If you want to know why India will miss Raghuram Rajan, just compare his first and last monetary policies

In focus, for the one last time.
In focus, for the one last time.
Image: Reuters/Danish Siddiqui
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In the last three years, Raghuram Rajan has become the most famous central banker India has ever seen.

In September 2013, when Rajan took over as the 23rd Reserve Bank of India (RBI) governor, he got a stellar reception—something his predecessors rarely got.

Policy-makers and journalists hooked on to his illustrious past. Stock market pundits hoped the former University of Chicago professor would perform miracles and breathe new life into an ailing Indian economy.

Charmed women swooned over his good looks, so much so that a Tumblr account called “Raghuram Rajan Staring at Things” was started.

“The guy’s put ‘sex’ back into the limp Sensex. That makes him seriously hot,” columnist Shobhaa De wrote in the Economic Times.

And the now 53-year-old Rajan lived up to the hype.

The former IMF chief economist—also the youngest—managed to bring down the double-digit inflation in India in 2013 to below 6% by 2016.

Rajan cracked down on bad loans and opened up the banking sector in Asia’s third-largest economy.

During his tenure, his smart analysis and matter-of-fact speeches made him popular among the masses. This is not typical for a central bank governor who is often only discussed in corporate boardrooms and on trading floors.

Such is his appeal that Rajan’s announcement of not continuing for a second term evoked anguished editorials from across the country.

But none of that could change Rajan’s mind.

Today (Aug. 09), he announced his last monetary policy review, keeping the interest rates unchanged. His term as the RBI governor ends on Sept. 04, after which he will return to the US to teach at the University of Chicago.

The following is a comparison of his last monetary policy review with his first, which took place on September 20, 2013.

It reminds us of how much India has changed under his term, and how Rajan continues to surprise and educate as one of the country’s sharpest minds.


In his maiden monetary policy review, Rajan stumped everyone when he hiked the repo rate—the rate at which the RBI lends to commercial banks—to 7.5% looking to rein in high inflation. At a time when the economy was growing at the slowest pace, Rajan was expected to cut rates and boost spending and demand. But he stayed firm on his view that inflation is the bigger concern that needs to be fixed.

Since that day, he hasn’t given in to demands—be it from the industry or the government—to go easy on rates. He has single-mindedly focused on the sticky inflation situation in India. As a result, retail inflation came down to 5.77% in June 2016, compared to 9.5% in August 2013 when he was appointed. Additionally, he put in place a formal inflation target with the government, which will be continued even after his departure.

In today’s review, he kept the repo rate unchanged at 6.5%. High food prices are still a concern for inflation, Rajan indicated in the policy statement (pdf).

“Going forward, the strong improvement in sowing on the back of the monsoon’s steady progress, along with supply management measures, augurs well for the food inflation outlook,” the statement said.


The Indian economy was pretty different three years ago.

Global financial markets were reeling under the 2008 crisis, and India was feeling the heat. Its economy grew at 4.4% in the April-June quarter of 2012-13, the slowest pace in four years. Inflation was inching up.

When food and commodity prices are high, easing the rates and boosting money supply in the economy only pushes demand upwards, thereby fuelling an increase in inflation. Hence, higher rates are used as a mechanism to control inflation.

This year, with the economy growing at 7.6% and inflation well under control, Rajan has held rates steady thrice and cut the repo rate once.

In today’s policy, Rajan said there is an upside risk to inflation, going forward. That is because there has been a “sharper-than-anticipated increase in food prices,” he said.

His strict views on rates have been criticised, most recently by senior leaders of the ruling Bharatiya Janata Party. But Rajan has been patient with such comments.

“Critics are there all the times. There are also people who send me anonymous messages saying ‘thank you for what you are doing.’ At the end of the day, you feel you made a useful contribution, and some people have benefited—that’s the best part of it,” he told reporters in a conference after announcing the policy in Mumbai.


During his first policy review, Rajan had clearly outlined the tasks before him. He said banks need cleaning up and inflation needs to be controlled to ensure growth.

“We must use this time to create a bullet-proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike,” he said.

“We will take a close look at corporate distress and bank non-performing assets (NPAs) to see how we can accelerate the process of resolution,” he had said.

In the three years since, he has taken a number of measures towards these goals.

He was one of the few Indian central bankers to have repeatedly voiced concerns over toxic loans messing up the banking system. Indian banks currently have over Rs13 lakh crore ($195 billion) of bad loans, according to some estimates.

In December 2015, he set a timeline for banks to clean up their books by March 2017. While he may not be around to see the process completed, Rajan indicated that it has been successful.

“Broadly speaking, (we are) comfortable with the recognition of NPAs and the culture of clean-up seems to be well embedded,” Rajan said today.

Apart from controlling inflation and clamping down on bad loans, Rajan’s focus was to increase financial inclusion in the country. During his tenure, the RBI, for the first time in its 80-year-old history, issued licences for payments banks to increase the reach of banking services.

With less than a month of his term left, Rajan still has work to do. In his briefing to reporters, he announced that the RBI will soon come out with new regulations for the bonds market and strict policies for consumer protection.

“This is my last policy statement, but there are still 28 days in my term which I intend to use (up) fully,” he said.