The government on Tuesday named chief economic advisor Raghuram Rajan
as the new Reserve Bank of India governor for a term of three years. Rajan --
'Raghu' to his many friends and colleagues -- who earlier served as chief
economist of the International Monetary Fund, takes over at a time when the
central bank is under pressure to push economic growth while arresting the slide
of the rupee. The two goals can be contradictory since stabilizing the rupee may
require raising interest rates, which could impact growth.
Ironically, his elevation to one of the hottest seats in the country came on a day when the rupee hit a fresh low of 61.80 against the dollar, before regaining some ground. While grappling with the worst external sector imbalance since 1991, Rajan will also have to deal with the competitive pressure of handing out the maximum number of new bank licences in two decades.
Rated by peers across the world as one of the most influential economists of his generation, Rajan, 50, will be the second youngest governor after Manmohan Singh, who took charge when he was 10 days short of his 50th birthday. He was the youngest-ever - also the first non-westerner -- chief economist of the IMF, from 2003 to 2006. In 2005, he predicted the financial crisis of 2008-09, but was brushed aside by economists such as former US treasury secretary and Harvard University president Lawrence Summers, who called him a "Luddite".
The Bhopal-born son of a bureaucrat has always been a high achiever: A gold medalist at both IIT Delhi and IIM Ahmedabad, he went on to complete his PhD from the Massachusetts Institute of Technology.
Rajan acknowledged the tough task ahead soon after his appointment was announced. "These are challenging times for the Indian economy, though no one can have any doubt about the country's promise. The government and the Reserve Bank are working together to address these challenges," he said. The statement is significant coming as it does in the context of frosty relations between his predecessor and the finance ministry.
No magic wand: Rajan
Shortly after being named RBI governor-designate, Raghuram Rajan sought to manage expectations, saying that policymakers "do not have a magic wand to make the problems disappear instantaneously". He, however, added that there was no doubt that "we will deal with them".
Apart from his academic credentials, Rajan has stamped his presence with an award-winning bestseller - 'Fault Lines: How Hidden Fractures Still Threaten the World Economy' -- on the financial crisis. The chapter on India came in for special mention as it extensively dealt with the issue of crony capitalism at a time when the phrase hadn't become a media favourite here.
Even after taking over as CEA, Rajan has stuck to his theme. In an interview to TOI last September, he had said that the government's governance capabilities had not kept pace with a rapidly growing economy, leaving space for sections of the private sector to "make a killing". He had pointed to spectrum allocation as an instance, where the award process did not change despite demand having grown exponentially.
A specialist in banking and finance, he was professor of finance at the University of Chicago's Booth School of Business. His first major brush with public policy in India was as the head of the Planning Commission working group on financial sector reforms in 2008. He was then appointed honorary advisor to the PM before taking over from Kaushik Basu as CEA in August last year.
Rajan, who was also part of a committee that drafted a report called 'Rethinking Central Banking' for the Brookings Institute (an American think tank) in 2011, is expected to use some of his new ideas at RBI. He will take charge as RBI's 23rd governor after D Subbarao completes his five-year term on September 4. It is perhaps an indication of the government's eagerness to scotch speculation and calm the markets at a time of exchange rate volatility and a sliding economy that it has, unusually, chosen to name Subbarao's successor a month in advance.
In shifting from Delhi to Mumbai, Rajan will move geographically closer to his brother, Mukund G Rajan, the Tata Group's chief ethics officer and brand custodian.
Economists and bankers said the external sector will be Rajan's biggest challenge. "The high volatility of the external environment makes Rajan's task tougher. I think he will be able to innovate more and think out of the box," said HDFC chairman Deepak Parekh.
Echoing similar sentiments, C Rangarajan, a former RBI governor who now heads the Economic Advisory Council to the PM said, "The immediate challenge for him is to ensure stability in the foreign exchange market and to reduce volatility. Going forward it would be maintaining price stability and growth."
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