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Should Rajan Get an Extension?
Mon, 6 Jun Pre-Open

The RBI governor Raghuram Rajan’s three year tenure ends in early September. Speculation abounds if he will get an extension or not. There is no doubt that the last three years have been tumultuous. When Rajan took over as RBI governor, the Rupee was in a free fall, India’s external situation was in bad shape, inflation was high, investors were fleeing the country and India was clubbed as part of the ‘Fragile Five’.

Things are much better now. The governor deserves a lot of credit for it. The Rupee has stabilised, the current account deficit is no longer a problem, inflation has come down, and India is considered to be the best emerging market by foreign investors.

But it hasn’t been easy. The NPA mess at PSU banks was an unprecedented challenge. The RBI responded by getting rid of the much maligned Corporate Debt Restructuring (CDR) and replaced it with a new, stricter mechanism. The damage done to the bottomlines of banks was enormous. However, the cleanup operation has set the stage for healthier banking system.

Of course the governor doesn’t deserve all the credit. The fall in global commodity prices is largely responsible for the fall in inflation. This has allowed the RBI cut interest rates. The low inflation environment enabled the steady fall in the benchmark government bond yield.

On the regulation front, we believe Rajan has done a good job. As per an article in the Economic Times, he has ended the kid-gloves treatment of banks by the RBI. But the biggest change has been the treatment that corporate by banks in Rajan’s tenure. Historically, large corporates could expect easy terms for credit and timely roll-overs of loans. This has come to an end over the last three years. Corporate India can no longer treat bank loans as their personal property.

All said and done, we believe Raghuram Rajan has steered the RBI quite ably. He was certainly the right man for the job in 2013. A tenure extension would be well deserved.

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