In a surprising move that sent shock waves throughout the Indian Financial Sector, Mr. Raghuram Rajan has indicated that he will not be accepting a second term as the Governor of the Reserve Bank Of India. His term is due to end on the 4th of September, 2016. This decision of his was intimated to his fellow employees at RBI through an e-mail which was later published on the RBI’s website, with this being the first time that a mail being publicly displayed on their website ‘for wider dissemination’.
He said this decision was taken in consultation with the government. Many speculations are underway as to why the current governor has taken this decision. It is being speculated that the government has had a major hand in this event. There have been previous incidents of friction between Mr. Rajan and the Indian government although both the parties deny this as a mere media speculation. According to some, the government’s decision to form a search panel, headed by a cabinet secretary to select financial sector regulators has not gone down too well with Mr. Rajan as the governor’s post is also a Cabinet Secretary Rank.
It is not yet clear if the search panel had even started looking for candidates. This is the first time a formal search panel has been formed to select the RBI governor. In the past, the Prime Minister and the Finance Minister have held consultations to select the governor of the Reserve bank.
Raghuram Rajan, born on the 3rd of February, 1963 in Bhopal in the state of Madhya Pradesh had a dream IIT-IIM combo. A combo which all the students dream of. He has a B.Tech in Electrical Engineering from the Indian Institute of Technology, Delhi and then later on a post graduate diploma in business administration from Indian Institute of Management, Ahmadabad, earning Director’s gold medal at both the colleges. In 1991, he joined the Booth Institute of Management, Chicago where he served as a professor of finance.
After this Mr. Rajan served as The Chief Economist of the International Monetary Fund for three years and two months from October of 2003 to the December of 2006. Later on in the month of November of 2008 he was appointed by the then Prime Minister of India, Mr. Manmohan Singh as an Economic Advisor. On 10th August, 2012, he was appointed as the Chief Economic Advisor to the Indian Ministry Finance. Almost a year later on 6th August, 2013 it was announced that Mr. Rajan would succeed Mr. Duvvuri Subbarao as the Governor of the Reserve Bank of India.
His first ever achievement on this chair would be the increase in the rupee value by about 2.1% against the American dollar after his first day as the Governor. But it seems all this coming an end on the 4th of September, 2016, with Mr. Rajan claiming that he will be returning to academia. Many are terming this as a great loss to the nation. Here is the letter from him to his employees published on the RBI website:
I took office in September 2013 as the 23rd Governor of the Reserve Bank of India. At that time, the currency was plunging daily, inflation was high, and growth was weak. India was then deemed one of the “Fragile Five”. In my opening statement as Governor, I laid out an agenda for action that I had discussed with you, including a new monetary framework that focused on bringing inflation down, raising of Foreign Currency Non-Resident (B) deposits to bolster our foreign exchange reserves, transparent licensing of new universal and niche banks by committees of unimpeachable integrity, creating new institutions such as the Bharat Bill Payment System and the Trade Receivables Exchange, expanding payments to all via mobile phones, and developing a large loan data base to better map and resolve the extent of system-wide distress. By implementing these measures, I said we would “build a bridge to the future, over the stormy waves produced by global financial markets”.
Today, I feel proud that we at the Reserve Bank have delivered on all these proposals. A new inflation-focused framework is in place that has helped halve inflation and allowed savers to earn positive real interest rates on deposits after a long time. We have also been able to cut interest rates by 150 basis points after raising them initially. This has reduced the nominal interest rate the government has to pay even while lengthening maturities it can issue – the government has been able to issue a 40 year bond for the first time. Finally, the currency stabilized after our actions, and our foreign exchange reserves are at a record high, even after we have fully provided for the outflow of foreign currency deposits we secured in 2013. Today, we are the fastest growing large economy in the world, having long exited the ranks of the Fragile Five.
We have done far more than was laid out in that initial statement, including helping the government reform the process of appointing Public Sector Bank management through the creation of the Bank Board Bureau (based on the recommendation of the RBI-appointed Nayak Committee), creating a whole set of new structures to allow banks to recover payments from failing projects, and forcing timely bank recognition of their unacknowledged bad debts and provisioning under the Asset Quality Review (AQR). We have worked on an enabling framework for National Payments Corporation of India to roll out the Universal Payment Interface, which will soon revolutionize mobile to mobile payments in the country. Internally, the RBI has gone through a restructuring and streamlining, designed and driven by our own senior staff. We are strengthening the specialization and skills of our employees so that they are second to none in the world. In everything we have done, we have been guided by the eminent public citizens on our Board such as Padma Vibhushan Dr. Anil Kakodkar, former Chairman of the Atomic Energy Commission and Padma Bhushan and Magsaysay award winner Ela Bhatt of the Self Employed Women’s Association. The integrity and capability of our people, and the transparency of our actions, is unparalleled, and I am proud to be a part of such a fine organization.
I am an academic and I have always made it clear that my ultimate home is in the realm of ideas. The approaching end of my three year term, and of my leave at the University of Chicago, was therefore a good time to reflect on how much we had accomplished. While all of what we laid out on that first day is done, two subsequent developments are yet to be completed. Inflation is in the target zone, but the monetary policy committee that will set policy has yet to be formed. Moreover, the bank clean up initiated under the Asset Quality Review, having already brought more credibility to bank balance sheets, is still ongoing. International developments also pose some risks in the short term.
While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016. I will, of course, always be available to serve my country when needed.
Colleagues, we have worked with the government over the last three years to create a platform of macroeconomic and institutional stability. I am sure the work we have done will enable us to ride out imminent sources of market volatility like the threat of Brexit. We have made adequate preparations for the repayment of Foreign Currency Non-Resident (B) deposits and their outflow, managed properly, should largely be a non-event. Morale at the Bank is high because of your accomplishments. I am sure the reforms the government is undertaking, together with what will be done by you and other regulators, will build on this platform and reflect in greater job growth and prosperity for our people in the years to come. I am confident my successor will take us to new heights with your help. I will still be working with you for the next couple of months, but let me thank all of you in the RBI family in advance for your dedicated work and unflinching support. It has been a fantastic journey together!
Raghuram G. Rajan
Following this the Finance Minister of India, Mr. Arun Jaitley has tweeted that- “The government appreciates the good work done by him and respects his decision. A decision on his successor would be announced shortly.”
A lot of speculations about his successor are on the run with the prominent names being Urjit Patel, Ashok Lahiri, Rakesh Mohan, and so on. But only time will tell who’ll be in and whether he/she will be the right person or not.
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