Mutters were heard when Raghuram Rajan was appointed governor of the Reserve Bank of India. A number of aspirants, in the finance ministry, RBI and elsewhere were disappointed that their prior claims had been ignored; many a civil servant on the verge of retirement thought it unfair that someone barely old enough to be a joint secretary had landed a prize he was looking forward to. The appointment of a professor from a reputedly rightist economic faculty of an American university to a post supposedly reserved for the pick of the Indian official establishment was seen as an insult to its loyal services. However, Mr Rajan has shown that while he may be an argumentative economist, he does not lack diplomacy. He has appointed a former governor, two deputy governors and a venerable financial bureaucrat as chairmen of committees.
However, the need for caution has not frozen him into inactivity. Two days after his appointment, he has taken action on a broad front. His most welcome moves address the concerns of importers and exporters in the new age of exchange-rate volatility. The old regime considered volatility a sin and endeavoured to hack it down; the new governor has promised to permit a wide range of forward markets and contracts so that those involved in foreign trade can hedge their exchange risks. A ten-year futures market in interest rates will take some time to develop; but when it does, it will make the lives of both borrowers and financiers much easier. But Mr Rajanís moves on the licensing of new banks are disappointing. The RBI has, for many years, done its best to sabotage and, when it could not, to delay the issue of new bank licences. Even after it called for applications, it has been sitting on them for many months. Now he has appointed a committee to examine them under Bimal Jalan, whose services to the old socialist regime are well-known and recognized. He wants the new private owners to bring in more equity. That, in itself, is not a bad idea; but under the rules carefully crafted by the RBI, they are going to owners only in name. None of them will be allowed to take a large enough stake to get any power to shape and lead a bank; and those powers are themselves heavily circumscribed.
In essence, the RBI wants private investors to bring in money without having any say in running the bank. Despite this, a handful of industrialists and financiers have applied for licences. They could no doubt bring in more capital; but they should also be allowed to manage the banks; that is the only way new competition and innovation can be introduced in the industry. Mr Rajanís appointment is welcome, but there is an enormous distance between the recommendations of the Rajan committee and the declared intentions of the same Mr Rajan.