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Rajan to be next RBI governor

Chief Economic Advisor succeeds D Subbarao at a time when economy requires contrasting monetary doses

BS Reporter  |  New Delhi 

Raghuram Rajan
Raghuram Rajan

After operating from Delhi’s North Block as the ministry’s chief economic advisor for less than a year, Raghuram Govind Rajan is set to get a new office address — Mint Road in Mumbai. Minister P Chidambaram on Tuesday announced his appointment as the Reserve Bank of India (RBI) governor from September 5.

The announcement has come at a time when, in incumbent D Subbarao’s words, RBI faces the “impossible trinity trilemma” — made worse by global factors that are hurting the rupee.

Rajan, who has written extensively on RBI’s role and had warned of a crisis even before it took global dimensions in 2008-09, knows these challenges very well. He had, in 2005, cautioned central bankers of a potential crisis if banks lost confidence in each other.

He told reporters on Tuesday: “These are challenging times for the Indian economy,” but added, in the same breath, “no one can have any doubt about the country’s promise”.

A Bhopal-born economist, Rajan was preferred to Economic Affairs Secretary Arvind Mayaram and Planning Commission Member Saumitra Chaudhuri for the top job at RBI.

The immediate priority for the new governor will be drafting the mid-quarter review of RBI’s monetary policy on September 18 — within a fortnight of taking charge. Here’s a snapshot of long-term challenges before him

North Block-Mint Road relationship: Amid a weak economic situation, improving RBI’s relationship with the ministry will be important

The rupee’s recovery: The currency, has fallen over 12% in FY14 so far

Recouping forex reserves: The forex reserves, which could cover imports for only six months, need to be replenished
Inflation: Wholesale inflation is below 5%, but retail inflation remains high

Reversal of liquidity-tightening steps: Withdrawing RBI’s liquidity-tightening measures will be a challenge
New bank licences: Selecting the ‘fit and proper’ candidates from among the 26-odd applicants

Starting September 5, he gets three years to convert into opportunities the present challenges thrown by the rupee’s fall to new lows against the dollar. Also, RBI’s recent liquidity-tightening measures, which seem to have achieved little in arresting the rupee’s fall, might be proving a drag for the already-sagging economic growth.

He, however, cautions against expecting too much too soon. “We do not have a magic wand to make the problems disappear. But, we will deal with them,” said Rajan, who will be the third-youngest among post-independence RBI governors. The youngest was C D Deshmukh, who took charge at the age of 47 years and seven months, Manmohan Singh was 10 days short of 50 years when he became RBI governor. Rajan will be 50 years and seven months old when he takes charge.

Rajan, however, between 2003 and 2006 was the youngest chief economist of IMF, which he joined after his teaching stints at the Chicago University, the Stockholm School of Economics and the Kellogg School at the US’ Northwestern University. He held a BTech degree from IIT before going for an MBA at IIM-Ahmedabad, and PhD from MIT.

Giving out new banking licences to corporate houses as RBI governor might also test the skills he displayed in Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity, the book he has co-authored with Luigi Zingales, a fellow professor at Booth School of Business, Chicago.

Among interesting facts about Rajan, the economist who talks about creating wealth, is that he did not even accept the wealth the government owed him. He took teaching assignments abroad, but for his job at the finance ministry, he took just Rs 1 per month as salary.

The appointment has also come at a time when the finance ministry and RBI do not seem to be on the same page. When he joined as the chief economic advisor about a year back, he had told Business Standard: “If my advice comes at odds with politics, I will emphasise economics.” He had also started one of his articles with a query: “What should central banks do when politicians seem incapable of acting?”

However, on the day of RBI’s first-quarter review of its monetary policy, as well as Tuesday, he said the government and RBI were working together to address the challenges faced by the economy.

Amid a fear among emerging markets over choking of capital inflows whenever Federal Reserve Chairman Ben Bernanke makes a cautious statement on quantitative easing (QE), Rajan’s 2012 article on QE might be an interesting read. He had written: “QE2, in which Fed bought long-term government bonds, did not have a discernible effect on long-term government interest rates. Indeed, with its recent decision to pursue QE3, the Fed is focusing once again with the mortgage-backed security, but given that the market is much healthier now, it is unclear how much good this will do.”

In his now famous book, Fault Lines: How Hidden Factors Still Threaten the World Economy, Rajan argues serious flaws in the economy are also to blame, and warns that a potentially more devastating crisis awaits if these aren’t fixed. This is an advice he will need the most as RBI governor, if the challenges currently facing India are not to turn into a full-blown crisis.

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First Published: Wed, August 07 2013. 03:38 IST