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RBI's priorities may see significant shifts under Raghuram Rajan

Anand Adhikari     September 11, 2013
Governors of the Reserve Bank of India (RBI) wield enormous power, but their fame is hardly commensurate. Until they actually ascend to that position, their names and faces are hardly familiar to the man on the street. Not so the newly appointed 23rd RBI governor, Raghuram Rajan. Thanks to his 2005 lecture which predicted the global financial crisis that was to hit three years later, followed by his widely admired 2010 book, 'Fault Lines: How Hidden Fractures Still Threaten the World Economy', Rajan, at 50, the youngest ever RBI governor, was already a rockstar economist. The social media networks, in particular, went delirious at his appointment, with some women even commenting approvingly on the 'eye candy' he presented.

Rajan's first official statement, seven pages long, on the day he took office, further consolidated his reputation. There were subtle changes in expression and emphasis from that of his predecessor, outgoing Governor Duvvuri Subbarao , which could herald policy shifts as his term progresses. "Rajan's first statement as governor was a confident articulation of his philosophy about the role of a central bank," says Shikha Sharma, CEO and Managing Director, Axis Bank Ltd.

Rajan takes over at a very difficult stage in India's economic history - inflation is rising, while both fiscal and current account deficits remain at worrisome levels. The country's gross domestic product growth rate has almost halved in the last three years. The rupee's value has been falling like a stone, while the likelihood of war in Syria threatens to send international oil prices soaring. With the US's quantitative easing to be tapered off in coming months, the pain for emerging markets - as liquidity reduces - is bound to increase. In his first statement, Rajan said the main responsibility of any central bank was to maintain monetary stability - sustain confidence in the value of the nation's currency. "Ultimately this means low and stable expectations of inflation," he added. "We need faster, broad-based, inclusive growth leading to a rapid fall in poverty."

Rajan's initial statement suggests he already has some antidotes to the looming crises up his sleeve, feel economists. "He has come well prepared with an agenda," says V. Vaidyanathan, Chairman and Managing Director of financial services provider, Capital First Ltd, analysing Rajan's statement. "The proposals to remove some of the requirements for branch licences and to allow foreign banks to set up wholly owned subsidiaries and enjoy near local bank benefits are almost as significant as abolishing licences for manufacturing was in 1991." He also appreciated Rajan refraining from being overprotective of the rupee. "Far from protecting the rupee from speculation, he is encouraging trading, which shows he believes it is not local speculators who are pulling down the currency," he adds. "By this logic, the recent short-term rate spike may even be revoked. This is bold and new thinking."

Not that the old thinking, dominated by predecessor Subbarao's determination to keep inflation down, lacked its own logic. In the first part of his tenure, which began in September 2008, barely a fortnight before the apocalyptic Lehman Brothers collapse triggering the global crisis, Subbarao rapidly reduced interest rates in a bid to keep India from catching the global contagion. The repo rate (at which the RBI lends to banks) went down from nine per cent when he started to five per cent in March 2009.

It was only a year later, when inflation rose and remained high, that Subbarao, in a turnaround, began hiking rates. Average wholesale price index inflation was 9.6 per cent through 2010/11. Though he did soften rates later, some felt he left it till too late. Not only Indian industry, but also finance ministers Pranab Mukherjee and P. Chidambaram, voiced impatience with his policies.

"Subbarao will be remembered for his grace under pressure," says Ananda Bhoumik, Senior Director at India Ratings and Research. "Posterity may well judge him kindly." With Rajan, expectations are very high, which could well turn out to be his biggest challenge. "His academic credentials, erudition and practical knowledge of international financial markets will stand us in good stead in the months ahead," says Sampat Kaushal, President and CEO at Dun & Bradstreet.   


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