Raghuram Rajan appointed as next RBI governor

By Tony Munroe and Manoj Kumar

MUMBAI/NEW DELHI (Reuters) - India named Raghuram Rajan, former International Monetary Fund chief economist, to head the Reserve Bank of India (RBI) on Tuesday, giving fresh impetus to efforts to revive a struggling economy and a currency that is languishing at record lows.

Raghuram Rajan, who predicted the global financial crisis in 2005, will take over at the RBI from Duvvuri Subbarao, whose turbulent five-year tenure ends on September 4.

Rajan is viewed as a pragmatist on monetary policy who is likely to stick fairly closely to Subbarao's line on managing inflation. The outgoing governor fought an uphill battle against price pressures for much of his term in an economy plagued by supply-side bottlenecks and legislative and bureaucratic paralysis.

"(Rajan) has the intellectual pedigree and policy experience but my worry is people will think a smart guy coming in will fix all of India's problems," said Bhanu Baweja, head of emerging markets strategy at UBS in London.

"The problem in India is political consensus and execution. By itself the appointment doesn't change my view on the market, I am underweight the rupee and Indian equities," Baweja said.

India's record-high current account gap at 4.8 percent of GDP makes it highly exposed to global flows away from emerging markets in anticipation of tighter U.S. monetary policy. Reforms are especially challenging for a weak ruling coalition headed by Prime Minister Manmohan Singh that faces elections by next May.

The rupee is down nearly 11 percent in 2013, making it the worst performing currency in emerging Asia, and emergency steps by the RBI in July to drain liquidity and raise short-term interest rates have failed to halt its decline.

It fell to a record low of 61.80 to the dollar on Tuesday before buying by the RBI helped it post a gain. Meanwhile, economists have been cutting back their growth forecasts for an economy that expanded by just 5 percent in the last fiscal year, its weakest in a decade.

"These are challenging times for the Indian economy, though no one can have any doubt about the country's promise," Rajan said in brief remarks late on Tuesday.

"The government and the Reserve Bank are working together to address these challenges. We do not have a magic wand to make the problems disappear instantaneously. But I have absolutely no doubt that we will deal with them," he said.

In a March interview with Reuters, Rajan said he believed inflation of around 5 percent in a developing economy is "reasonable", putting him on the same page as Subbarao, who set 5 percent as medium-term goal and 3 percent as a long-term target.

In recent months Rajan has tended to speak in favour of pro-growth policies, as well as talking up the need to address the current account deficit.

"In the last two months, he has been taking a key role on rupee-related steps, and his appointment as the governor will lift expectations of constructive and positive steps to lift the rupee," Siddhartha Sanyal, an economist at Barclays in Mumbai, said.

GLOBAL STATURE

Informal and outspoken, Rajan brings global stature to a post that in recent years has been held by career bureaucrats. At 50, he is also young by Indian central bank chief standards.

The former University of Chicago professor gained fame with a 2005 paper at a U.S. meeting of central bankers, warning that financial sector developments could trigger an economic crisis. The argument, later spelled out in his book "Fault Lines", was dismissed by many at the time as alarmist.

In a Reuters poll, 13 of 15 respondents said Rajan was the best-suited to the RBI job. Other candidates were said by government insiders to include Economic Affairs Secretary Arvind Mayaram and Planning Commission member Saumitra Chaudhuri. Subbarao ruled himself out of a term extension.

Rajan had been considered the most likely candidate to be the next governor when he returned to India last year to accept the top advisory post at the Finance Ministry in New Delhi, although some in government had said his relative outsider status might count against him.

Based in Mumbai, the RBI is not statutorily independent, although its governor has enjoyed wide latitude when it comes to policymaking.

Unlike Subbarao, Rajan favors the formation of a monetary policy committee, departing from the current autocratic power enjoyed by the governor, a set-up that would bring the RBI more in line with the practice at major central banks elsewhere.

During his tenure, Rajan will also oversee the issuance of new bank licenses to corporate houses under a policy pushed by the finance ministry but opposed by many in the central bank.

Rajan was appointed to a three-year term. Subbarao was also initially appointed for three years, and his tenure was then extended by two years.

(Additional reporting by Rajesh Kumar Singh, Sujata Rao-Coverley, Subhadip Sircar and Suvashree Dey Choudhury; Editing by John Chalmers and John Stonestreet)