“The Governorship of the Central Bank is not meant to win one votes or Facebook ‘likes’. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism.” That was Raghuram Rajan on the day he assumed office as governor of the Reserve Bank of India back in September 2013. Even on Day 1, Rajan was under no illusion about the pressures that came with the job and the statement was a clear signal that he would not play to the gallery just to be popular.

Despite momentous changes in both the political and economic landscape over the last three years, Rajan has stayed true to his word that he would do the right thing, no matter what the criticism. Obviously, there have been instances of tension between Mint Street and North Block over policy issues but such creative tension is necessary in a democracy. If the finance ministry and the RBI were to cheerfully agree on all issues related to the economy, it would be abnormal and undesirable.

There’s an agenda

Yet, the Government and the central bank have exhibited nothing but harmony in public during Rajan’s governorship, at least until now. Differences, which have been many ranging from monetary policy to administrative issues such as separation of certain powers of the central bank, have all been addressed quietly, behind closed doors. This was possible only due to the maturity and mutual respect that the Prime Minister (and the finance minister) and the governor, obviously have for each other. If Rajan is a world-acclaimed economist and one of the best central bankers in the world today, Narendra Modi is a strongman with a clear vision for governance and blessed with a massive mandate from the people. And the two were obviously conscious of these at all times.

All this is at the risk of unravelling now at the fag end of Rajan’s term. The vicious attack mounted by Subramaniam Swamy against Rajan, large parts of it personal, deserves to be dismissed with contempt. Even so much as an attempt to defend Rajan and answer Swamy’s unsubstantiated allegations would confer undeserved legitimacy on them. There is obviously an agenda behind the campaign against Rajan but investigating that is inconsequential. Instead, the onslaught offers a good excuse to focus on the tremendous work that Rajan has done during his term: it speaks for itself and is his best defence.

Rajan set out his point-by-point agenda the day he assumed charge, something unprecedented for an RBI governor. There were six broad focus areas: monetary policy to rein in inflation; inclusive development with new bank licences, differentiated banks and so on; reforming and deepening of debt markets and introducing interest rate derivative products; internationalising the rupee and aiding capital inflows; improving financial infrastructure including loan recovery processes; and finally, measures to help the retail investors/customers through introduction of CPI-inflation-indexed bonds, boosting mobile payments and so on.

His biggest success, of course, has been in rolling back inflation, which was in double digits, with food inflation raging in the high teens when he took over. Even if he had failed in every one of the other items on his agenda, the slaying of the inflation demon alone would have been enough to call his tenure successful. But Rajan managed more than that.

Deft handling

The rupee was reeling after the Fed chairman Ben Bernanke spoke of tapering the Fed’s bond-buying programme and capital began flowing out of India. With some deft policy measures the most important of which was the special concessional window to banks for swapping their FCNR (B) dollar funds with the RBI, Rajan sent out an unambiguous signal to the markets of the central bank’s determination to stem the rupee’s slide and contain volatility. That the rupee immediately reversed course and appreciated sharply over the following months is now recorded history.

In the matter of new bank licences and extending the branch network, the RBI tasted mixed success. While two new banks were born — Bandhan Bank and IDFC Bank — there were some who felt that the RBI was probably too conservative in not issuing more licences. Again, the jury is still out on small banks and payments banks, licences for which were also issued in the last one year. The concept of payments banks seems to be having teething trouble with three of the 11 licensees opting out. Rajan has also not been very successful in pushing lending by banks, especially to the corporate sector. Loan growth has fallen from around 14 per cent in 2013-14 to just 8-9 per cent now with banks focussing more on retail loans. The governor did his bit to stop ‘lazy banking’ by whittling down the statutory liquidity ratio to 21.25 per cent from 23 per cent but the lack of investment appetite in the corporate sector ensured that credit offtake would be poor.

Going after banks

Rajan’s tenure would, of course, be remembered for one aspect: the relentless pressure that he brought on banks to clean up their balance sheets, the results of which we are seeing now with historic losses posted by public sector banks that are writing off their past sins. Bank chiefs might hate him for forcing them to dig out all that dirt from under their carpets but the markets seem to be cheering. With the weight of bad loans lifted, banks are now well set for capitalising on the next economic upswing, which seems under way now.

There are admittedly unfinished items on the agenda for a second term, if there is one. The RBI has been unable to persuade foreign banks to set up wholly-owned subsidiaries in India to enable better regulation, something that Rajan explicitly mentioned in his initial statement. The idea of deepening the debt markets and promoting interest-rate derivatives is still a work in progress as is the ambitious agenda of internationalising the rupee.

The powers-that-be would certainly find it difficult to overlook Rajan’s excellent performance while taking a call on a second term for him. Unless, of course, the plan is to move him into government, which is not a bad idea, assuming Rajan is willing. Has Swamy sensed such a move? Is that the reason for the onslaught?