Reserve Bank of India (RBI) Governor Raghuram Rajan was named The Banker magazine’s Global and Asia-Pacific Central Bank Governor of the Year 2015, for stabilising the Indian rupee, initiating key reforms to attract much needed foreign capital in the country and reining in a runaway price appreciation. The RBI governor has been named central bank governor of the year several times by other international magazines. In October 2014, Euromoney and in January 2015, Central Banking awarded him the best central banker award for his contribution in stabilising the Indian economy.
Rajan in his paper, has warned about the adverse spillover effects on other countries, if India resorts to unconventional monetary policies to tackle inflation and unemployment issues. The constant intervention in exchange rates and financial markets can cause other countries to resort to aggressive policies to gain, embarking on a sub-optimal path. Mr. Rajan says that countries should collectively agree to guidelines on responsible behavior on policies to improve collective incomes.
India has weathered the storms pertaining to capital outflow and currency in the emerging markets fuelled by US Federal Reserve interest rate hike in 2015.
The third quarter of 2015 saw a stable rupee, growing GDP@ 7.4% more FDIs and sophistication in the financial markets.
Mr. Rajan feels that policies have to be based on analytical inputs and discussion and classified as the ones that need to be adopted, temporarily adopted, avoided at all cost etc. which is currently missing.
For example he states that easy monetary policies in advanced economies can lead to capital inflows, exchange rate appreciation, rapid credit growth and asset price bubbles in emerging markets. Normalization on the other hand can lead to rise in interest rates, capital outflows and exchange rate depreciation.
The bottom line is that monetary policies should be beneficial to the world, and what matters is the relative magnitude of demand creating versus demand switching effects and the net financial sector spillovers, which need to be favorable.
Rajan has been instrumental in stabilizing the rupee, curbing inflation and reinforcing the foreign investor’s confidence in rupee denominated assets. The other defining achievements were guiding banks to clean their balance sheets, teaching them to handle bad debts and introducing new banks.
He feels that India needs an efficient bankruptcy or corporate resolution system.
Rajan also has to his credit the launch of offshore rupee bonds nicknamed Masala Bonds and the green bonds. Foreign investors were ready to pay a record 88 basis points to reserve their rights to invest in government bonds.
One has to be aware that the prevalent economic model is complicated with multiple sectors, regions, parameters and not country specific and depends on assumptions for predictions – the reason why Rajan feels that a new global model with IMF involvement is required.
There can be no other more important issues than to understand and discuss the international spillover of domestic policies and the Government should certainly and most importantly look for a person who has impeccable vision and the knowledge, if they decide to replace Mr. Rajan.