Correcting the fault lines

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SummarySince we have been living with low growth and high inflation in general, there are expectations that the stance will change

The appointment of Dr Raghuram Rajan as the Governor of RBI does not really come as a surprise but certainly ends speculation on the issue. The obvious question that arises is whether or not there will be change of stance in monetary policy once he takes over and, as a corollary, will the solutions be any different given the multiple conundrums we face on growth, inflation and currency.

First, the choice of Rajan appears to be more on the global lines where the Bank of England has appointed Mark Carney from Canada. We have opted for this route as Rajan brings with him a lot of experience from the West, especially the IMF, and has the reputation of the one who saw the crisis coming. The fact that we are exploring options of raising funds from international markets is pertinent here as he could steer the ship in this direction. This is a big advantage for us too when we talk of Basel III and banking regulation in India at a time when the entire system is under various pressures imposed by the new regulatory regime.

Unlike Carney, Rajan has the added advantage of having worked with the PMO and the finance ministry and hence understands what goes on at the ground level to better appreciate how various segments are affected by policy measures. This is important because Indian banking has different priorities given the focus on inclusion, which is not the case in the western countries. Further, the fact that he has studied and authored an entire report on financial sector reforms indicates his expertise in all areas.

The next question is more speculative in nature on how he sees the economy going and the kind of measures that would be taken. On the face of it, so far, the CEA has been in consonance with the moves made by RBI and hence there has never been any overt disagreement on the approach taken by RBI. Therefore, one may expect continuity in approach in general. So far, RBI has a priority list of currency, inflation and growth in the pecking order. Will this change? This could be possible because there are evidently multiple views even among economists on what should be the main priority. And also it is quite possible that conditions could be different in September when he takes over in which case it could be a no-brainer.

Assuming the present situation

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