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Essays Banking Raghuram Rajan

RAGHURAM RAJAN need not even leave his office atop the Reserve Bank of India’s (RBI) tower in Mumbai to gauge two factors central to India’s prosperity. Looking down, the ships sailing to nearby docks provide clues as to the buoyancy of foreign trade: the imposition of steel tariffs earlier this year, a knock-on effect from China’s slowdown, all but stopped traffic for a time, he notes. Looking up, the skies also offer troubling portents. Mumbai should have been drenched by seasonal rain for over a week by now. The belated onset of the monsoon has already pushed up food prices, hampering the central bank’s crusade against inflation.

Indian policymakers have no control over the weather or the health of the global economy. But they can eliminate a third source of concern. Mr Rajan’s three-year term expires in September, but the government has prevaricated about granting him a second one. Both locals and foreign investors are wondering whether they are dealing with a lame-duck central banker. The rupee has gyrated, bond investors have quailed and tongues have wagged despite the admonition of Narendra Modi, the prime minister, to pay no attention to “this administrative subject”.

Though a relative newcomer to the cut and thrust of Indian policymaking, Mr Rajan (pictured on the left below, with Mr Modi) knows better than to offer any comment on his reappointment. “What is important is to not personalise this office. It will survive any governor, it is bigger than any governor,” he says.

Yet he has suffered a spate of ad hominem attacks, some from within the ruling BJP party. One complaint hinges on his supposed lack of patriotism, as evidenced by his American work permit (he is on leave from the University of Chicago). Another depicts him as a stooge of the Congress party, which appointed him to the job but is now in opposition. Amid all the jibes, relatively little attention has been paid to Mr Rajan’s performance in the job. His record so far is good—though many of his reforms have yet to be tested.

Shortly before he took over in 2013 the “taper tantrum” struck. The Federal Reserve held out the prospect of tighter monetary policy in America, prompting money to flee emerging markets. The rupee was falling, causing inflation to rise. Wary Indians were importing more gold as a result, putting further pressure on the exchange rate. Mr Rajan’s arrival, and prompt adoption of an informal inflation target, helped to restore calm.

Progress towards meeting that target—essentially halving inflation from 10% to 5% (see chart)—has been made easier by tumbling commodity prices, especially oil. Despite a recent jump, food prices are lower than they might be after two years of drought thanks to sound government policy. But many wonder if the structural rigidities that make India’s the highest inflation rate in Asia have been tackled.

Mr Rajan favours incremental reforms over wholesale ones. He has made it easier to move money in and out of India, but not abolished capital controls in the way you might have expected from a former IMF chief economist. He does not try to dictate the level of the rupee, but still stage-manages it. Licences for new banks are no longer rationed in the manner of the “licence raj”; they are instead awarded to all those who show they are fit and proper. But the existing banks, which the RBI oversees, are in grim shape.

Lenders remain bound by intricate rules that dictate what assets they can hold (over half must consist of government bonds, reserves at the central bank or loans to particular industries, such as agriculture). Meanwhile state-owned lenders, which make up 70% of the banking system, have huge problems with bad loans. Some will breach regulatory standards on capital absent promised new money from government. Even healthy banks are foiling monetary policy by not passing lower interest rates on to clients. But Mr Rajan largely inherited this mess and has at least forced bankers to admit to their bad debts.

Mr Rajan’s stature has helped attract investors. Domestically, it has given him a confidence to speak his mind. When government ministers gloat that India has the world’s fastest-growing economy, he likes to point out how low a bar that is. When ministers publicly urge him to cut interest rates, he pushes back by demanding a more balanced budget first.

The RBI is not technically independent, which makes the process of appointing its boss especially sensitive. The governor’s three-year term is the shortest of any G20 country. Recent governors have been given second terms as much as seven months in advance. If Mr Modi wants to curb speculation about the job, he could do so easily by reappointing Mr Rajan now. It would be a deserved extension.

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Reserve Bank of India’s 23rd governor, Raghuram Rajan recently featured among Time magazine's '100 Most Influential People in the World'. Terming Raghuram as "India's prescient banker," Time said he is among a rare breed of economic seers who steered India through the global crisis and fallout, playing a large role in making it one of the emerging-market stars of the moment.

While serving as the youngest chief economist of the IMF from 2003 to 2006, Time said Raghuram predicted the subprime crisis that would lead to the Great Recession, standing up to critics like former US Treasury Secretary Larry Summers, who labeled him a "Luddite".

Raghuram studied at the Delhi Public School, Delhi. After having passed out from school he enrolled at Indian Institute of Technology, Delhi, for a bachelor's degree in electrical engineering. He graduated in 1985. He was awarded the Director's Gold Medal as the best all-round student. In 1987 he earned a Post Graduate Diploma in Business Administration from the Indian Institute of Management, Ahmedabad. After graduation and a brief stint at the Tata Administrative Services as a management trainee, he joined the doctoral program in management at the MIT Sloan School of Management. In 1991 he received a PhD for his thesis titled 'Essays on Banking'.

"Growth... is just one measure of performance," Rajan told students graduating from the National Institute of Bank Management in Pune last week. "The level of per capita GDP is also important. We are still one of the poorest large countries in the world on a per capita basis, and have a long way to go before we reasonably address the concerns of each one of our citizens," he added, reported The Economic Times.

As the governor of the RBI, Raghuram holds an esteemed position and it's a given that he is bound to enjoy a whole lot of perks. The greatest perk enjoyed by him is the fact that he gets to have signature across all currency notes in the country. Raghuram is also entitled to use a colonial bungalow on Carmicheal Road, a posh street that weaves along a ridge across South Mumbai- living opposite India's richest industrialists. According to Business Insider, as of June 30, 2015, Raghuram drew a salary of Rs 1.98 lakh per month. That's not much considering there are IIM graduates earning way more than that. It is said that this figure is up for revision.

According to Raghuram, “Our current growth certainly reflects the hard work of the government and the people of the country, but we have to repeat this performance for the next 20 years. We cannot get carried away by our current superiority in growth, for as soon as we believe in our own superiority and start distributing future wealth as if we already have it, we stop doing all that is required to continue growing... This movie has played too many times in India's past for us to not know how it ends."

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