Swamy might blame him for wrecking the economy but Raghuram Rajan has actually fixed (some of) it

In 2013, when Raghuram Rajan was appointed the governor of Reserve Bank of India, he had his task cut out. Global downturn was continuing, rupee was in freefall and inflation was rising untamed. Cut to 2016 – inflation is under control, rupee’s fall has been arrested and banking reforms have been sped up. However, not everyone is happy.

There is chatter that despite popular appeal, Rajan may not get a second term. At the forefront of his detractors stands Subramanian Swamy, motormouth leader of the ruling Bharatiya Janata Party who has been repeatedly angling for Rajan to be ousted.

On Monday, he wrote to the Prime Minister Narendra Modi recommending that his appointment be terminated with “immediate effect” or when his term ends. Rajan is responsible for wrecking the Indian economy “deliberately” and he is “mentally not fully Indian”, wrote Swamy in his letter.

This comes amid speculation that even ministers inside the government aren’t fully happy with Rajan. Their argument presumably is that the economy has not taken off because Rajan hasn’t cut rates “drastically”, according to a senior government economist who spoke to The Hindu.

The Finance Minister Arun Jaitley, meanwhile, seems to have stepped in for some firefighting. On Monday, Jaitley said that the ties between his ministry and the central bank are “institutionalised” as they share a “mature relationship” while not alluding to any questions about the impending decision on Rajan’s tenure which expires this September.

An extension or not, it’s hard to prove that Rajan has “wrecked” the Indian economy in any manner. In fact, his strategy has won him accolades and applause across the world.

Here’s a look at some of the key things that Rajan has managed to achieve so far in the three years of his tenure that get over in September.

Inflation hawk

Rajan has been called an inflation hawk for his single-minded focus on curbing consumer price index inflation. When he assumed office, the inflation measured by the Wholesale Price Index was at 6.1% while Consumer Price Index stood at 9.52%.

He raised repo rate – the rate at which the RBI lends to commercial banks – by 0.25% to control the flow of funds in the economy and control inflation a little bit. Since then, he has only hiked the interest rates twice choosing to hold back more often than not while waiting for inflation to subside.

After these tweaks, the retail inflation stood at a more comfortable 5.39% in April while repo rate is at its lowest level in five years at just 6.5%.

Rajan argues that there’s no tradeoff between growth and inflation in the long-run and “boosterism” of cutting rates should be avoided. “Rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading. Instead, what is important is sustained low inflation,” Rajan has said in the past.

A rupee saved is a rupee earned

Another thing that has long troubled policymakers as well as consumers is rupee’s value in the international market. Seen as a volatile currency, the Indian rupee was going through a period of depreciation in the international market when Rajan took charge in 2013.

In August 2013, the Indian rupee hit a record low of Rs 68.845 per dollar as the volatility peaked at 21.1%. Three years later, the volatility has plunged to 7.44% as the RBI has sporadically intervened in the markets to contain losses in the value of the rupee.

Today, the rate stands a little higher than Rs 66 per dollar while Rajan believes that it is now trading in the band of what he terms the “goldilocks rate” – neither overvalued nor undervalued.

Building reserves

In September 2013, India’s foreign exchange reserves dipped to their 39-month-low at $275.5 billions as the central bank found it tough to arrest the fall of rupee and continued to sell dollars.

Rajan stepped in with a slew of policy measures aimed at controlling first the rupee’s fall and then eventually building up forex reserves which seem to have borne fruit. In April 2016, Indian foreign reserves rose to a record high of US $360 billions on account of RBI’s continued buying of dollars in the market.

With the strengthening of the rupee in the international market, foreign funds continue to pour in further adding to legroom for the RBI to carry out its open market operations to maintain reserves. Recently, Rajan indicated that the central bank will continue to intervene in the foreign exchange market.

“We really don’t want the currency to move only as result of capital flows,” Rajan said. “We would like it to be more focused on the underlying fundamentals of trade and services.”

Deep surgery for banks

For years, Indian banks – especially the ones in public sector – have lent rather recklessly to both retail and business customers. A substantial part of these loans are no longer coming back as borrowers are now turning into “wilful defaulters”.

Over the last five years, the bad debts have risen more than five times in public sector banks to Rs 3.6 lakh crores in 2015. What this means is that the quality of lending has gone down considerably as 5% of all loans by public sector banks have turned into NPAs.

Rajan sensed this problem early on and has worked on making the banks at least disclose the extent of Non-Performing Assets hiding in their accounts. In 2014, he said that he was working on NPAs but that they were likely to come down only once the economy recovered. This year, he called on the banks to start classifying NPAs in full and go for a deep surgery rather than temporary band-aids.

“If the bank wants to pretend that everything is all right with the loan, it can only apply band-aids. For any more, drastic action would require NPA classification,” he said. “But to do deep surgery such as restructuring or writing down loans, the bank has to recognise it has a problem, and classify the asset as a non-performing asset,” he added.

The RBI has set a deadline of March 2017 to clean up the balance sheets of banks which will have provided for NPAs and then the process of restructuring and reforming will begin.