In 2005, Raghuram Rajan, then the chief economist of the International Monetary Fund, irked top U.S. economic policy makers at a gathering at Jackson Hole when he criticized the US financial system, and warned that a global economic crisis could be looming.
Dismissed as someone who was out of his depth and had failed to understand the innovations of the Western financial system, Mr. Rajan was subsequently vindicated – and ultimately seen as prescient – when the 2008 global financial crisis hit.
India’s government is now hoping Mr. Rajan, who has spent the last year as its chief economic adviser, will in his new role be able to use his intimacy with global financial markets – and his high profile – to rescue the battered rupee, and restore confidence in macroeconomic stability.
It’s a formidable order, but many Indian economists and market participants on Tuesday said no one could be better-suited for the task than the market-savvy and articulate Mr. Rajan, who spent his professional career in the U.S. before returning to New Delhi last year to take a job that was seen as preparation for becoming the Reserve Bank of India governor.
“There could not have been a better choice for India at this point in its tryst with destiny,” said New Delhi-based economist Surjit Bhalla. “You need confidence back in the Indian economy, you need stability and you need growth. He is certainly the guy best suited to do that.”
Mr. Rajan will replace Duvvuri Subbarao in early September, and takes the helm at a critical juncture for India’s economy. Growth, which had been between 8 to 9 per cent for around eight years, has fallen sharply, and is expected to be between 5 to 5.5 per cent during the current April-to-March financial year.
The rupee has depreciated 39 per cent in the last two years, and plunged 13 per cent since May on worries about how an end to U.S. Federal Reserve policy of quantitative easing, which has kept emerging markets flush with liquidity, would affect India, given its large current account deficit.
The Congress party-led government is trying to control the current account deficit mostly by curbing gold imports, while efforts to woo foreign direct investment have faltered, due to policy makers’ continued ambivalence about greater international involvement in the domestic economy.
In brief comments to reporters after his appointment, Mr. Rajan sought to downplay any expectations of quick fixes. “We do not have a magic wand to make problems disappear instantaneously,” he said. “But I have absolutely no doubt we will deal with them.”
Others also cautioned that many of the biggest problems India is confronting are far beyond the realm of the central bank, and will require tough decisions by the central government, something seen as difficult – and even unlikely – in a pre-election year.
“There aren’t really any especially easy options for India at the moment,” said Sanjeev Prasad, head of research at Kotak Institutional Equities, a brokerage.
At the very least, many hope Mr. Rajan, with his understanding of how global financial market shifts can affect developing countries, can help restore confidence in macroeconomic management, and re-anchor expectations in the rupee.
The rupee’s woes during the past few months are seen as partly due to missteps by the central bank, which was slow to act – and subsequently sent mixed signals about its intentions – as the currency came under pressure. In June and July, $10.5-billion (U.S.) in foreign funds flowed out from India.
The RBI finally tightened liquidity earlier this month to make currency speculation more costly, which swiftly bolstered the rupee. But the currency began sinking again last week, after Mr. Subbarao expressed his anguish at the liquidity-tightening measures, which markets interpreted as a sign of an imminent rollback.
Mr. Rajan has stated that he believes the rupee has been oversold and has depreciated excessively. Jahangir Aziz, chief India economist of JPMorgan Chase & Co., says the governor’s priority must be to break the rupee’s current downward spiral by convincing markets he will do what it takes to put a floor under the currency until expectations, and the currency, stabilize. “He has to defend an exchange rate which he thinks is the right rate,” says Mr. Aziz. “You have to establish that ‘even if it requires pain, I’m willing to take it in order to ensure that the rupee stabilized.’ That is the message. There are no other objectives.”
In the longer run, though, investors and the business community are hoping Mr. Rajan will be able to improve monetary policy making and help support growth. Others say Mr. Rajan, who wrote a landmark report proposing major reforms of India’s financial sector several years ago, may be able to implement his own recommendations, which, like so many proposals for modernizing India’s economy, have sat on a shelf for years.