Reforms will not be reversed, says outgoing RBI chief
When Raghuram Rajan took the helm of the Reserve Bank of India three years ago, India had a plummeting currency, galloping inflation and a soaring current account deficit — a crisis many economists blamed on poor decisions by the central bank itself.
In grappling with these problems, Mr Rajan, a confident former IMF chief economist with a secure professorship at the University of Chicago, set out to shake up an institution previously led by low-profile, career bureaucrats considered susceptible to political pressure from New Delhi.
He overhauled the RBI monetary policy framework, instituting a new inflation-targeting regime to replace previous ad hoc decision-making. He forced banks to tackle billions of dollars in distressed corporate loans, discomfiting powerful tycoons accustomed to fending off their creditors through politician friends in New Delhi.
But Mr Rajan’s hawkish approach to inflation and bad debts had plenty of public critics, including from within Prime Minister Narendra Modi’s administration, who accused him of holding back economic growth.
Now, investors are waiting to see whether Mr Rajan's reformswill survive his departure — or whether the RBI will gradually revert to its previous pliancy, easing monetary policy to accelerate growth — while potentially undermining India’s hard-won macroeconomic stability.
In an interview with the Financial Times on the eve of his departure, Mr Rajan said he believes the RBI and its workings have changed for good. “Broadly speaking, I think we have sort of unfrozen an older equilibrium and moved the system towards a new equilibrium,” he said. “My sense is that momentum cannot be and will not be arrested.”
As evidence of the progress made on his watch, Mr Rajan pointed to the unprecedented recent issuance, by two Indian companies, of $750m in rupee-denominated bonds to international investors in London. “This would be unthinkable in 2013 when there was great concern about the rupee,” he said.
But doubts about New Delhi’s commitment to Mr Rajan’s focus on macroeconomic stability were fuelled by the circumstances of his departure, following a high-profile campaign against him by a senior ruling party lawmaker.
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