Excerpt: Rendezvous With Raghuram Rajan on India’s Banking Sector

Tamal Bandyopadhyay’s ‘From Lehman to Demonetization’ chronicles the ups and downs of banking and finance in India.

4 min read
Image of former RBI governor Raghuram Rajan with Tamal Bandyopadhyay’s book cover in the background, used for representational purposes.

(Excerpted with permission from Penguin Random House. From Lehman to Demonetization by Tamal Bandyopadhyay is available on Amazon.)

When Raghuram Govind Rajan came to India as the government’s chief economic adviser two years ago, everyone warned him about the bureaucracy. “People told me the bureaucracy here will be very difficult to deal with—very smart people, but with very different agendas.”

Rajan, fifty-one, hasn’t found much truth in that.

The cover of Tamal Bandyopadhyay’s book
The cover of Tamal Bandyopadhyay’s book
(Photo: Penguin Random House)
If you have paid attention elsewhere and if you are not completely naive, there isn’t a whole lot that is surprising or different. It is slightly different here inasmuch as there isn’t often a sense of urgency. Things that need to be done yesterday are still not done, in some cases. But that’s not surprising.
Raghuram Rajan, former RBI Governor

When he took over as the Reserve Bank of India governor on 4 September, he was handed a report by a committee he had headed in 2008 which recommended differentiated bank licences (where different kinds of banks do different things as opposed to the current crop of universal banks).

Predecessor Duvvuri Subbarao had liberalised branch licensing right up till tier-2 cities but had then hit a roadblock. “So my initial effort was to pull all those things that were in the planning stage and say let’s finish. There’s no reason for things to season.”

‘Cross the River by Feeling the Stones’

Rajan even has a term for this style of policymaking.

One way to do things is to say let us think in theory, develop the best plan possible and then implement in one go. I call this the Brahminical way. But this may not work at the implementation stage as you will realise, that some aspects were not considered. The alternative is, roll up the sleeves, don’t minimise the thinking phase, but do it quickly. I am trying to do that.
Raghuram Rajan, former RBI Governor

“There’s this Chinese phrase, ‘cross the river by feeling the stones’. It’s basically step by step, but take that step, don’t theorise about how you’re going to cross the entire river, not knowing where the steps are . . . Take the first step and feel your way through the next step, be more practical about it.”

Rajan’s Reticence

We’re having lunch in the RBI visitors’ room, adjacent to Rajan’s eighteenth-floor corner office in Mumbai’s Fort area. The menu features everything you could possibly think of, from green pea soup and ‘stuffed pomfret’ to ‘prawn balchao’ and ‘badami murg’—all from the RBI kitchen run by chef Brian Pais. Rajan walks in a few minutes past 1 pm.

A warm handshake later, I ask him bluntly whether he offered to resign when the Bharatiya Janata Party-led National Democratic Alliance government took over in May. After all, he was appointed by the Congress-led United Progressive Alliance government. Rajan doesn’t seem annoyed, but prefers not to answer this question, even off the record. He says curtly:

Of course, if I lost the confidence of the government at any point, I would go the next day.
Raghuram Rajan, former RBI Governor

Was the governorship part of the arrangement when he took over as chief economic adviser? I ask him even before we sit down to lunch. “There was no arrangement,” says Rajan.

We plough through all the food, with the portraits of sixteen of the RBI’s twenty-two past governors (Subbarao is still not there though it has been a year since he stepped down) looking down at us.

Rajan’s Ongoing ‘Honeymoon’ with the Industry

Rajan had two conditions when I invited him for lunch: One, let’s meet at the RBI and two, no personal questions. He is a vegetarian, although he doesn’t mind eating eggs. So, the onus of eating all that meat and seafood is on me, but I find him keeping a close eye on my plate. 

He asks me while eating a chapatti with paneer birbali:

Are there too many bones? Would you care for a fresh plate?
Raghuram Rajan, former RBI Governor

In August last year, the UPA government announced the name of the next RBI governor a month before the position fell vacant, and Rajan, then chief economic adviser, was sent to the RBI as an officer on special duty—something that had never happened in the RBI’s seventy-nine-year history.

It was a tough gig. Inflation had been high for years, but what added to the problem was a record high current account deficit, a falling local currency against the greenback and the real threat of a ratings downgrade.

One year on, the rupee has stabilised, the current account deficit is manageable. Rajan is not shy of raising policy rates to fight inflation and, most importantly, the government is backing him to the hilt in his fight against inflation. He is under no pressure to cut interest rates to boost growth in Asia’s third-largest economy. Unbelievably, Rajan’s honeymoon with the industry and people in general continues.

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