee in 1985
reviewed the functioning of the monetary and banking systems of India and made some

P Y
recommendations. According to the Chakarvarty Committee’s recommendations, a flexible
monetary targeting approach21 was introduced as the basic framework of monetary policy. 22 The
other recommendations included emphasis on price stability and economic growth, coordination
between monetary and fiscal policy to reduce the fiscal burden on the former, and a scheme of

Vaghul Committee in 1987.24

14 C O
interest rates in accordance with valid economic criteria.23 Another noticeable shift in the monetary
policy was the introduction of money market reforms following the recommendations of the

Reserve Bank of India, “Chronology of Events: Institution Building– 1960 to 1971”,

15
http://www.rbi.org.in

T
Y.V. Reddy, “Monetary and Financial Sector Reforms in India: A Practitioner's Perspective”,

16

O
http://www.economics.cornell
CRR is a legal obligation on scheduled commercial banks to maintain certain reserves in the form of cash

N
with the RBI.
17
Credit planning included regulating the quantum and distribution of credit flow to various sectors of the
economy, in line with national priorities.
18

O
Bank Rate is the rate of interest at which the Reserve Bank is prepared to buy or rediscount bills of
exchange or other commercial papers eligible for purchase under the RBI Act,1934.With raising or
lowering of the Bank Rate, the cost of borrowing from the RBI for the banks becomes dearer or cheaper.

D
19
Reserve Bank of India, “Chronology of Events: Social Controls, the Nationalisation of Banks and the era
of bank expansion - 1968 to 1985”, http://www.rbi.org.in
20
Glimpses of RBI’s history”, http://www.bankbazaar.com, January 21, 2010
21
The final objective of a monetary targeting policy was price stability. Under monetary targeting, the
central bank intervenes in the money market.
22
“Analytics of Monetary Policy in India since independence”, http://shodhganga.inflibnet.ac.in
23
“Analytics of Monetary Policy in India since independence”, http://shodhganga.inflibnet.ac.in
24
“Report Of The Working Group On Operating Procedure Of Monetary Policy”, http://rbidocs.rbi.org.in,
March 2011

3
 Imperatives for Reserve Bank of India – Agenda for Raghuram Rajan

In 1991, there was an external payment crisis, due to which the rupee was devalued in two stages.
The cumulative devaluation was about 18% in USD terms.25 In 1991, the Narasimham Committee
recommended a wave of financial sector reforms in the country. The deregulation of interest rates,
which started in the early 1990’s, was completed by October 1997.26 The Narasimham Committee
pointed out that a high Cash Reserve Ratio (CRR) adversely affected the profitability of banks, as
it exerted pressure on them to charge high interest rates on their commercial sector advances. 27 As
a result, CRR as a tool of monetary control was de-emphasized and liquidity management was
undertaken by Open Market Operations (OMOs)28.
Another major reform was carried out in the year 1997 under the leadership of C. Rangarajan
(Rangarajan), RBI governor from 1992-1997.Rangarajancame out forcefully in favor of procuring
greater autonomy for the RBI. This paved the way for the signing of a historic memorandum
between the RBI and the Government, whereby a cap was put on the automatic finance by the RBI
ST
markets endowed the RBI with considerable instrument independence to achieve the monetary
PO
to the Government in the form of ad hoc treasury bills.29 This measure resulted in the elimination
of the automatic monetization of government deficits and moderated the monetized deficit in the
late nineties.30 Simultaneously, the opening up of the economy and the development of financial

policy objectives. Finally in April 2006, the phasing out of the participation by the RBI in the

R
primary auction of government securities enabled the central bank to conduct monetary policy
operations using a market-based model.31

O
In June 2000, the Liquidity Adjustment Facility (LAF)32 was introduced as a tool to modulate
short-term liquidity and signaling of interest rates in the overnight market. As of 2012, LAF had
emerged as the key element of the monetary policy, as it helped in steering the desired trajectory of
interest rates in response to evolving market conditions.

RBI GOVERNORS: 1997-2013

P Y
C O
Out of all the RBI governors, Bimal Jalan (1997-2003), stood tall for his crisis management skills.
Jalan became the RBI governor in November 1997, when the Asian financial crisis was at its peak.
A series of problems like the US sanctions, the Kargil War, an oil crisis, and the US invasion of
Iraq followed, and Jalan brought in sweeping reforms. The Financial Express, highlighting the
large number of Jalan’s achievements during his tenure as governor, said, “The external sector

T
management, the control of inflation, the strengthening of the banking system, internal debt
management, regulation and supervision, currency management and internal reforms on HRD
were all handled with sagacity, élan and style.”33 According to the RBI, Jalan’s tenure was

O
N
25
Reserve Bank of India, “Crisis and Reforms: 1991 to 2000”, http://www.rbi.org.in
26
“Report Of The Working Group On Operating Procedure Of Monetary Policy”, http://rbidocs.rbi.org.in,
March 2011
27

O
“Analytics of Monetary Policy in India since independence”, http://shodhganga.inflibnet.ac.in
28
OMO is an activity by a central bank to buy or sell government bonds on the open market.
29
Reserve Bank of India, “ Reserve Bank of India History: Governors”, http://rbi.org.inl

D
30

31

32
Y.V. Reddy, “Monetary and Financial Sector Reforms in India: A Practitioner's Perspective”,
http://www.economics.cornell
Report Of The Working Group On Operating Procedure Of Monetary Policy”, http://rbidocs.rbi.org.in,
March 2011
LAF enables banks to mitigate their short-term mismatches in cash management on a daily basis with the
RBI. LAF operates through repo and reverse repo auctions, thereby setting a corridor for the short-term
interest rate consistent with policy objectives.
33
“Select Press Comments On Demitting Office As Governor, RBI”,
http://www.bimaljalan.com/farewell.html

4
 Imperatives for Reserve Bank of India – Agenda for Raghuram Rajan

characterized by the strengthening of the balance of payments and forex position, low inflation,
and soft interest rates (Refer to Exhibit I for the relative performance of India’s recent four RBI
governors).
Y. V. Reddy (Reddy), RBI governor from 2003 to 2008, took charge in relatively more stable
times. During his tenure, Reddy understood the risk of global imbalances and mispricing of risks
in the global markets. As a result, he maintained a tight monetary policy stance throughout his
tenure. 34 Unlike Rangrajan and Jalan35, who shared a good relationship with the government,
Reddy did not enjoy a cordial relationship with P Chidambaram (Chidambaram), India’s finance
minister. Reddy did not agree with Chidambaram on financial sector reform, especially on
liberalizing the capital account in haste. 36 Reddy also disagreed with him on interest rates,
increasing the interest rates to cool down an overheated economy, whereas Chidambaram favored
low interest rates to promote economic growth.
ST
Dr. Duvvuri Subbarao (Subbarao), the 22nd RBI Governor (September 2008-2013), assumed

PO
responsibility when the global financial system had almost collapsed into the deepest economic
crisis since the Great Depression. Subbarao too shared an uneasy relationship with the finance
ministry over the RBI’s tight monetary policy. Chidambaram was unhappy with the fact that the

R
RBI under Subbarao’s leadership decided to keep the interest rates high, despite the government
unveiling a five-year fiscal consolidation map.37 Subbarao did not heed his advice to reduce the
interest rates. Chidambaram criticizing his stance, said in October 2012, “Growth is as much a

we will walk alone.”38

O
challenge as inflation. If the government has to walk alone to face the challenge of growth, then

On August 29, 2013, in his farewell speech, Subbarao remarked that with no clear mandate set out

P Y
in the RBI Act, the government blamed the RBI and its monetary policy for all the economic
problems, especially the slow economic growth and the rupee depreciation during 2012-2013.39 He
said the moderation in India’s economic growth to 5% in the fiscal year 2012-2013 from 6.5% in
2011-2012, was due to a host of supply-side constraints and governance issues, and not to the

C O
RBI’s tight monetary policy.40 According to Subbarao, the widening current account deficit, which
resulted in the rupee decline in 2013, was to be blamed on the government. 41 Chidambaram
himself was of the view that policy decisions taken by the government during 2009-2011 had
contributed to the swelling of the current account deficit.42 Subbarao during his tenure did not give
into the pressures of the government by reducing the interest rates. In his final speech, he hoped

34
T
K. Kanagasabapathy, “When RBI chiefs speak their mind”, http://www.thehindubusinessline.com,

35
August 19, 2011

O
Rangarajan shared a mutual relationship with the then finance minister Manmohan Singh. In 1991, the

36
N
reforms carried out by Ranagrajan complemented the financial reforms. Jalan also shared a cordial
relationship with the finance ministry, especially with the then finance minister, Yashwant Sinha.
Niranjan Rajadhyaksha, “Trial by fire awaits Raghuram Rajan as RBI governor”,

O
http://www.livemint.com, August 06, 2013
37
Anand Adhikari ,“His own man”, http://businesstoday.intoday.in, November 24, 2013
38
Ashok Dasgupta, “We will ‘walk alone’ if need be: Chidambaram”, http://www.thehindu.com, October

D
39

40
31, 2012
“RBI boss delivers a parting kick:Finger at loose Govt stance”, http://www.telegraphindia.com, August
30, 2013
“RBI boss delivers a parting kick: Finger at loose Govt stance”, http://www.telegraphindia.com, August
30, 2013
41
“Subbarao’s parting shot to Chiddu: Don’t blame RBI for rupee’s worries”, http://www.firstpost.com,
August 30, 2013
42
Subbarao’s parting shot to Chiddu: Don’t blame RBI for rupee’s worries”, http://www.firstpost.com,
August 30, 2013

5
 Imperatives for Reserve Bank of India – Agenda for Raghuram Rajan

that one day the finance minister would recognize that the RBI’s actions were correct. He said “I
do hope Finance Minister Chidambaram will one day say, 'I am often frustrated by the Reserve
Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the
Reserve Bank exists.”43

AGENDA FOR RAGHURAM RAJAN

Raghuram Rajan, appointed as the 23rd governor of the RBI on September 4, 2013, for a tenure of

T
three years, had a remarkable background. Analysts felt this would help him manage the Indian
economy, which was at its lowest point since 1991. Rajan became the youngest-ever chief
economist at the IMF at the age of 40 and served there during 2003-2006. Rajan was one of the
few economists who predicted the 2008 financial crisis correctly. In 2012, he was appointed as
Chief Economic Adviser to India’s Finance Ministry. He was known as an economist with a S
rockstar appeal and was among the top 10 economists of the world in 2012.

PO
As soon as Rajan became RBI governor, he took many steps to stop the rupee’s fall. In early
September 2013, when foreign fund inflow slowed down, Rajan opened a swap window for
deposits from non-resident Indians. In a matter of two months, the swap window had attracted

R
USD12 billion.44 Rajan also allowed banks to borrow more overseas. Apart from this, external
factors like the easing worries of a US strike on Syria and Ben Bernanke’s45 decision to postpone

O
the tapering of its US$85 billion a month bond-buying program on September 18, 2013, aided in
the stabilization of the rupee. After Bernake’s announcement, the Indian rupee appreciated by
2.5% to INR61.7 against the dollar46 (Refer Exhibit to II for Rajan’s main initiatives in the first 60
days of his office).

P Y
Apart from stemming the rupee fall, banking sector reform was also high on Rajan’s list of
priorities (Refer to Exhibit III for measures taken by the RBI). Rajan opined that “changing the
financial sector will help India to grow.”47

STUBBORN INFLATION

C O
In the first two months, Rajan raised the central bank’s main lending rate twice to control inflation.
This was despite knowing that the government preferred a reduction in interest rates to boost the
economy. The RBI’s repo rate, the rate at which the RBI lent money to banks, was raised for the

T
second time on October 29, 2013 to 7.75%.48 This move came after October 2013’s CPI inflation
stood at a worrying 10.9%, WPI inflation at 7%, and food inflation at an alarming 18.9%. 49

O
According to analysts, Rajan was following in the steps of Subbarao,50 who had raised the repo
rate a record 13 times – from 4.75% to 8.5% during March 2010 and October 2011.51

43

N
“D Subbarao: P. Chidambaram will one day say 'thank God RBI exists”, http://www.indianexpress.com,
August 29, 2013
44

45

O
http://in.finance.yahoo.com/news/rajan-quietly-asserted-autonomy-rbi-184100774.html
US Federal Reserve Chairman in 2013

D
46
“India must get out of its policy taper: ET Jury”, http://economictimes.indiatimes.com, September 20
2013
47
http://www.hindustantimes.com/business-news/businessbankinginsurance/the-rajan-effect-rupee-rises-
again/article1-1136124.aspx
48
“RBI raises repo rate, cuts MSF”, http://in.reuters.com, October 29, 2013
49
Remya Nair, “WPI inflation rises to 7% in Oct, adding pressure on RBI”, http://www.livemint.com,
November 14, 2013
50
“Chidambaram, Rajan: Agree to disagree?”, http://businesseconomics.in, 2013
51
Anand Adhikari , “His own man”, http://businesstoday.intoday.in, November 24 2013

6
 Imperatives for Reserve Bank of India – Agenda for Raghuram Rajan

Some economists opined that the rate hikes had slowed down the country’s growth but not the
inflation, which remained stubborn (Refer to Exhibit IV to understand the relationship between
repo rate, GDP growth and inflation). Chidambaram, criticizing the move, said, “Monetary policy
has no impact on food prices…the only way we can contain food inflation is to augment supplies,
but supplies are not entirely elastic…For supplies to rise we need great investment, great
production, better distribution, and better logistics.”52 However, defending the interest rate hike,
Rajan opined “…CPI is at a worrisome number at 10% and beyond. I do not think there is any
elbow room to give any kind of relaxation as far as interest rates are concerned.”53 Rangarajan,
former RBI governor, who had also focused on price stability during his tenure (1992-1997), said
there was always a dilemma between growth and inflation. He said, “People were critical of me,
but I broke inflation's back. I took the position that we have to increase interest rates.”54

ST
WIDENING CURRENT ACCOUNT DEFICIT

PO
According to the RBI, India’s widening current account deficit, which was the main reason for the
rupee’s decline, was estimated to come down to USD56 billion (3% of the GDP) for the fiscal year
2013-2014, when compared to a deficit of USD88 billion (4.8% of the GDP) in 2012-2012.55 The

R
decline in gold imports was expected to narrow the current account deficit, and as a result,
according to Rajan, there was no fundamental reason for the rupee’s decline.56 However, analysts

O
opined that India which imported79% of its oil imports,57 would continue to face a high current
account deficit, and, as a result, the rupee was likely to continue weakening over the long term.
According to a report by Wharton, in the fiscal year 2012-2013, India’s oil imports were 2.6

Y
million barrels per day (bpd), which pushed its oil import bill to USD109 billion. This was the
major cause behind India’s huge current account deficit of USD88 billion.58 The gold import bill

P
for the same year stood at USD47 billion, less than half of India’s oil import bill. The Wharton
report opined that unless the Indian government took drastic steps 59 to reduce its oil imports, “the

O
weakness or strength of the Indian rupee will continue to be largely determined by the level and
costs of the country’s crude oil imports.”60

52
C
“India and the slowing economy: Chidambaram squares off RBI, again!”,

53

T
http://articles.economictimes.indiatimes.com, November 16, 2013
“India and the slowing economy: Chidambaram squares off RBI, again!”,

54

O
http://articles.economictimes.indiatimes.com, November 16, 2013
“Anand Adhikari”, “Rajan has quietly asserted his autonomy as RBI chief”, http://in.finance.yahoo.com,

N
November 06 2013
55
“Rajan pegs CAD at 56 billion, says no reason for R decline”, http://www.indianexpress.com, November
14, 2013
56

O
“Rajan pegs current account deficit at $56 billion this year, says no reason for rupee decline”,
http://timesofindia.indiatimes.com, November 13, 2013
57
“Nearly 80 per cent of India's crude oil needs to be imported: VeerappaMoily”,

D
58

59
http://businesstoday.intoday.in, August 27, 2013
“The Future of the Indian Rupee Is Tied to Oil Imports”, https://knowledge.wharton.upenn.edu,
November 15, 2013
The Indian government needed to reduce its oil subsidies (USD25 billion a year), and there was also a
need for punitive taxes to curb use of petroleum products, as was the case in some European countries.
But both were unlikely to happen given the political backlash from the beneficiaries of the subsidies as
well as automakers, distributors, and service providers, and employee unions in the auto industry.
60
“The Future of the Indian Rupee Is Tied to Oil Imports”, https://knowledge.wharton.upenn.edu,
November 15, 2013

7
 Imperatives for Reserve Bank of India – Agenda for Raghuram Rajan

RBI: THE SAVIOR OF INDIA’S ECONOMY?

There were a lot of expectations that Rajan would tackle the most serious economic problems in
more than two decades. However, according to Rajan, a central bank governor could only affect
access to finance.61 In this regard, he devised five pillars of financial reform which were: clarifying
and strengthening the monetary policy framework; reforming the banking system; liberalizing
Indian markets; increasing financial inclusion; and sorting out financially distressed financial
institutions.62
Rajan’s five pillars were compared to Abenomics, the term coined for Japanese Prime Minister
Shinzo Abe’s (Abe) economic policies. In December 2012, Abe, to stimulate Japan’s economic
growth and to escape from 15 years of deflation, came up with a macroeconomic policy
comprising three pillars: bold monetary easing; flexible fiscal policy; and a growth strategy. 63
ST
PO
According to some analysts, Rajan’s five pillars lacked the deep, broad-ranging structural reforms
that comprised the third pillar of Abenomics, which was expected to have the most lasting
impact.64 In August 2013, Abe’s and Bank of Japan’s gamble on massive fiscal and monetary
stimulus had started to pay off, and Japan was slowly escaping from deflation, with rising prices,
falling unemployment, higher incomes, and factory activity. 65

R
Rajan acknowledged that there was a limit to what central bankers could do.66 A central bank
could only manage a state's currency, money supply, and interest rates; it did not have the potential

O
to address the lagging structural problems that had affected India's development since 1947. 67
According to analysts, “The central bank governor can't sort out the trade deficit, the fiscal deficit,
or the lagging education system. These are among the persistent issues that have plagued India's

P Y
growth.”68 The biggest challenge before Rajan was not to get labeled as India’s savior, because
“the country’s economic future was largely in the hands of its government, not its central bank.” 69
Analysts were hoping that Rajan could push the Finance Minister and Prime Minister of India to
adopt better policies and at the same time maintain the autonomy of the RBI. 70

C O
T
O
61
N
Linda Yueh, “The Limits of Star Power”, http://www.bbc.co.uk, October 29, 2013

O
62
ShefaliAnand, “The Five Pillars of RaghuramRajan”, http://blogs.wsj.com, October 24, 2013
63
Kozo Koide , “Abenomics”, http://www.diam.co.jp, February 23, 2013

D
64
Linda Yueh, “The Limits of Star Power”, http://www.bbc.co.uk, October 29, 2013
65
Leika Kihara and Tetsushi Kajimoto, “More Signs Abenomics is Working as Japan Prices, Output Rise”,
http://uk.reuters.com, August 30,2013
66
Sachin Kumar, “The Rajan Effect: Rupee Rises Again”, http://www.hindustantimes.com, October 16,
2013
67
Linda Yueh, “The Limits of Star Power”, http://www.bbc.co.uk, October 29, 2013
68
Linda Yueh, “The Limits of Star Power”, http://www.bbc.co.uk, October 29, 2013
69
“Into the pressure cooker”, http://www.economist.com, September 07, 2013
70
“Into the pressure cooker”, http://www.economist.com, September 07, 2013

8
 Imperatives for Reserve Bank of India – Agenda for Raghuram Rajan

Exhibit I
Performance of RBI Governors during Their Tenures
C. Rangarajan Bimal Jalan Y.V. Reddy D. Subbarao
(December 1992- (November (September (September
1997) 1997-2003) 2003-2008) 2008-2013)
Average 7.79% 4.53% 5.85% 7.23%
Inflation
GDP
Growth
Exchange
5.49%

-9.16%
5.4%

-5.67%
7.9%

-0.68%
S
-8.35%
T
7.86%

rate *
*Annualized rupee depreciation against the dollar

PO
Adapted from Niranjan Rajadhyaksha , “Trial by fire awaits Raghuram Rajan as RBI governor”,
http://www.livemint.com, August 06, 2013

Exhibit II
R
O
Raghuram Rajan’s Main Initiatives (First 60 days)
 Reduced short-term interest rates by withdrawing earlier exceptional measure to reduce
forex volatility.



Completely freed branch licensing.

P Y
Talked about permitting foreign banks to acquire local lenders with riders.
Attracted USD12 billion via swap facility of dollar deposits.

O
 Relaxed forex hedging limits for exporters/ importers to rebook cancelled forward contracts.
Adapted from Anand Adhikari ,“His own man”, http://businesstoday.intoday.in, November 24, 2013

C
T
O
N
O
D
9
 Imperatives for Reserve Bank of India – Agenda for Raghuram Rajan

Exhibit III
RBI’s Measures
Measures For Banks, Non-Bank Financial Companies
 Foreign banks setting up wholly-owned subsidiaries to be given near-national treatment.
The RBI to issue this scheme by mid-November 2013.
 Initial minimum paid-up voting equity capital or net worth for wholly owned foreign bank's
subsidiary to be USD5 billion.




More durable way for banks to mitigate mismatch in demand and supply of cash is to step
up efforts to mobilize deposits.
Draft report on Basel III capital framework likely by November-end 2013.
Draft of proposed framework for domestic systemically important banks by November-end
ST


2013.
The RBI to issue updated guidelines on stress testing for banks by November-end 2013.
Banks to be given the option to pay interest on savings deposits and term deposits at
intervals shorter than quarterly intervals. PO

2013.
R
First meeting of High Level Advisory Committee on new bank licenses was on November 1

O
 Guidelines on restructuring for non-bank finance companies (NBFCs) to be issued by
November-end 2013.
Measures For Markets, Liquidity




P Y
To issue 10-year retail inflation-indexed securities in November/December 2013.
To launch 10-year interest rate futures contracts by end-December 2013.
To allow partial credit enhancement for corporate bonds by banks via credit, liquidity
facilities


O
To issue final guidelines on unhedged foreign currency exposures by end-December 2013.
To close special repo window for mutual funds with immediate effect.

C
Adapted from “RBI raises repo rate, cuts MSF”, http://in.reuters.com , October 29, 2013

T Exhibit IV
India’s Stubborn Inflation (2002-03 to 2012-13)

O
N
O
D
Adapted from AnandAdhikari , “His own man”, http://businesstoday.intoday.in, November 24 2013

10
 Imperatives for Reserve Bank of India – Agenda for Raghuram Rajan

Suggested Readings and References:

1. AnandAdhikari ,“His own man”, http://businesstoday.intoday.in, November 24, 2013

2. “India and the slowing economy: Chidambaram squares off RBI, again!”,
http://articles.economictimes.indiatimes.com, November 16, 2013
3. “The Future of the Indian Rupee Is Tied to Oil Imports”,
https://knowledge.wharton.upenn.edu, November 15, 2013
4.

5.
Remya Nair, “WPI inflation rises to 7% in Oct, adding pressure on RBI”,
http://www.livemint.com, November 14, 2013
“Rajan pegs CAD at 56 billion, says no reason for R decline”,
ST
O
http://www.indianexpress.com, November 14, 2013
6. “Rajan pegs current account deficit at $56 billion this year, says no reason for rupee

7.
decline”, http://timesofindia.indiatimes.com, November 13, 2013
“RBI raises repo rate, cuts MSF”, http://in.reuters.com , October 29, 2013
P
8.
9.
R
Linda Yueh, “The Limits of Star Power”, http://www.bbc.co.uk, October 29, 2013
ShefaliAnand, “The Five Pillars of Raghuram Rajan”, http://blogs.wsj.com, October 24,

10.
2013

O
K R Srivats, “World Bank lowers India’s GDP growth forecast for 2013-14”,
http://www.thehindubusinessline.com, October 16 , 2013
11.

12.
October 16, 2013

P Y
Sachin Kumar, “The Rajan effect: rupee rises again”, http://www.hindustantimes.com,

“India must get out of its policy taper: ET Jury”, http://economictimes.indiatimes.com,

13.
14.
September 20 2013

C O
“Into the pressure cooker”, http://www.economist.com, September 07, 2013
“RaghuramRajan comes in as RBI governor, rupee and stocks rise”,
http://www.hindustantimes.com, September 05, 2013
15.

T
“RBI boss delivers a parting kick: Finger at loose Govt stance”,
http://www.telegraphindia.com, August 30, 2013
16.

O
“Subbarao’s parting shot to Chiddu: Don’t blame RBI for rupee’s worries”,
http://www.firstpost.com, August 30, 2013
17.
N
Leika Kihara and Tetsushi Kajimoto, “More Signs Abenomics is Working as Japan
Prices, Output Rise”, http://uk.reuters.com, August 30,2013

O
18. “Estimates of Gross Domestic Product for the First Quarter (April-June) of 2013-
2014”, Press Information Bureau Government Of India, http://mospi.nic.in , August 30,
2013

D
19.

20.
“D Subbarao: P. Chidambaram will one day say 'thank God RBI exists”,
http://www.indianexpress.com, August 29, 2013
“Nearly 80 per cent of India's crude oil needs to be imported: Veerappa Moily”,
http://businesstoday.intoday.in, August 27, 2013
21. NiranjanRajadhyaksha, “Trial by fire awaits Raghuram Rajan as RBI governor”,
http://www.livemint.com, August 06, 2013
22. Kozo Koide , “Abenomics”, http://www.diam.co.jp, February 23, 2013

11
 Imperatives for Reserve Bank of India – Agenda for Raghuram Rajan

23. “Chidambaram, Rajan: Agree to disagree?”, http://businesseconomics.in, 2013

24. “Economic Survey 2012–13”, http://indiabudget.nic.in, 2013
25. Ashok Dasgupta, “We will ‘walk alone’ if need be: Chidambaram”,
http://www.thehindu.com, October 31, 2012
26. K. Kanagasabapathy, “When RBI chiefs speak their mind”,
http://www.thehindubusinessline.com, August 19, 2011

T
27. “Report Of The Working Group On Operating Procedure Of Monetary Policy”,
http://rbidocs.rbi.org.in, March 2011
28.
29.
“Glimpses of RBI’s history”, http://www.bankbazaar.com, January 21, 2010
Reserve Bank of India, “Chronology of Events: Brief History”, http://www.rbi.org.in
S
30.

31.
http://www.rbi.org.in O
Reserve Bank of India, “Chronology of Events: The Early Years – 1935 to 1949”,

P
Reserve Bank of India, “Chronology of Events: Institution Building– 1960 to 1971”,
http://www.rbi.org.in
32.
R
Reserve Bank of India, “Crisis and Reforms: 1991 to 2000”, http://www.rbi.org.in
33.
34.
O
Reserve Bank of India, “ Reserve Bank of India History: Governors”, http://rbi.org.inl
Amaresh Samantaraya, “Monetary Policy of the Central Bank: Simplifying
theMystique”, http://cab.org.in, April-June 2008
35.
36.

P Y
“Role of RBI in Indian Economy”, http://www.scribd.com
Y.V. Reddy , “Monetary and Financial Sector Reforms in India: A Practitioner's
Perspective”, http://www.economics.cornell
37.

38.

C O
Reserve Bank of India, “Chronology of Events: Social Controls, the Nationalisation of
Banks and the era of bank expansion - 1968 to 1985”, http://www.rbi.org.in
“Analytics of Monetary Policy in India since independence”,
http://shodhganga.inflibnet.ac.in
39.

T
“Select Press Comments On Demitting Office As Governor, RBI”,
http://www.bimaljalan.com/farewell.html

O
N
O
D
12