MUMBAI/NEW DELHI, Sept 3 (Reuters) - Raghuram Rajan, a
suave, unflappable University of Chicago economist, will step
into the eye of the storm roiling India's economy on Thursday as
the new governor of India's central bank and chief defender of a
The currency has plunged nearly 20 percent since May as
Asia's third-largest economy confronts its worst crisis since
1990-1991. The government's piecemeal efforts to stabilise the
rupee have done little to halt its steep slide. It has tumbled
about 10 percent alone since Rajan's appointment on Aug. 6.
Rajan has few policy options to revive the rupee but one
thing he can do immediately is explain to financial markets more
clearly what steps the central bank is taking and the thinking
behind them. Investors and economists have complained that the
bank has caused unnecessary confusion with some pronouncements.
The big question is whether the former chief economist of
the International Monetary Fund (IMF), who famously predicted
the 2008 global financial crisis, will take the helm of the
Reserve Bank of India with a whisper or a bang. In other words,
will he take his time or come out with fresh policy
announcements like Bank of Japan Governor Haruhiko Kuroda, who
launched a massive stimulus package within weeks of taking
office earlier this year.
Another pressing concern for markets is whether Rajan plans
to dismantle any of the mishmash of measures, including a hike
in short-term interest rates, the central bank has unveiled
since mid-July to prop up the rupee. Economists have expressed
concern the steps could further damage the ailing economy.
Rajan, aware markets are scrutinising everything he says for
clues about his intentions, has been circumspect in public,
revealing little about whether he will pursue the policies of
his predecessor, Duvvuri Subbarao, or change tack.
Either way, economists expect him to hold fire with any
major measures until after the U.S. Federal Reserve meets on
Sept 17-18, when it might announce a pivotal shift in its
Keen to lower unrealistic hopes of what he can achieve,
Rajan has stressed that he has no "magic wand" to solve India's
multiple economic ills. The country has the world's
third-largest current account deficit of about $90 billion, high
inflation and an economy projected by private economists to grow
at about 4 percent this fiscal year, half the rate it was in
Rajan, 50, has raised expectations of out-of-the box
thinking to rescue the rupee and boost economic growth.
"Economic policymakers require an enormous dose of humility,
openness to various alternatives (including the possibility that
they might be wrong), and a willingness to experiment," Rajan
wrote in a column on the Project Syndicate website on Aug. 8.
"ROCK STAR ACADEMIC IMAGE"
Rajan is a distinguished academic and author of the
prize-winning book "Fault Lines: How Hidden Fractures Still
Threaten the World Economy". He gained fame with a 2005 paper at
a U.S. meeting of central bankers, warning that financial sector
developments could trigger an economic crisis.
Rajeev Malik, an Indian-born economist at CLSA Singapore,
fears Rajan's "rock star academic image" could be a hindrance.
"That is because it has generated unrealistic hope that he has
some magical prescription to fix our problems," he wrote in the
Business Standard newspaper on Tuesday.
Rajan will swap his first floor office in the splendid red
sandstone British colonial building that houses the finance
ministry in New Delhi for a view of the Arabian sea from the
18th floor of the central bank's Mumbai headquarters.
He will officially become the 23rd governor of the RBI after
signing an oath of secrecy on Wednesday and will take charge
operationally on Thursday.
In Delhi, policy-making can be a painfully slow process
bedevilled by political intrigue but in Mumbai, Rajan will be in
a faster-paced environment where his decisions will have a
real-time impact on financial markets.
For the past year, Rajan, as chief economic adviser in the
finance ministry, has been an articulate champion of
Chidambaram's efforts to curb India's fiscal deficit and has
travelled with him to foreign capitals to try to woo investors.
Analysts expect Rajan to improve the central bank's
communication with markets, which could help in restoring
confidence among investors. Outgoing governor Subbarao has been
sharply criticised for failing to communicate the central bank's
exchange rate policy effectively.
The RBI has taken a series of extraordinary measures in
recent weeks in a bid to curb speculative trades in the rupee.
These have been cited as a key factor behind a slew of brokerage
downgrades of India's growth forecasts since last month.
"One is tempted to say that if Mr Rajan can't help restore
confidence in India's battered currency, nobody can," said
Nicholas Spiro, managing director of Spiro Sovereign Strategy.
"His immediate priority must be to restore credibility to Indian
monetary policy which, over the past several weeks, has been a
Economists predict Rajan will prioritise currency stability
over inflation and growth, at least initially, a Reuters poll
showed last week.
Central bank officials privately say Rajan will have to
continue Subarrao's strategy of draining cash from money
markets, even though that has made it more costly for struggling
corporates to raise money, putting another brake on growth.
"We don't expect any knee-jerk change in monetary policy
direction," echoed Radhika Rao, economist at DBS in Singapore.
Many economists say Rajan will refrain from taking action
until after the U.S. Fed meeting, which is widely seen
announcing a tapering off in the bank's huge bond-buying
programme. Those prospects have already sparked an investor
exodus from emerging markets, including India, contributing to
the rupee's fall.
He faces a dilemma on policy rates, which other hard-hit
emerging market economies such as Brazil and Indonesia have
raised to support their currencies. Doing so in India could
undermine economic growth further - already running at a decade
low - but cutting them could hit the rupee.
Outside the immediate steps to rescue the rupee, Rajan may
pursue pro-growth policies.
In the government's economic survey published earlier this
year, Rajan said it was imperative for India to revive growth to
provide more decent jobs for the millions joining the labour
force. At the same time, the government needed to bring down
inflation and the fiscal and current account deficits, he said.
"Macroeconomic rigour may, in fact, lead to growth; cutting
wasteful subsidies may reduce market distortions, shrink excess
consumption and increase confidence about government finances,
all of which can help growth, even in the short run," he wrote.
Rajan will join a central bank that is not statutorily
independent from the finance ministry, but whose bureaucrats
Rajan is seen as close to Chidambaram and the pair had
adjoining offices in the finance ministry "but he is a man of
his own" stressed one policymaker who has been involved in
recent meetings between the RBI and the ministry.
Finance ministry officials say Rajan will improve the
coordination and communication between the government and the
RBI. Under Subbarao the bank focused its efforts on curbing
inflation, frustrating Chidambaram, who wanted the RBI to cut
rates to boost the sluggish economy.
But the officials acknowledged that like his predecessor,
Rajan would likely try to assert his independence. Before
becoming Chidambaram's adviser, Rajan was sharply critical of
the government for failing to drive ahead with economic reforms.
Rajan is expected to implement measures he recommended in
2008 while heading a committee on financial sector reforms, such
as spinning off the debt management office and setting up a
formal monetary policy committee.