As Raghuram Rajan completes second year, pressure mounts to cut rates

Mumbai: As Governor Raghuram Rajan, known for his hawkish approach to inflation, completes tumultuous two years at RBI on September 4, calls for rate cuts have become shriller with the Finance Ministry raising alarm bells over a possible deflation demon gobbling up the economy.

Raghuram Govind Rajan took charge as the 23rd Governor of RBI on September 4, 2013 for a three-year term, amid a bleeding rupee threatening to plunge to 70 levels, very high current account deficit, growth screeching south and rating agencies threatening to junk the sovereign.

On his inauguration, the noted monetary economist made several big-bang announcements that promised to change the financial sector landscape radically and to his credit he has successfully implemented many of them in the past two years. The Governor successfully brought down retail inflation to 3.8 per cent in July from 9.8 per cent in September 2013.

Also, many analysts and marketmen described chief economic advisor Arvind Subramanian's yesterday's statement that Rajan should start fearing deflation and not inflation, as a political statement to arm-twist the Governor and devoid of any merit.

The only few big misses of Rajan are the sudden fall of the rupee following the China crisis, and the massive spike in bad loans that almost doubled. But his achievements, on every other front dwarf these shortcomings.

Also, probably the biggest criticism that he will face when he leaves the 19th floor corner room at Mint Road, will be that Rajan was a party to the Reserve Bank losing most of its powers and autonomy - as he has accepted the government formula of not having a veto power for the Governor in the proposed Monetary Policy Committee. Leading economist and industry veteran DK Pant, chief economist at India Ratings, has described Rajan as "a person with a vision". "Rajan has brought in a new dimension to the monetary policy. When he initially took over, the rupee was in a tailspin but his reforms have restored investor confidence," Pant told PTI.

Marketmen are more enthused with Rajan, stating that he is the best that has happened to the country in the last two years. "You could not have a better person during the last two crisis years. He has brought in structural changes which may not have immediately yielded results, but we may see it happening in future," said a market dealer who wished not to be named.

"Rajan is a man with a global view and he has brought in changes, which we may not agree now, but I am sure those will be positive for the economy in the long run," is how another bond dealer described the Rajan years.

Similarly, Dun & Bradstreet India senior economist Arun Singh said Rajan's biggest achievements are "his success in containing CPI inflation and inflation expectations as well as regaining investor confidence in the economy."

"The Governor has also brought about some important changes to the monetary policy framework. The measures he has taken to bring about resolution of a rising pile of stressed assets will show results in the years to come," Singh said. On the macro side, most of the credit for turning around the country from the "Fragile Five" in 2013 to the "only few bright spots" in 2015, Rajan has successfully brought back the economy from the brink- a situation the country had faced only in June 1991.

His most singular achievement is on the inflation front - getting it down from 9.8 per cent in September 2013, to a healthy 3.78 per cent in July 2015-the lowest since the 1990s, while WPI has been in the negative territory for the past nine consecutive months with July print coming in at -4.05 per cent, the lowest in the past three decades.

However, the Governor feels that there is more distance to be covered on the same and cited the elevated household expectations on price rise as a worry, which can potentially inhibit him from delivering on the Finance Ministry's wish for a rate cut.

The steep price declines, along with a 7 per cent GDP print in the first quarter of 2015-16, down from 7.5 per cent in the previous quarter, have the CEA Arvind Subramanian calling for urgent rate cuts, arguing that the economy is headed to a much bigger crisis of deflation and not inflation, on September 2.

Rajan's measures have seen CAD coming down from a high 5.2 per cent of GDP in 2012-13 to a healthy 0.2 per cent as for the March 2015 quarter, which has seen foreign investors flocking back to the country. On a balance, most credit for low CAD should go to external factors with crude plunging from USD 114.2 to a barrel on September 2, 2013 to USD 47.5 on September 1 this year, though.

While improving CAD situation also had its positive impact on the foreign exchange front, which has been hovering at record highs for the past many months. The forex reserves jumped more than 30 per cent to USD 355 billion as per the latest RBI data, up from USD 274 billion on September 6, 2013, which is more than sufficient to cover 9 months of imports.

On the regulatory front, Rajan unleashed a slew of customer friendly measures like making bank licensing process on-tap (already two universal banks have been licensed and 11 payments banks are on the way), linking bank rates to marginal cost of funds, making large foreign banks to become local subsidiaries and tap-and-go payments among others.

On the policy side, Rajan and his deputy Urjit Patel would be credited for getting agreements to have an official inflation target, a more broad-based monetary policy committee and a public debt management agency outside RBI, among others.

However, many regulatory autonomy proponents may blame Rajan for being party to RBI losing autonomy under the proposed new MPC which does not envisage a veto for the Governor in rates decisions. But his biggest headache has been the mounting NPAs and the recent rupee fall.

Despite efforts from day one and putting in new structures to improve the balance sheets of banks, bad loans and restructured accounts have soared to 13.4 per cent of the system as of Q1 this fiscal year.

Similarly, the recent currency war launched by China amidst its slumping economy and the resultant flight of capital from across the world, (FIIs have pumped out over Rs 17,000 crore in August alone) the rupee has been at the receiving end.

Last Tuesday the rupee had slumped to 66.65, while its historic low was 68.85 on August 30, 2013. Yesterday the rupee lost five paise to 66.24 to the dollar. Industry and analysts are blaming high interest rate of 7.25 per cent for the low credit growth, which at little over 8 per cent has hit a two-decade low.

"Rajan's focus on price and currency stability with absolute clarity has been his outstanding achievement," is how domestic brokerage Centrum Capital's Sandeep Nayak describes the two Rajan years. May be the best way to describe Rajan is to quote his own words that "the central banks are not the cheerleaders of the market."