Raghuram Rajan, the sheriff of Mint Road, walks into the sunset
Raghuram Rajan’s masterstroke three years ago brought in about $34 billion via the FCNR route, and helped India build a war chest to stem future shocks to the rupee. The country now has a record $363.5 billion in forex reserves, with the week through to June 3 adding the maximum: $3.3 billion.Updated: Jun 20, 2016 11:21 IST
At the monetary policy review meeting less than a fortnight ago, on June 7, RBI governor Raghuram Rajan started the conference by alerting the country to a possible outflow of about $20 billion from foreign currency nonresident (FCNR) deposits.
RBI held interest rates, in line with expectations, but the warning came as a surprise. The deposits are due for redemption in December. These were the same deposits RBI issued at the start of Rajan’s term in October 2013, to stem a rupee that had plunged to record lows of 68.85 to the dollar. The window to garnering dollars had calmed the currency markets.
The trend on the foreign currency deposits virtually sums up Rajan’s tenure – a comforting start that soothed panicky markets, to an uncertainty that will grip the markets again, now that he has made it clear he is not seeking a second term.
Rajan’s masterstroke three years ago brought in about $34 billion via the FCNR route, and helped India build a war chest to stem future shocks to the rupee. The country now has a record $363.5 billion in forex reserves, with the week through to June 3 adding the maximum: $3.3 billion.
Worry lines on the street
Markets are dreading the uncertainty if such policies will remain. Experts are talking about volatility in even equity markets from Monday, including a drain on foreign institutional investor inflows, a major prop for Indian stock markets. An economist of international repute, Rajan is a darling of FIIs, who see him as the saviour of the rupee and of India. CLSA managing director and equity strategist Christopher Wood echoed foreign investor sentiment when he said: “The biggest risk to Indian bond and currency markets will be if Rajan is not given a second term.” That was in May, when his re-appointment was still a subject of debate.
There are other worries. The formation of the monetary policy committee, which was supposed to take on RBI’s role of policy formation, is yet to be completed. Its composition had triggered friction between RBI and the government, but the finance minister allayed the fears by dividing the responsibility equally. But subsequent statements by Rajan at international fora on India being a “oneeyed king in the land of the blind” rubbed some in the government the wrong way. This is also being attributed to the government’s prompt acceptance of his exit letter. “It is very unfortunate,” said Bajaj group chairman and outspoken industrialist Rahul Bajaj. “His letter showed that he had consulted the government. The statement about his decision makes it very clear on how it was taken.”
Bad debt turning worse
When Rajan took charge at the RBI headquarters, he inherited a stalled economy that saw companies defaulting on loan payments which inflated bad loans for banks. By March 2016, the situation had escalated to a point where the gross bad loans or non-performing assets (NPAs) amounted to Rs 4.76 lakh crore, triggering large provisions by banks and forcing them to report huge losses, about Rs 14,283 crore.
The central bank came up with three debt restructuring schemes in three years to address the problem, indicating a grudging admission of the f ailure of each scheme. The problem may be getting bigger. According to Religare’s Parag Jariwala, “The asset watchlists declared by banks last quarter are highly subjective. This runs the risk of severe understatement of bad loans. Baking in our assumptions of missing components, we arrived at stressed asset figures far in excess of those disclosed; 35% higher for ICICI, 39% higher for Axis Bank and 144% higher for SBI.”
First Published: Jun 20, 2016 06:15 IST