India's new Reserve Bank of India chief Raghuram Rajan leads his first monetary policy review Friday as the country looks to the respected former IMF chief economist to rescue Asia's third-largest economy from slow growth, high inflation and a weakened currency.
Raghuram Rajan has been governor of the Reserve Bank of India for less than a month but already is being hailed as a rock star in local media. A day after he took office, the free-falling rupee reversed course after losing more than a sixth of its value. It hit a one-month high of 61.77 on Thursday, additionally buoyed by news that the US Federal Reserve would continue its stimulation policy of cheap credit instead of scaling it back as many had expected.
A long-time University of Chicago professor known for having predicted the 2008 global financial crisis, Rajan's steadying voice of authority has given a boost to investor confidence. But the central bank has limited scope in addressing India's economic woes. Rajan's greatest potential contribution might lie in whether he can use his credentials and international standing to coax India's government into reforming policies that he identifies as the underlying cause of the country's economic doldrums.
Rajan faces a tough, ongoing balancing act of trying to stimulate growth while keeping inflation in check. He has signaled he considers stability in both prices and the currency a priority, indicating he likely will leave the benchmark interest rate of 7.25 per cent unchanged at Friday's review.
Businesses and the government would like him to cut interest rates to boost consumption and kick-start flagging economic growth. The economy expanded 4.4 per cent in the April-June quarter, far below the average of 8 per cent growth of just a few years ago.
But making borrowing cheaper risks worsening inflation, which climbed to 6.1 per cent in August, exceeding the 4.5 per cent rate that the Reserve Bank has set as a target. For the millions of Indians who get by on less than $2 per day, such price increases, especially for food, are a major hardship.
"They really are in a bind,'' said Anjalika Bardalai, an analyst for Eurasia Group. "There are a lot of different economic indicators that are not looking very good. And quite frankly, there is no single set of policies that is going to fix all