Raghuram '007' Rajan faces pro-growth boss in Narendra Modi

May 31 2014, 11:48 IST
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Investors are looking to PM Narendra Modi to stir India's economy, putting Raghuram Rajan and Modi on a collision course if inflation stays high. Investors are looking to PM Narendra Modi to stir India's economy, putting Raghuram Rajan and Modi on a collision course if inflation stays high.
SummaryHailed as troubleshooting 'James Bond', Raghuram Rajan had been given a licence to kill inflation.
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and former chief economist at the International Monetary Fund, Rajan was brought back to India in 2012 to be chief adviser to then-finance minister P. Chidambaram of the Congress party, which meant the two already had a working relationship when Rajan took over at the RBI.

After stunning the markets with a series of bold measures on his first day, he was dubbed variously by the Indian media as "The Guv" and "a rock star banker".

The "Name's Rajan, game's Bond," the Economic Times daily gushed on its front page, with a photo-edited picture of Rajan in an action pose and brandishing James Bond's trademark Beretta pistol, albeit one made of rupee notes.

Rajan, 51, has proven to be a pragmatic - if not swashbuckling - operator at the RBI, pushing to streamline a staid institution, deepen markets, and reform policymaking to control the country's grinding inflation.

Rajan and the new finance minister, Arun Jaitley, 62, a prominent corporate lawyer, held a meeting in New Delhi on Tuesday, but have not previously worked together.

Jaitley is not seen to be as hawkish as Rajan on inflation - a dynamic that is typical between central bankers and governments around the world and often leads to tension.

One senior finance ministry official who worked with Rajan and was part of the team that made a presentation this week to Jaitley said Rajan's initiative to set an inflation target based on CPI could create conflict if, as many expect, CPI rises in coming months.

"Rajan is ... making things difficult for the government by publicly speaking about RBI's stance on the CPI inflation. He would not find it easy to backtrack even if he wants to adjust with the new government," the official said.

The shift would give the central bank a clear price-stability mandate and make fighting inflation its chief objective. Previously, the RBI was charged with promoting growth and financial stability as well as controlling inflation.

FAR FROM DONE

Getting the new government's support for inflation targeting is far from a done deal. Rajan has done what he can to set an informal target by establishing a "glide path" to get CPI inflation down to an annual 6 percent by January 2016 and 4 percent, plus or minus 2 percentage points, a year later.

CPI inflation was at 8.59 percent in April year-on-year after running near or above 10 percent for almost two years through the end of 2013.

"Inflation targeting will require

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