Mr Rajan's swansong

His last policy review raises hope for continuity in RBI's actions

In his last monetary policy statement as the Reserve Bank of India Governor, nobody expected Raghuram Rajan to change any of the policy variables. To that extent there were no fireworks. Nevertheless, what stood out in Tuesday's policy review, which is expected to be the last of its kind before the Monetary Policy Committee (MPC) takes over, is the element of continuity in Mr Rajan's thinking and approach, and the likelihood that it may be carried forward even after he exits the central bank. This is noteworthy as the run-up to his departure from the RBI has been rather controversial, with many criticising him for choking India's growth potential by the choice of his policy actions. The latest policy maintained the RBI's accommodative stance despite inflation risks tilted to the upside and talked about a steady supply of durable liquidity, following up on the changed framework earlier announced in April. The latter is important as the central bank has successfully turned the banking system to "neutral" from a high cash crunch zone during the February-March period at the fag end of FY16. This is expected to help consumers derive faster benefits from the central bank's future policy rate cuts.

Mr Rajan also sounded hopeful of seeing an institutional shift with the formation of the MPC and even named the RBI board nominee on the committee. The ball is now in the government's court to quickly announce its three nominees and bring the MPC into existence. The other aspect on which more action is expected from the RBI is the marginal cost of funds-based lending mechanism. It was hoped that the MCLR would improve the transmission of interest rate cuts, but in effect, roughly 60 basis points of interest rate cuts are yet to be transmitted by the banks to the market. Besides tweaking the MCLR though, Mr Rajan was rather scathing on banks finding excuses for not passing on the benefits of the previous rate cuts.

Yet another area where continuity can be expected is in the RBI's stance on the process of bad debt clean-up in the banking sector. Mr Rajan said in his post-policy media conference that as against the initial days when they resisted the move to come clean on their non-performing assets (NPA), banks were now more "positively engaged" in NPA resolution. This is welcome because there were apprehensions that the RBI and the banks may go slow on this count after Mr Rajan's exit.

As Mr Rajan enters the last leg of his stint, it is obvious that he has made the job a little easier for his successor, at least in the short term. When he took over, India faced the despondency of double-digit inflation, volatile rupee, falling forex reserves and a banking crisis just waiting to derail India's nascent recovery. In contrast, the new governor can hope to breathe relatively easier with the expectation of a lower interest rate regime, especially since Mr Rajan was not overly hawkish in his last policy review. But, Mr Rajan's contribution was not just tactical in nature. He also brought about fundamental shifts in Indian banking - be it in terms of setting in motion on tap bank licensing or improving governance within banks. In particular, what stands out is his focus on finding institutional solutions to several of India's long-standing banking ailments.