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Appointing Raghuram Rajan as RBI governor is a risk worth taking

Rajan is a high risk choice not on account of any shortcoming in his professional credentials but that being the RBI governor involves navigating political minefields. Will he be able to do it, asks Sanjiv Shankaran?

Sanjiv Shankaran Last Updated: August 12, 2013 | 18:25 IST

Sanjiv Shankaran
Raghuram G. Rajan, currently Chief Economic Advisor in the finance ministry, is a high risk choice as the 23rd governor of the Reserve Bank of India (RBI). However, given the perilous state of the economy, it's a risk worth taking.

Prime Minister Manmohan Singh, a former RBI governor himself, has appointed Rajan for the three-year period beginning September 5. Usually, the governor gets an extension of another two years at the end of the period.

Rajan is a high risk choice not on account of any shortcoming in his professional credentials. It's unlikely there is someone in India today better equipped to deal with monetary policy.

What makes Rajan a risky choice is that being the RBI governor involves navigating political minefields. The RBI governor's efficacy comes not merely from his professional credentials, but also his ability to get the entire system bend to his will without appearing to do so.

For a start, Rajan will have to deal with Finance Minister P. Chidambaram at a time when the United Progressive Alliance (UPA) government has less than a year to go. As things stand, the economy has registered a 5 per cent growth rate in 2012/13, the lowest in a decade.

There is always a possibility that UPA constituents will exert pressure indirectly on Rajan to loosen monetary policy, even if the central bank thinks it is not prudent, to stimulate the economy before the election.

In the Indian system, it is the RBI governor, and not a committee, who takes a final call on monetary policy. Therefore, the governor is subject to enormous pressure. Something that won't be easy to cope if one doesn't have a thick skin, among other attributes.

There's bound to be all kind of lobbying and stories in the media as RBI prepares to shortlist new banks. This part of the job would require political skills to keep out unworthy applicants without deeply offending people in power.

Finally, the RBI itself may be in for some kind of makeover if some of the recommendations of the Financial Sector Legislative Reforms Commission are expected. It won't be easy for Rajan to deal with entrenched interests within central bank when there is an attempt to reform it.

The odds are against Rajan having an easy term. However, if ever there was a time to take the risk, this is it.

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