The exit of Raghu Ram Rajan should not be such a big event. It is looking like one due to the penchant of this government to hire and retain mediocres. Dissent is simply not on.


I am sure that RBI will find enough people to lead it. I always think that our RBI has been given an exaggerated importance. Let us take interest rates. Dropping by half a percent makes an impact when your rates are already at one, tow or three percent. Not when it is at ten or twelve percent. I do not think businessmen are shying away from new projects just because interest rates are two percent above their desired rates. Nor can the RBI significantly change the value of the rupee. It is the government policies which decide on the supply and demand for the rupee. RBI at best can do a bit of fine tuning and nothing more. Fundamentally, our nation continues to be have a shortage of foreign currency and we had some ease last couple of years thanks to cheap Oil prices. So, here, the RBI at best is an intervenor than a decider of trend. For that, we have to go to the government policies.


To me, the solution to new investment lies outside the RBI. Labour laws are possible the single biggest deterrent. And consistency of words with action is the second most important one. When the PMO promises a tax friendly regime, it does not behove the Fin Min to restore retrospective battles. Forms have been complicated instead of having to be simplified. Good talks of Shri Modi do not seem to get converted to action on the shop floor of the government machinery.


One characteristic of the past RBI honchos has been their servility to political masters. RRR does not fit the bill here. RRR also took the politicians at face value in setting about cleaning the PSU Banks. Suddenly, politicians and their friends are not very comfortable and sweating under their collars as RRR started his clean up of the Augean stables.


The cromy duo of politics and business is potent. They have run this country since Jawaharlal Nehru. Business makes friends with all shades of politicians. The businessmen are an important pillar of support to every politician. No politician would like to antagonise them for long. Yes, the set of friends may change, but life goes on as before.


RRR exit will create a lot of noise from the academia and the global economists. However, I believe that this will merely restore status quo ante. Bankers who had frozen all decision making, will perhaps be emboldened enough to start the favour mills again. In this process, maybe some good businesses will also get some money. The old crony businessmen will get back to focusing on doing more business. The PSU Banks posts will become remunerative enough again.


The clean up of the PSU Banks will be done ‘tomorrow’. More statements of intent will come and heads will nod. And everyone will be fully aware that the dirt of the PSU Banks cannot come out and will have to be covered with the carpets. Thus the PSU Banks will once again become the engines of growth. All populist schemes can be pushed through with ease, without having to worry as to what the “Governor” wll say about it. After all, we cannot have a Governor who is not in tune with the seat of power.


Inflation is another thing that the RBI is ‘supposed’ to manage. This is by increasing or decreasing the supply of money. Given that the Indian economy has almost equal portions of accounted money and other money, RBI policies can only impact what the banking system can do. Moreover, the last two years have seen us benefit from falling crude oil prices plus benign commodity prices. Inspite of that we still have 5 to 6 percent of food price inflation. Is it RBI’s fault ? Yes, RBI may make a big impact if the SLR rates brought down by ten percent or so. But then, it would mean that the government cuts off its own source of funding. So, there is a very limited role of RBI in this. Yes, what can add to inflation in a country like ours is increased money with the public without corresponding increase in availability of goods and services. This has so many influencers that I would not like to put the credit or blame solely or mainly on the RBI.


The PSU Banking reforms had started, but without a course of action. What next? In the meanwhile there is a decision paralysis. If the clean up is going to be taken to its logical conclusion, unless the PSU Bank ownership and control structures are changed, nothing changes. You can write off all that you want now. It does not give us any guarantee about the future. So we have two choices: Either let the PSU banks be well and truly privatised OR let it be status quo, increase the SLR and reduce the lending by the PSU Banks. The second option will not be liked by the politicians and their friends. So, I presume it will be status quo. We might see a symbolic merger or three, but nothing more than that. Politicians will continue to use PSU Banks as their tool for vote gathering. RRR was seen as a threat to this. So, Off with his head was the cry.


RBI has had many academics in the past as its governor. No one made any difference and even now, I doubt if RRR has been able to change anything in the way the RBI moves. In fact, the existing bureaucracy at RBI must be happy to see the back of RRR. They have always lived their life on inaction, reaction and circulars getting drafted in the most convoluted ways. That is life for them. Put you signature only after the copy underneath has been initialled by the person immediately under you. They do not like independent thinking. It is bureaucracy in action. Look at a supposed academic like Manmohan Singh. His subsequent political life tells us how he thinks. Do not rock the boat. RBI ‘regulates’ NBFCs, Banks, Cheat Funds, leasing companies etc. But beyod giving the business license, they have not bothered about anything. Public have lost money in enterprises where they are regulators. They have never regulated anything. So, in the ultimate analysis, if RRR was trying to take on the system, he was bound to not succeed. It is unfortunate that we lose a good man. But we can sacrifice more good men so long as the system is not exposed to the vulnerabilities injected in to it by the politicians over decades.


The next Governor will be a competent one, and someone who is surely going to toe the government line. The way RRR has been hounded out clearly sends that message. And it is nothing new to career government servants. They spend a lifetime of servility, in the hope that they gather riches along the way and get some nice ‘postings’ after retirement. Here was someone who did not hanker after all that. He has to go.


So now, things will be back to where they were a few years ago. Any spark of change or intent to ‘change’ the system has been effectively snuffed out. I have had personal experience of meeting some very famous chaps in the RBI during the Leasing boom. They did not want to do anything, unless someone ‘brings it to our notice”. Which meant, a formal letter from somebody whom they will fear. I informed the gentleman that right outside the RBI building is the banner of a finance company promising six percent incentive on a fixed deposit. But, when they go around in their office cars (ambassador cars then) it strains their necks to look up and hence they did not notice it. This gentleman then went to greater things with the government, thanks to his being like the dog in the HMV logo. This is the quality that the government values more than anything. See the appointments in the FTII, Censor Board or NIFT etc… You prove your loyalty to the king and a bone shall be thrown at you.


Thus the exit of RRR is not a catastrophe. Except in the eyes of the liberal and academic world of economists. Maybe some FIIs will use this as an excuse for their inability to invest in the country right now. I think, nothing is going to happen now. A decent name will be announced as a replacement and there will be back slapping all round. And our economy will do what ihe policy makers decide and not on the basis of a 25 or 100 basis points interest cut. So if the noise produces pandemonium, take advantage. It is sad we lose a rock star like RRR, but economies go on. Remember a Rock Star named Alan Greenspan?


R Balakrishnan

June 19, 2016



6 thoughts on “Thank you Governor, Welcome Governor, RBI

  1. A very lengthy article. . .

    1) Sir, why have you chosen to ignore Dr. Swamy’s charges against RRR?

    2) Despite 4 weeks having passed, why is there still not a single evidence forthcoming either in MSM or in SM to prove Dr. Swamy wrong on his even one of his SIX points charge sheet?


    1. I do not like Swamy. But that would not have changed anything in what I wrote. Even if I assume that whatever Swamy alleges against RRR is true, my focus in this piece is on two things- The importance or otherwise of RBI ; and the qualities needed to be in that office.


  2. How about his timing? Do not you think it’s illtimed? He could have waited for Brexit. He could have waited for his successor to be selected. I think he put his interest above the nations.


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