Money & Banking

Mission incomplete: Raghuram Rajan’s overhaul of the Reserve Bank of India

REUTERS Mumbai | Updated on January 19, 2018

RBI Governor Raghuram Rajan

Governor will need another stint to make RBI nimble footed, say analysts

In a video conference in mid-2014, RBI Governor Raghuram Rajan told employees that he wanted to hire talented external candidates and improve the quality of research at the 81-year-old central bank.

The proposals would hardly seem out of place in any major institution on the planet.

But in the storied halls of the Reserve Bank of India (RBI), where staff have to pass comprehensive examinations to join public service and spend decades slowly moving through its ranks, Rajan’s ideas were seen by some staff as controversial, the sources said.

“(The) entire process is being hurried up,” a protest letter written by the United Forum of Reserve Bank Officers and Employees, the RBI’s staff union, read, according to a copy seen by Reuters at the time.

“There is a need for better clarity, communication — both internal and external, consensus and fairness to all stakeholders.” Rajan did not formally respond to the letter, according to several sources.

Since then, Rajan has only hired one permanent staffer from outside. It is not clear what role, if any, opposition from the staff played in the low number of external hires. The RBI declined to comment for this story.

New thinking

Rajan’s calls for out-of-the-box thinking were reiterated in a memo last month, seen by Reuters, which urged increased accountability and performance and was described by a half dozen mid-level officials as toughly worded, sparking similar misgivings among some in the bank’s rank-and-file.

Such reactions highlight what has probably been one of the hardest fights of his tenure: transforming what is seen as a slow-moving and bureaucratic RBI of 17,000 staff into a modern, nimble central bank.

Rajan said he also wants to improve training for staff, through initiatives such as sending them to other central banks for short stints, creating scholarships, and emphasising research, while also strategically bringing in outside expertise.

“I am not trying to swamp the place,” Rajan told reporters last week, in response to questions about external hires.

“When outsiders come in they have to show that they can actually deliver as advertised.”

Rajan himself is an external hire, previously working as the chief economic advisor to the Congress-led government.

Domenico Lombardi, an economist who has served on the boards of both the World Bank and the IMF, said it is vital for Rajan to persuade sceptics within the RBI and the government to integrate India into the world economy.

“Central banks are very conservative environments, and it takes far more than a three-year stint to change their culture,” Lombardi said.

Since taking over as Governor in 2013 in the midst of India’s worst currency turmoil in two decades, Rajan has overcome several challenges to steer some of the biggest changes in RBI’s history.

Many changes

These include introducing inflation targeting, tackling crony capitalism and successfully asserting the RBI’s independence with New Delhi. Government sources say he has struck a personal relationship with Prime Minister Narendra Modi, even though he was appointed by the UPA. Rajan also streamlined operations, scaling back scheduled policy reviews to six from eight per year.

People who work with Rajan describe him as easy-going compared with his more formal predecessors. But he is also a demanding boss, seeking more exacting research and analysis.Rajan has become a source of confidence for those investing in India and a leading voice for emerging markets on global economic policy issues. “There is no alternative to officials like Rajan if India wants to signal it is serious in its reform process,” said Lombardi.

His tenure expires in September and central bank watchers say he may only be able to finish the job if he is appointed to a second term.

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Published on February 12, 2016
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