Fundamental change has been taking place in India. Whether we look at trade in goods, trade in services or the capital account, India is reintegrating into the world economy. At the same time, elements of a sophisticated financial sector have come about, led by the equity market, where the iconoclastic reforms of the 1994-2001 period have yielded handsome dividends. In the new India, the savings rate exceeds 30% of GDP. A good quality financial sector is required so that these massive resources are invested wisely in the economy. These changes frame the task for the next RBI governor. In recent years, RBI has viewed economic integration with the world with suspicion and tried to throw up roadblocks in the way of this process. The next RBI governor must be a person who understands that its reintegration into the world economy is a central driver of India’s GDP growth. The strategy adopted must be to rapidly integrate India into the world as dozens of emerging markets have done, while having a sophisticated understanding of the new economics of an open capital account. Speeches from RBI should talk about the intricacies of reform, instead of preaching inaction.
In recent years, RBI has worked to prevent progress on financial sector reforms, on issues like competition in banking or on the development of the bond-currency-derivatives nexus. The next RBI governor must understand that it is dangerous to give over 30% of GDP of savings to a malfunctioning financial system. He or she must be the biggest advocate of financial sector reforms, helping to unleash forces of competition and innovation into the system, drawing on the analysis of the Percy Mistry and Raghuram Rajan committee reports. RBI’s operating procedures have to change in order to adapt to the agenda of reforms. India’s interests are more important than the interests of the existing RBI setup. Many bureaucratic and practical hurdles will come in the way of this process of change—just like the hurdles that have been thrown up against reforms in every other part of the economy. The new RBI governor must be tough enough to overcome these constraints and deliver the pace of change commensurate with a fast changing India.