Raghuram Rajan Committee

The Raghuram Rajan Committee, formally known as the Committee on Financial Sector Reforms, was constituted to examine the structure, efficiency, and future direction of India’s financial system. Its recommendations have had a lasting influence on banking, finance, and the broader Indian economy by emphasising competition, inclusion, stability, and market-oriented reforms. The committee’s work provided a strategic roadmap for modernising India’s financial architecture in line with global best practices while addressing domestic developmental needs.

Background to the Formation of the Committee

In the early 2000s, India’s financial system had achieved a degree of stability following post-1991 economic reforms, yet it faced persistent challenges such as limited financial inclusion, inadequate credit penetration, inefficiencies in banking operations, and underdeveloped financial markets. At the same time, increasing integration with the global economy required a more resilient and competitive financial sector.
Against this backdrop, the Government of India appointed a high-level committee in 2007 to review financial sector reforms and propose a medium- to long-term strategy. The committee was chaired by Raghuram Rajan, a noted economist who later served as Governor of the Reserve Bank of India.

Mandate and Scope of the Committee

The Raghuram Rajan Committee was tasked with examining the existing structure of the financial system and recommending reforms to improve efficiency, inclusiveness, and stability. Its scope extended beyond banking to include capital markets, insurance, pensions, and financial regulation.
The committee focused on balancing two critical objectives: promoting innovation and competition in finance, and ensuring adequate regulation to manage systemic risks. It also placed strong emphasis on expanding access to financial services for underserved segments of society.

Key Recommendations on Banking Sector Reforms

One of the most significant contributions of the committee was its emphasis on increasing competition in the banking sector. It recommended issuing new bank licences and encouraging the entry of diverse players to improve efficiency, customer service, and innovation.
The committee advocated greater operational autonomy for banks, particularly public sector banks, along with improvements in governance, accountability, and risk management. It highlighted the need for professional management and reduced political interference in lending decisions to enhance asset quality and profitability.

Focus on Financial Inclusion

Financial inclusion was a central theme of the Raghuram Rajan Committee’s report. The committee argued that access to basic financial services was essential for inclusive economic growth and poverty reduction.
It recommended expanding branchless banking, leveraging technology for low-cost delivery of financial services, and promoting specialised institutions to serve small borrowers, farmers, and micro-enterprises. These ideas later influenced the development of differentiated banking models and technology-driven inclusion initiatives in India.

Recommendations on Financial Markets and Capital Flows

The committee emphasised the development of deep and liquid financial markets to complement the banking system. It highlighted the importance of strengthening corporate bond markets, improving market infrastructure, and enhancing transparency and disclosure standards.
On capital account management, the committee supported a calibrated approach to capital account liberalisation. It recommended gradually opening up to foreign capital flows while strengthening domestic financial institutions and regulatory capacity to manage volatility and external shocks.

Regulatory and Institutional Reforms

The Raghuram Rajan Committee underscored the importance of strong, independent, and well-coordinated financial regulation. It advocated clearer regulatory mandates, better coordination among regulators, and improved supervisory capacity.
The committee also highlighted the need for better mechanisms to deal with financial distress, including efficient resolution frameworks for banks and financial institutions. These recommendations later gained prominence in the context of rising non-performing assets and financial sector stress.

Impact on Banking and Financial Policy

Although not all recommendations were implemented immediately, the committee’s ideas significantly influenced subsequent financial sector reforms. Policies related to banking competition, financial inclusion, market development, and regulatory strengthening drew heavily from its analytical framework.
The emphasis on inclusion, innovation, and stability became guiding principles for financial sector policy in the years that followed, particularly during periods of economic expansion and stress.

Significance for the Indian Economy

From a macroeconomic perspective, the Raghuram Rajan Committee contributed to shaping a more balanced and forward-looking approach to financial sector development. By linking financial reform with inclusive growth and systemic stability, it reinforced the role of finance as a facilitator of sustainable economic development.
A more competitive and inclusive financial system improves credit availability, mobilises savings, supports entrepreneurship, and enhances resilience to economic shocks. These outcomes are critical for a large and diverse economy such as India.