January 22, 2025

Raghuram Rajan has definitely not been an ordinary governor of RBI. His two- year tenure has been a roller coaster ride that has found him more admirers than critics. Even finance minister Arun Jaitley, who often thought Rajan was too stingy with the repo rates, had a grudging admiration for Rajan's scholarly and horses-for-courses approach to monetary policy. Business leaders, who thought Rajan was scuttling investment and harming industry by keeping interest rates high, were all praise for his efforts to keep a tight leash on government spending and fiscal deficit. It was only people like Harvard- educated Subramanian Swamy and like-minded blokes in the so-called Swadeshi brigade who could not digest Rajan’s success and attacked him for specious reasons.

Born into a Tamil family, son of an IPS officer, Rajan is hailed as one of the jewels of Indian economy by both intellectuals and commoners. The 23rd governor of RBI previously served as the chief economist at the International Monetary Fund, the youngest to serve that position. He was also a professor at the University Of Chicago Booth School Of Business. His vast experience and knowledge about the economy helped him predict the 2008 world economic crisis in 2005. In 2003 Rajan received Fischer Black prize for the most significant contribution to finance by a financial economist of age less than 40. Besides all these achievements, the personality which Rajan carries with so much ease has earned him names like ‘people’s governor’. The honesty of his work and practical explanation of his decisions has left his critics baffled. He was included in the list of ‘100 Most Influential People in the World’ by Time magazine this year.

Rajan was appointed as honorary economic advisor by Dr Manmohan Singh in 2008. On 10th August, he was appointed as chief economic adviser to India’s Ministry of Finance. He succeeded Duvvuri Subbarao in 2013 as the RBI governor for a term of three years. He said his major targets were to lower inflation, provide an impetus to savings and intensify financial markets, for which reducing inflation is important. According to Rajan, monetary stability can be achieved through “low and stable expectations of inflation.” He made curbing inflation his primary focus and stuck to it for three years. Rajan warned against the effects of high inflation that are most likely to affect the poorer sections and may lead to a crisis. He brought the retail inflation down from 9.8% in September 2013 to 3.78% in July 2015. Wholesale inflation also came down from 6.1% to -4.05% in July 2015.His determination to curb inflation has earned him nicknames like ‘inflation warrior’ and ‘inflation hawk’. However, Rajan remained indifferent to such names saying "I don’t know what you want to call me... Santa Claus... you want to call me hawk, I don’t know. I don’t go by this. My name is Raghuram Rajan and I do what I do."

Rajan suggests greater role of financial markets in economy. In his book co-authored with Luigi Zingales, both argue for deregulated financial markets to facilitate access of finance to poor. He believes that competitive and healthy financial markets are hugely effective in dispersing opportunity and combating poverty.

The key changes that took place under Rajan’s leadership were-
1) Adopting consumer price index (CPI) as the new measure of inflation instead of WPI. This meant interest rates calculation based on retail inflation or CPI inflation. Unlike WPI, CPI measures the price changes of goods and services used by households, thus giving a better covered measure.
2) A flexible inflation targeting system with a target of 4%and a band of +/- 2%.
3) Setting up a Monetary Policy Committee of six members responsible for making policy decisions and achieving those targets.

In his tenure Rajan stabilized the rupee, attacked PSU banks' stressed assets, reconstituted policy framework, and managed inflation. Rajan’s efforts to clean up banks’ balance sheets forced the banks not to compromise with commercial defaulters. He extended full banking licenses to Bandhan and IDFC banks. He also introduced on-tap licensing, allowing licensing to be a continuous process instead of the ‘stop and go’ approach. One regret Rajan will have is not having built-up the RBI through lateral entry. Rajan was pitching for outside experts to be appointed in key posts to add expertise to the RBI. But till now, there has been only one such appointment. The honesty of his work and the success of his tenure are unquestionable. However, some critics chose to attack him personally for issues mostly not related to his work.

Rajan’s outspokenness on social issues and his stand to not cut down rates angered some of Modi’s allies. Subramanian Swamy repeatedly criticized Rajan and asked the PM to ensure that he steps down after his term. Swamy also accused Rajan of being "mentally not fully Indian." He questioned Rajan’s loyalty to India. However, Modi supported Rajan and slammed Swamy for his senseless attacks. Eventually, On 18 June 2016, Rajan announced that he will not be serving a second term as RBI Governor in a letter to RBI employees. He didn’t clear the air on the reason for his sudden exit, but people believe the friction and regular attacks from members of the government as one of the main reasons.

Swamy criticized Rajan for keeping interest rates high which according to him has proved to have catastrophic effects on industries. “All the industries have collapsed and as a result, unemployment has increased. In my opinion, he should be removed as early as possible,” he said. However, Swamy couldn’t gather much support with his allegations even from his own party. Narendra Modi also praised Rajan for his honesty and simplicity in understanding economic issues saying “he must have been a very good teacher in the past."

State Bank of India chairman Arundhati Bhattacharya acknowledged Rajan’s contribution and dedication in building credibility of the RBI. Rajan’s own name was credible enough for the market to detain a rupee slide. After Rajan decided to exit, there have been 60,000 signatures, 5 online petitions asking for the governor’s second term.

There is no doubt of the success of Rajan’ tenure and his remarkable proficiency in managing monetary policy and foreign exchange reserves. In 2014, he received the Governor of the Year Award from London-based financial journal ‘Central Banking’. Rajan didn’t mix up role of the RBI and role of the government. He clarified his stand from the beginning asserting that the primary focus of RBI is monetary policy stabilization, controlling inflation, and stabilization of rupee parity. He explained that cutting rates can only be a temporary solution for inducing GDP growth and people often forget that growth and inflation are the two sides of the same coin. Raghuram Rajan could effortlessly communicate the reasons for his actions and policies. He leaves behind a legacy of well formulated and directed monetary policies and clear economic thinking and understanding. As Rajan ends his term in September to return to academics, India can only hope that his successor at RBI, Dr Urijit Patel, follows in Rajan’s footsteps and maintains the credibility of RBI.