Raghuram Rajan will present his last monetary policy on August 9 as governor of the Reserve Bank of India (RBI).
And as the curtains fall on his eventful three years in office – his term ends in September — the former IMF chief economist would leave on a high note as the government last week accepted a retail inflation target of 4%.
The move vindicates Rajan’s policies on a no-holds-barred strategy to rein in prices and keep inflation well below interest rates on fixed deposits.
The approach, which won him few supporters and in fact, helped the din against his re-appointment, also underscores the government’s tacit agreement that the environment is not conducive for a rate cut. That is probably what will happen on Tuesday too.
The third bi-monthly monetary policy for this fiscal will likely retain the repo rate — the rate at which banks borrow short-term funds from RBI — at 6.5% as retail inflation is still above RBI’s targeted level.
According to the central bank’s own projections, consumer price index (CPI)-based inflation should come down to 5% by January 2017 and anchor in at 4% by March 2018. So, chances of a rate cut even in the remaining part of 2016-17 look remote.
What is now important is to know what will be left on the plate for Rajan’s successor.
For starters, there is the formation of the monetary policy committee (MPC) that Rajan feels can institutionalise the mechanism of setting interest rates. The composition that saw initial run-ins with the government, will now be equally divided between the central bank and the government, with the RBI governor having the casting vote. “This creates an institution that many other countries have adopted, which India was slow to adopt,” Rajan had said during a recent meeting of central bankers.
Much has been written about Rajan’s efforts to rid the banking system of the huge bad loans it had taken upon itself. In the past two years, RBI has asked banks to recognise bad loans early on and make provisions for them, besides rolling out debt restructuring exercises.
But the central bank is still striving uphill. There is still much to be done and much more to do to make companies and banks take harsh decisions.
Bank licence is another area where RBI has a lot to cover. While it has successfully kept away large business houses from owning banks, small finance banks and payments banks are yet to develop. The latter has already seen teething problems with shortlisted applicants abandoning their ventures on grounds of viability — enough to prompt RBI to issue veiled warnings of penalties. But screening of applicants and selecting serious players is less than half the battle; use of technology to allow the poor to transfer money, at low costs, is a big task.
Then there are areas such as the bond market and financial inclusion. But the biggest feature of Rajan’s legacy and one that the new governor will have to carry forward, is to strengthen RBI’s independence. The role of the financial regulator will also have to be aligned with financial sector reforms. That would be one of the biggest items on the plate.