RBI gets a feted Boss

The government has appointed Raghuram Rajan as the next governor of the Reserve Bank of India, raising hopes that the former IMF chief economist, who in 2005 famously predicted the financial crisis that hit the developed world three years later, will bring a fresh and perhaps more innovative approach to pull the economy out of the current crisis of slowing growth and a weakening currency.
Rajan, 50, who is currently the chief economic advisor, will take over from D Subbarao on September 4. He is the youngest governor of India’s central bank since Sir CD Deshmukh, the first Indian governor whose tenure ran from August 1943 to June 1949.
He will be the 23rd governor of RBI, succeeding Subbarao, whose tenure was marked by visible tension between North Block, the abode of the finance ministry, and Mint Street, as RBI is often referred to.
Rajan’s appointment comes on a day the rupee touched an all-time low of 61.81 to the dollar before recovering to close at 60.77, up 11 paise from Monday’s closing after RBI intervened. Rajan’s appointment, which was announced around 4 pm — the currency trades till 5 pm — also helped stabilise the rupee, said market participants. News that the government would name Rajan was reported on TV channels earlier in the afternoon.
But the cheer seemed temporary as CLSA, an influential brokerage, cut India’s growth forecast for the current fiscal to 5.2% and below 6% for next year, highlighting the conflicting goals that have forced Subbarao to abandon monetary easing.
India needs lower interest rates to revive growth, but the sharp depreciation in the rupee requires rates to remain high, a conflict that the former IMF chief economist will find difficult to address, though he has hinted that he might give growth a little more attention.
He has said in the past that 5% inflation is reasonable for a developing economy like India, indicating that he may not be averse to cutting rates sharply if the rupee, down nearly 11% in the current calendar, recovers from its slide.
Wholesale inflation was at 4.86% in June, though retail inflation was higher at 9.87% because of high food prices.
An alumni of IIM-Ahmedabad and IIT-Delhi, Rajan earned his doctorate from the Massachusetts Institute of Technology. He was professor at the University of Chicago’s Booth School of Business before taking over as chief economic advisor last August.
Rajan, whose appointment as chief economic advisor was widely believed to be a stop-gap arrangement before heading to RBI, faces the challenge of repairing the damaged relationship between North Block and RBI. It is also likely that Rajan may reform the 78-year-old institution, making it more democratic in terms of monetary policy, as is the case in developed countries. In the process, he may have to dilute some of the extraordinary powers of the governor.
Rajan may also push forward some of the reforms he suggested in his 2008 report on financial sector reforms that was commissioned by the Planning Commission. Rajan has been appointed for a period of three years.