5 reasons why debate over Raghuram Rajan’s second term is baseless


Will Raghuram Rajan get another term as RBI governor? The reports are conflicting. Some reports say the prime minister is keen to keep Rajan at the helm at Mint Street. Some others suggest that Rajan, who assumed office in September 2013, is not keen on another term. Though he hasn’t obliged India Inc with rate cuts as per their wish list, prominent business tycoons like Adi Godrej ,Rahul Bajaj , Harish Mariwala, among others, are firmly backing Rajan’s candidature for a second term. Even the common man is taking an unusual interest in Rajan’s second term. An ETMarkets.com poll of 9,168 readers last month showed that 69 per cent gave him a perfect 10; a thumping 87 per cent said they will like him to continue as the governor.

Apart from topping the popularity contest, there are some compelling reasons why the flamboyant professor should get another three years at RBI. We list five reasons why Rajan should be the government’s obvious choice.

1. Inflation
Under Rajan’s stewardship, the RBI has adopted the historic reform of using consumer price index as the key indicator of Inflation opposed to wholesale price index used earlier. Consumer Price Index (CPI), a metric to measure changes in price levels of goods and services used by households, almost halved during Rajan’s tenure. Before Rajan took over, India recorded CPI at 9.52 percent in August, 2013. The CPI has declined sharply to 5.24 percent in April, 2016.

2. Rupee
The Indian Rupee made a startling comeback from an intra-day low of Rs 69.22 per dollar on August 28, 2013 to Rs 65.54 on September 5, a day after Rajan took office. The global investor community’s trust in Rajan comes from his deep understanding of world economy. Rajan has served as the youngest chief economist of the International Monetary Fund (IMF) and had cautioned the world of the risks of credit-default swaps and mortgage-backed securities, which led to the global recession in 2008. Since his appointment, Rajan has worked ardently to contain the volatility of the rupee, which has been see-sawing between Rs 58.27 in 2014 to Rs 67.29 as of Thursday’s close.
3. Forex reserves
Rajan’s legacy as the governor has witnessed once nearly-depleted currency reserves to swell to a record high of $359.76 billion as on week-ended April 1, 2016, compared to $249 billion in September 2013. High forex reserves help the system have enough liquidity to combat a potential crisis. Foreign exchange reserves comprise of foreign currencies like treasury bills, government and corporate bonds along with special drawing rights and goldthat the RBI holds with the International Monetary Fund.
4. 10-year bond yield
Weeks before Rajan assumed office, India’s benchmark 10-year bond yield touched nearly 2-year high of 9 percent. It has since declined to 7.48 percent as of May 20, 2016 from 8.58 percent as on September 2013. Lower bond yields make it easier for companies as well as the government to borrow from the market at lower rate.
5. Bank licences
The RBI, under Rajan’s leadership, issued 23 new banking licences, out of which conditional licenses were granted to 10 small finance banks and 11 of them to payment banks, the balance two were granted to IDFC Bank and Bandhan Bank. This is in stark comparison to the 12 licences issued in the last 20 years – 10 in 1993 and the next two a decade later. This year, the RBI also said it would allow wholesale banks and custodian banks to come up and has proposed on-tap banking licences for private sector universal banks.