Raghuram Rajan says he won’t serve second term as RBI Governor

NEW DELHI: Raghuram Rajan has announced that he would not be serving a second term as the Governor of the Reserve Bank of India. The announcement comes on the back of intense speculation and criticism over the international banker.

BACKGROUND

RBI governor Raghuram Rajan faces ghosts of rupee’s past

Highlights

  • Rupee is among Asia’s worst performing currencies against the US dollar this year.
  • Rajan said last week he expected $20 billion in outflows in September to November.

NEW DELHI: The looming expiration of an emergency liquidity measure introduced during India’s 2013 currency crisis comes at a risky time for the rupee, with about $20 billion in deposits expected to leave the country as global investment appetite worsens.

Analysts warn the rupee – already Asia’s worst performing currency against the US dollar this year – continues to look vulnerable ahead of September, when dollar term deposits that India raised from citizens abroad in 2013 start to mature.

The outflows, though widely anticipated by both markets and policymakers, will present a near-term currency challenge for Reserve Bank of India (RBI) governor Raghuram Rajan, whose position is also up for renewal in September.

“It’s a well anticipated event and the flows are largely known. Still, investors will be watching this carefully to see how the Reserve Bank handles the liquidity situation,” said Luke Spajic, head of portfolio management emerging Asia at PIMCO.

Rajan announced the initiative to shore up foreign reserves soon after taking over the RBI in September 2013, when fears of US Federal Reserve rate hikes punished vulnerable emerging markets such as India.

Under the programme, banks were incentivised to offer dollar deposits to Indian citizens abroad – through instruments known as foreign currency non-resident bank deposits – in a scramble to boost liquidity and regain the confidence of foreign investors.

The RBI then exchanged those dollars for rupees at lucrative rates for bankers.

With about $28 billion in deposits maturing in September through to November, the RBI must provide dollars to the banks so they can pay back those depositors. Rajan said last week he expected $20 billion in outflows in September to November, more than three times the outflow volumes typically seen over a three-month period.

Rajan will need to manage those outflows carefully at an especially tricky time for global markets with US rate hikes expected and worries about China and crude prices lingering. A vote by Britain to leave the European Union in next week’s referendum would add to these worries.

Rajan is talking down the risks, saying he is ready to deal with any rupee volatility in September.

Since last October, the RBI has met with banks to assess their respective currency positions, according to bankers who attended those meetings.

The RBI is also steadily building its dollar warchest, with foreign exchange reserves hitting a record high of $363.5 billion as of early June, enough to cover about 12 months of imports, compared with $274.8 billion in early September 2013, when it covered only six to seven months.

While stronger economic fundamentals mean few analysts expect the type of volatility India saw in 2013, policymakers still have some tricky markets to navigate.

“The impact may be contingent upon the global backdrop. If there is major risk aversion during that time, yes the impact can be accentuated,” said Anindya Banerjee, associate vice president for currency derivatives at Kotak Securities.

“If the yuan starts to falls sharply or oil starts falling sharply, emerging markets will be under the hammer.”Rajan
has written a letter to his staff at the central bank, saying he would return to his academic career when his term ends on September 4.

“I am an academic and I have always made it clear that my ultimate home is in the realm of ideas. The approaching end of my three-year term, and of my leave at the University of Chicago, was therefore a good time to reflect on how much we had accomplished,” said Rajan in his letter.

“… on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016. I will, of course, always be available to serve my country when needed,” the letter added.

Rajan also listed out a number of achievements of the

BACKGROUND

RBI eases stressed asset restructuring rules for banks

MUMBAI: The Reserve Bank of India (RBI) relaxed guidelines on Monday for lenders restructuring large stressed loans, in a move that could allow banks to more effectively manage bad loans.

Indian banks are grappling with about $120 billion in stressed loans, or 11.5 per cent of the total, and RBI governor Raghuram Rajan has set a deadline of March 2017 for them to clean up the bad loans on their balance sheets.

The central bank said late on Monday that lenders would be allowed to carve up stressed loan accounts into two categories.

The first is the sustainable debt portion that banks, or a lending syndicate, deem repayable and that the borrower would continue repaying on existing terms.

The second is the remainder that a borrower is deemed unable to repay, which can now be converted into equity or convertible debt, giving lenders a chance to eventually recover funds if and when the borrower is able to turn around its business.

“This is a welcome move,” said B Sriram, managing director corporate banking at the State Bank of India. “It gives us another tool for resolution of stressed assets to clean up our books quickly and efficiently.”

The RBI said the eased restrictions will only be on loans of over 5 billion rupees ($74 million) from a single bank or a syndicate, and in only those instances where a borrower has its project already in commercial operation.

Rajan last year undertook a massive overhaul of Indian banks’ stressed ?assets, asking each bank to provision for all assets which could potentially sour by March 2016.

This asset quality review not only forced banks to provide massive capital for such loans, but also led to quarterly losses in March for several state-run banks.

The latest guidelines are aimed at helping some troubled borrowers restructure and turn around quickly, by easing the interest burden on them, and in turn also speed up the asset recovery process for banks.
RBI
during his tenure, such as putting in place an inflation-focused framework, 150-basis point cut in the interest rates, improving the balance sheets of banks through the Asset Quality Review, assisting the government with reform state-run bank management appointments and a restructuring of the RBI among others.

Rajan thanked his team at the RBI. “I am confident my successor will take us to new heights with your help. I will still be working with you for the next couple of months, but let me thank all of you in the RBI family in advance for your dedicated work and unflinching support. It has been a fantastic journey together!” his letter read.

Rajan’s announcement comes amid intense speculation over whether he would be offered a second term by the government. BJP leader

BACKGROUND

Subramanian Swamy fires another salvo at Raghuram Rajan

NEW DELHI: Firing yet another salvo at RBI governor Raghuram Rajan, BJP MP Subramanian Swamy on Thursday alleged that the former IMF chief economist had planted “a time bomb” in the Indian financial system that will explode in December.

Swamy, who had last month written twice to Prime Minister Narendra Modi seeking ouster of Rajan for keeping interest rate high, took to Twitter to criticise the governor.

“R3 (Raghuram Rajan) planted a time bomb in our financial system in 2013. It is timed for December 2016. The redeemable USD 24 billion in f.e. to be paid out by banks,” he tweeted.

He did not specify further. The ‘f.e’ in the tweet apparently refers to foreign exchange.

There was no immediate response to the query sent to RBI spokesperson Alpana Killawala in this regard.

On May 26, Swamy had levelled six allegations against Rajan, including that of sending confidential and sensitive financial information around the world, and asked the Prime Minister to sack him immediately.

Prior to that, Swamy had claimed that Rajan was “mentally not fully Indian” and alleged that he has “wilfully” wrecked the economy.

On Swamy’s earlier comment, Rajan on Wednesday said, “There are certain allegations which are fundamentally wrong and baseless and addressing them would amount to giving them legitimacy.”

He further said: “I think when you think about Indianness, when you think about love for your country, it’s a very complicated thing. For every person, there is a different way that you show respect for your country… my mother-in-law will say karmayogi is the way to go — do your work.”

The governor clarified that he “welcomes genuine criticism of our policy, but will not address ad hominem attacks” or allegations against him as an individual instead of the policies and the position he holds.
Subramanian Swamy
had attacked the RBI chief, accusing him of underperformance, saying he was “not fit” to be the central bank chief and that he was not “Indian at heart”.

Rajan had waded clear of controversy, even as his friends in the academia defended him. His co-author Luigi Zingales had said any other country would have “guaranteed re-confirmation” to Rajan.

Here is the full text of Raghuram Rajan’s letter to his colleagues at the RBI
:

I took office in September 2013 as the 23rd Governor of the Reserve Bank of India. At that time, the currency was plunging daily, inflation was high, and growth was weak. India was then deemed one of the “Fragile Five”. In my opening statement as Governor, I laid out an agenda for action that I had discussed with you, including a new monetary framework that focused on bringing inflation down, raising of Foreign Currency Non-Resident (B) deposits to bolster our foreign exchange reserves, transparent licensing of new universal and niche banks by committees of unimpeachable integrity, creating new institutions such as the Bharat Bill Payment System and the Trade Receivables Exchange, expanding payments to all via mobile phones, and developing a large loan data base to better map and resolve the extent of system-wide distress. By implementing these measures, I said we would “build a bridge to the future, over the stormy waves produced by global financial markets”.

Today, I feel proud that we at the Reserve Bank have delivered on all these proposals. A new inflation-focused framework is in place that has helped halve inflation and allowed savers to earn positive real interest rates on deposits after a long time. We have also been able to cut interest rates by 150 basis points after raising them initially. This has reduced the nominal interest rate the government has to pay even while lengthening maturities it can issue – the government has been able to issue a 40-year bond for the first time. Finally, the currency stabilized after our actions, and our foreign exchange reserves are at a record high, even after we have fully provided for the outflow of foreign currency deposits we secured in 2013. Today, we are the fastest growing large economy in the world, having long exited the ranks of the Fragile Five.

We have done far more than was laid out in that initial statement, including helping the government reform the process of appointing Public Sector Bank management through the creation of the Bank Board Bureau (based on the recommendation of the RBI-appointed Nayak Committee), creating a whole set of new structures to allow banks to recover payments from failing projects, and forcing timely bank recognition of their unacknowledged bad debts and provisioning under the Asset Quality Review (AQR). We have worked on an enabling framework for National Payments Corporation of India to roll out the Universal Payment Interface, which will soon revolutionize mobile to mobile payments in the country. Internally, the RBI has gone through a restructuring and streamlining, designed and driven by our own senior staff. We are strengthening the specialization and skills of our employees so that they are second to none in the world. In everything we have done, we have been guided by the eminent public citizens on our Board such as Padma Vibhushan Dr. Anil Kakodkar, former Chairman of the Atomic Energy Commission and Padma Bhushan and Magsaysay award winner Ela Bhatt of the Self Employed Women’s Association. The integrity and capability of our people, and the transparency of our actions, is unparalleled, and I am proud to be a part of such a fine organization.

I am an academic and I have always made it clear that my ultimate home is in the realm of ideas. The approaching end of my three year term, and of my leave at the University of Chicago, was therefore a good time to reflect on how much we had accomplished. While all of what we laid out on that first day is done, two subsequent developments are yet to be completed. Inflation is in the target zone, but the monetary policy committee that will set policy has yet to be formed. Moreover, the bank clean up initiated under the Asset Quality Review, having already brought more credibility to bank balance sheets, is still ongoing. International developments also pose some risks in the short term.

While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016. I will, of course, always be available to serve my country when needed.

Colleagues, we have worked with the government over the last three years to create a platform of macroeconomic and institutional stability. I am sure the work we have done will enable us to ride out imminent sources of market volatility like the threat of Brexit. We have made adequate preparations for the repayment of Foreign Currency Non-Resident (B) deposits and their outflow, managed properly, should largely be a non-event. Morale at the Bank is high because of your accomplishments. I am sure the reforms the government is undertaking, together with what will be done by you and other regulators, will build on this platform and reflect in greater job growth and prosperity for our people in the years to come. I am confident my successor will take us to new heights with your help. I will still be working with you for the next couple of months, but let me thank all of you in the RBI family in advance for your dedicated work and unflinching support. It has been a fantastic journey together!

With gratitude

Yours sincerely,

Raghuram G. Rajan

Contacts:
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