Change of guard at RBI

On the Saturday that Raghuram Rajan sent his letter to employees saying he would not be staying on after completing his term, I got a call from the correspondent of a foreign paper seeking my reaction. The correspondent told me that the name of Rajan's successor would be announced on Monday itself as the government wanted to ensure there was no uncertainty. I told him that was most unlikely- a process would have to be followed, including approval by the Cabinet Committee on Appointments. He insisted his information was from reliable sources.

Well, it's taken a while since then for the appointment to be announced. In the intervening period, the media speculation on the subject has been unbelievable. They said the appointment would happen by mid-April, soon after the PM returned from his visit to Africa. It didn't. Modi had told WSJ that the RBI governor's appointment was an administrative decision. Since the governor's term expired in early September, a decision would be taken close to that date. He has been true to his word. One hopes the media begins to take the PM more seriously hereafter.

As for the candidates, the front-runner kept changing every few days. Initially, it was said that it would be some internationally known economist of stature comparable to Rajan's. Perhaps Arvind Subramanian?.. he was well known and was also less hawkish than Rajan, so he had a great chance.  A little later, it was ...no, no, it would be a bureaucrat who was on the same wavelength as the government. Shaktikanta Das, Expenditure Secretary, emerged as a favourite. Further on, BREAKING NEWS....Arvind Panagariya was set to be named (never mind that he had Cabinet Minister rank and this would be a step down for him). 

A few days later, it Arundhati Bhattacharya's turn. Sorting out the banking mess was now the priority, hence a banker! Two other names entered the fray at some point, K V Kamath and Kaushik Basu. Then, one day, there was a buzz around Subir Gokarn... he had met Rajan and Das, so there must be something to it? (As though the government would first share the news with the RBI governor).

One is glad this silly game has ended. To give the media its due, Urjit Patel was always in contention although I don't recall his being cited as the hot favourite.

One thing is clear. The government runs a tight ship, so the media is pretty clueless on these matters. It also appears that a rigorous process has been followed. Two rounds of the Committee on Financial Sector appointments followed by discussions between the PM and the FM. This is as it should be. Due process must be followed in the case of high appointments, so all credit to the government for adhering to one.

After the announcement, the excitement moved to a dissection of the governor-designate. Would he continue Rajan's hawkish stance? Or would he be something of a dove? Neither, they said, he would be an owl!

The usual platitude was rolled out- there would be continuity with change, although it wasn't clear what would continue and what would change. One paper quoted government officials saying that they expected Patel to take a more "balanced" approach to inflation. Fighting inflation was, of course, a priority but he should not ignore growth.

The fact of the matter is that no governor has much of a choice on interest rates, now that the Monetary Policy Framework has articulated the inflation rate band (4 plus or minus two per cent) and also said that the indicator used would be CPI. The governor is also somewhat constrained by the proposed constitution of a Monetary Policy Committee. We are bound to have continuity in respect of monetary policy.

The more interesting question is whether there will change in respect of the banking sector. Patel does have the option of relaxing the accelerator on NPA recognition and giving PSBs and the corporate sector a bit of a breather. Whether he opts for this course or not depends on the view that he and the government will take on PSBs. It does appear that there is an effort on to shrink the market share of the PSBs by curbing their access to capital and hence their ability to lend. Even if this is the game plan, it would be unwise to push it at this point because then lending to the corporate sector and infrastructure will be stuck. That would not be good for the economy. One has to see whether pragmatism trumps ideology in the incoming governor's approach to PSBs.

There's just one other observation I'd like to make. Perhaps Rajan's biggest contribution, which has gone unheralded, is that he changed the stuffy, hierarchical culture of the RBI. He made himself accessible to staff at all levels (I was told they only needed to check with his secretary whether he was free and could walk in). Rajan himself did not hesitate to drop in at colleagues' offices, sometimes just for a casual chat. In more ways than one, he took away the aura of aloofness and inaccessibility attached to the governor's office (and now the governor's floor)- this was no small achievement in an organisation in which the governor had always been some distant God perched on the top floor.

In meetings, he was refreshingly free from airs of any kind, unfailingly polite and courteous and a good listener, as I can myself vouch for. This was not an affectation, it was a genuine something, just an aspect of the personality of a very cultured person. Perhaps, it helped that Rajan came from an academic background, not a bureaucratic one.

This was a great contribution because organisations are ultimately about team work, motivating and leading by example. In an organisation such as RBI, you cannot motivate through bonuses and stock options. You can only motivate by creating a culture where people feel respected and cared for. Three years is too short a period in which to bring about a radical change in culture but we must salute Rajan for his efforts.