Raghuram Govind Rajan, 50, who was named on Tuesday as the 23rd governor of the Reserve Bank of India (RBI) for a three-year period has a challenging, if not daunting, job at hand. The former IMF chief economist, whose credentials for the coveted post are both unexceptionable and immaculate, will have the immediate task of restoring stability to the foreign exchange market at a time when the emerging markets are perceived to be running out of puff.
What would be keenly watched is how Rajan, who would be the youngest governor of India’s central bank as he takes over from incumbent Duvvuri Subbarao a month from now, would grapple with the RBI’s multiple objectives that are seen to be largely at odds with one another at this time. Acutely aware of the primacy the government accords to revive economic growth and himself almost unreservedly pro-growth, Rajan can’t, however, give short shrift to the cause of price stability. He will also have to think about how to catalyse inbound capital flows to bridge the high current account deficit, in consonance with and subsequent to the measures the government is expected to announce in this regard later this week.
Rajan’s first comments on his appointment was appreciative of his unenviable task. ?We do not have a magic wand to make the problems disappear instantaneously, but I have absolutely no doubt we will deal with them,? he said. Reflecting what’s in store for him, the rupee fell to a record low on Tuesday, prompting the RBI to intervene and necessitating fresh measures to bolster the currency, which has fallen 12.7% against the dollar since the start of May. It seems the recent liquidity tightening measures haven’t really helped the rupee and the government’s borrowings from the central bank also, meanwhile, added cash to the market.
As governor, Rajan will now have to deal with certain policy questions he had pondered over earlier with an academic zest. While sticking to the policy of flexible-but-managed exchange rate for an economy with a largely open capital account, he will have to take a view on how the RBI should be divested of its subsidiary functions like public debt management to focus exclusively on the key function of managing a key short-term base rate to maintain price stability. As the head of a government committee, Rajan had earlier favoured removing debt management role from RBI.
Other rather long-term goals would likely include the setting up of a monetary policy committee for more nuanced and structured interaction with the government in this respect and implementing the long-pending (and well-recognised) reforms in the corporate bond markets. Says Radhika Rao, economist at DBS, Singapore, ?weighing the inflationary risks, rupee depreciation and growth headwinds, the new appointee is also likely to lean towards status quo on the rates front. However, some stop-gap measures to plug rupee depreciation might be resorted to in a bid to calm the markets.?
Rajan, who is a visiting professor for the World Bank, the US Federal Reserve board and the Swedish Parliamentary Commission, is noted for perspicacious views on the global financial markets (he attributed economic crises in the US and Europe to ?workforce competitiveness issues? in the globalisation era, which politicians attempted to ?paper-over? with easy credit and suggested supply-side solutions of a long-term structural nature). But there are analysts who think that the jury is out on his monetary policy views. Says Robert Prior Wandesforde, economist with Credit Suisse, Singapore: ?He (Rajan) has no central banking background; so, it will be a steep learning curve… The jury is out on his monetary policy views. My assumption is he will be pragmatic. Hopefully he will be a safe pair of hands.?
Analysts feel that his sound understanding of the global economic and financial system would stand him in good stead in the new job. He is also expected to be less conservative than his two immediate predecessors ? Subbarao and YV Reddy ? who belonged to the Indian Administrative Service.
Rajan said recently: ?For a large vibrant economy like India’s, there is always hope. We still have tools to tackle our problems. But we must exercise those tools with vigor and a sense of urgency.? He may not have any magic wand in hand, but is believed to bring some new ideas and implement them to restore the rupee’s stability and the salvage the economy that seems to have plunged into a low (around 5%) growth phase.