Raghuram Rajan faces the toughest test of his career.
By R. Chandrasekaran
CHENNAI: At a time when India is facing multiple economic issues, the government has named Dr. Raghuram Rajan as a successor to the current Governor of the Reserve Bank of India, Dr. D. Subbarao, whose term will come to an end on September 4. The choice may have overwhelming support, but Rajan will face the toughest challenge of his career.
Rajan will be the 23rd Governor appointed by the Government for a period of three years. He has impeccable credentials. He is an alumni of the prestigious Indian Institute of Management – Ahmedabad and Indian Institute of Technology – Delhi, apart from having a doctorate from the Massachusetts Institute of Technology. His stint in International Monetary Fund (IMF) as its Chief Economist has given him experience in the monetary policies being practiced by different countries. He has also served as the president of the American Finance Association
He was credited for predicting the global financial crisis in 2008 well in advance in 2005 itself, thus suggesting the amount of understanding of the global economic and financial system. His knowledge on crisis management, especially during the tough times like the current situation, will put him in good stead to handle the situation.
In August 2012, Rajan was hired as the Chief Economic Advisor by the finance ministry after he served as the professor of the University of Chicago’s Booth School of Business. He was part of the report on financial sector reforms that the Planning Commission authorized
After his appointment, the government has been pushing forward a spate of reforms since September of last year, including the opening up of foreign direct investment (FDI) to retail sector, which faced strong opposition from different sections, hiking of FDI in aviation sector, telecom and so on.
While many experts believe that Rajan is a right choice for the RBI Governor’s position due to his global exposure and economics acumen, he faces the daunting task of not only bringing the economy back to higher growth rate but also have to stabilize the volatile Indian rupee.
If Subbarao opened his innings just a fortnight before the U.S. – based Lehman Brothers collapsed, thereby dragging the global financial services sector to worst ever crisis, Raghuram Rajan is entering the scene with Indian economy facing a tough road ahead.
The first priority is to stabilize the Indian currency in the foreign exchange market. His appointment came on a day when the rupee hit an all-time low of 61.80 beating the previous low of 61.21 recorded on July 8. Only after the Indian rupee stabilizes, he will be able to roll back the recent measures of tightening money policy.
The roll back should be followed by easing of money policy to spur economic growth that had hit a decade low of 5 percent in the fiscal year ended March 2013. The current account deficit position will make him more worried in determining the monetary policy, though the government’s actions dictate current account deficit position.
Though Rajan voiced government opinion on the question of interest rate before the Indian currency went berserk, it remains to be seen whether he will be able to concur with the government on many issues where Subbarao differed. While the government wanted the RBI to announce interest rate cuts especially after September last year, Subbarao cited higher inflation for not reducing the interest rates in the past. It was no secret that Subbarao and the government were not on the same page on some key issues.
It will be interesting to see whether Rajan concurs with the government or Subbarao. He is said to be forthright and frank in expressing his views and his opinion may hold key on several issues, including granting of new banking licenses.
The incumbent has already said that there is no magic wand to fix the issues that India is currently facing. This indicates that it will take some time before his efforts bears its fruits.
To contact the author, email to rchandrasekaran@americanbazaaronline.com