Marathon Runner Raghuram Rajan Must Sprint At RBI

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New RBI Governor Raghuram Govind Rajan is greeted by his predecessor D Subbarao as he takes charge at the RBI headquarters in Mumbai. PTI Photo
New RBI Governor Raghuram Govind Rajan is greeted by his predecessor D Subbarao as he takes charge at the RBI headquarters in Mumbai. PTI Photo

The country’s new RBI Governor, who also has a passion for running marathons, Raghuram Rajan takes charge at the central bank at a time when the economy is at crossroads. High interest rates, high inflation, high deficits have pushed growth down to 4.4 percent. As he moves into his new office – complete with a stately leather chair and a daunting table in front – he will need to start planning some short-term measures. He would need to become the defender of a sliding rupee. He would need to depart from the policies of Subbarao to signal he has new ideas. He would need to motion to the world that the Indian economy isn’t facing a rout.

But can he really make these moves? If the previous RBI Governor felt his hands were tied, what makes us think Rajan would be able to deliver on these? It’s widely known that monetary policy can only be effective – as Subbarao too has been hinting in his public speeches – if other reform and fiscal efforts work parallel to it. Fundamental issues must be addressed. Inflation can be lowered only if our supply chains and infrastructure develop enough to eliminate middlemen. Import of coal must stop (and so the government must release India’s own reserves through policy action and avoid spend on massive imports) for the forex to stabilise.

The central bank governor Rajan will be watched for his prudence and not political-correctness, as was the case being economic advisor. Let’s not forget D Subbarao had served as finance secretary, was considered to be the ideal government choice to implement its measures but eventually did what he thought the RBI ought. Even if, in the process, he gained the wrath of the finance ministry, evident by the recent public display of disagreements between the two. As one internal RBI man shares, the central bank is a different beast and all governors soon realise that to be fair to the job entrusted to them, they must take decisions that can hurt the north block’s or the government’s objectives and desires.

Given the current economic scenario and the shattered market and industry sentiment, Rajan faces a vicious and spinning merry-go-round. As governor if he stays away from increasing interest rates, he would lose an effective tool to reign in the rupee. If he raises interest rates to defend the currency, it would still further hurt India’s already dwindling growth rate. If the government’s other reforms and policies don’t kick in quickly, the RBI will remain pressed for options.

Poor parameters of growth, low global confidence on India and an election year will put Rajan’s mettle through a real test. It will be a break from the charming life of writing for international publications, economist style global conferences, from being protected by the strong red brick walls of north block, or from the beautiful streets of Chicago Booth School -where he was a professor for economics for many years.

Rajan has admitted there is no quick fix to sorting the problems out. “These are challenging times though no one can have any doubt about the country’s progress,” Rajan asserted on being announced the governor. “We don’t have a magic wand to make the problems disappear.”

Give him a chance. That’s the verdict from economists, analysts and CEOs. All that they hope, in the short run, Rajan the marathon runner would do a sprint.

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