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Managing Raghuram Rajan and the sexy side of monetary policy

Raghuram Rajan of the Reserve Bank of India Lunch by anthony jenkins Raghuram Rajan of the Reserve Bank of India.

Anthony Jenkins/The Globe and Mail

It's New Delhi in the mid-1970s; Indira Gandhi's India.

A teenaged boy is trudging through the city's markets in a desperate search for a loaf of bread. Unlike so many around him, he isn't undernourished. As the son of an Indian diplomat, he is neither rich nor poor. He just wants some bread because his family has acquired a taste for it.

The boy's name is Raghuram Rajan: today a star of international finance. He would realize that the reason for his frustrating search was that the government's production limits and price controls had pushed bakers onto the black market.

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"I was determined to learn more, so I became interested in economics," Mr. Rajan wrote 30 years later in Fault Lines: How Hidden Fractures Still Threaten the World Economy, one of the most celebrated economics books of the past decade. "This book is another unintended consequence of the government's policies."

The unintended consequences keep piling up. Mr. Rajan and I are sitting across from one another at an office table in a bland space in the upper levels of the International Monetary Fund's headquarters on a Friday night in April, surely an unintended consequence of an overenthusiastic scheduler. Mr. Rajan's eyes are red, indicative of jet lag and the dawn-to-dark schedule followed by finance ministers and central bankers when they gather for the IMF's biannual meetings.

Mr. Rajan is one of the hottest things in global economics; maybe the hottest.

The intellectual path he started down in the 1970s led him to a tenured job at the University of Chicago, one of the world's top economics schools, and the IMF, where he served as chief economist in the mid-2000s. In 2012, he returned to India to become the former government's chief economic adviser. A year later, he was appointed governor of the Reserve Bank of India, pledging to slay inflation and restore confidence in the banking system. To the surprise of many, he made good on his promise to focus on inflation, raising interest rates even as the economy slowed.

The move brought comparisons with Paul Volcker, the former chairman of the U.S. Federal Reserve, who killed inflation in the early 1980s, although he caused a recession in the process. Mr. Rajan has resisted the comparison, saying he has no intention of crushing economic growth to conquer his country's long struggle with price increases. That will please his new boss, Prime Minister Narendra Modi, who won India's first majority in three decades earlier in May.

Mr. Rajan's current celebrity is reminiscent of that of Canada's Mark Carney, now the governor of the Bank of England, circa 2010: The fresh face on the scene to whom everyone wants to talk. The 51-year-old Mr. Rajan has been described as a "sex symbol."

This seems a good place to start the interview. Sex symbol?

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"That's something I am trying to live down," he said, laughing a little. "I try to wear the most boring ties and stuff like that."

I glance at his neck wear: paisley, ruby red on dark silk. At one point during the interview, Mr. Rajan leans back in his chair, revealing a "Barney's New York" label on the inside of his suit jacket. These are the marks of a man who puts some care into his appearance. It sets him apart in the halls of the IMF, where even the most fashion conscious among the men appear to share the same tailor, and most wear suits that could be from the earliest days of the Great Moderation.

The Indian press was full of stories at the end of last year about the "Rajan effect," as writers and analysts took note of the fact that India's financial markets regained lost vigour and the rupee strengthened after Mr. Rajan was chosen to lead the central bank in August. He said that has more to do with his policies than his star status. "One of the reasons I'm trying to down play this stuff is people might not take you as seriously if they think there is this other aspect, that central bankers should be seen from the perspective of the policies they have more than anything else."

Still, Mr. Rajan says that if he brings a little cool to central banking, then that might not be all bad. He recalls discovering John Maynard Keynes, the original celebrity economist. "What in my mind is useful about this is if it encourages young kids to maybe go out and do something as boring as economics because they feel that they may have a useful impact, it's a good thing," he said. "In my youth, I was influenced by the idea of Keynes. I didn't actually internalize what he had written, but the idea of a superstar economist who made such a big impact on the world, but in many ways was a Renaissance Man, struck me as fascinating."

As an economist, Mr. Rajan is a throwback; he has more in common with the political economists of Keynes's day than he does with contemporaries who seek to predict human behaviour with mathematics and models. And while he has little use for Keynesian theory, he shares Keynes's penchant for challenging received wisdom from within the confines of the establishment.

In 2005, when he was at the IMF, Mr. Rajan, whose expertise is in banking and finance, said that the widely held notion that the proliferation of credit default swaps and similar assets was making the financial system safer by spreading risk was wrong. (We should have listened.) In Fault Lines, Mr. Rajan spent considerable time on the subject of income inequality, castigating politicians for encouraging debt-fuelled consumption as a "palliative" for stagnating middle-class incomes.

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His new target is the Fed. He thinks the U.S. central bank needs to do a better job co-ordinating its policies with its international counterparts. India was sideswiped last year when former Fed chairman Ben Bernanke abruptly signalled a shift in policy. The day before we met, Mr. Rajan used a speech at the Brookings Institution to voice his concerns in detail. He expressed doubts about the efficacy of the Fed's commitment to ultra-low interest rates, arguing that household debt is too high to make stimulus effective. The experiment of lower-for-longer interest rates, he said, no longer justifies the risks.

Mr. Bernanke was in attendance and rose in confrontation. He said he consulted emerging-market central bankers formally eight times a year at international meetings. He said Mr. Rajan's critique of the Fed's stimulus measures "just reflects the fact that you are very skeptical about unconventional monetary policy."

The sight of Mr. Bernanke so obviously piqued by Mr. Rajan, was something to behold. In our interview, Mr. Rajan said Mr. Bernanke's idea of co-ordination is really little more than "information sharing," and that he is skeptical the Fed knows as much about how the U.S. economy links up with the rest of the world as it thinks it does.

"I don't have in mind that we sit together and determine each other's monetary policy," Mr. Rajan said. "I sympathize with the U.S. They are being asked to be paragons of virtue because they are the global economic leader. If they were to carry out that role in full measure, I think it would serve them well years from now when the global economic situation will change."

When we met in April, it wasn't evident that Mr. Modi would run away with the election. Yet it was clear something special was happening. Mr. Rajan described the campaign as a "battle for India's soul" and compared it to 1977, when Ms. Gandhi held an election after two years of authoritarian rule. This year's contest could signal a break from decades of inept economic policy that has undermined India's potential.

"These elections are about what kind of economic model we really want," Mr. Rajan said. "We will see over the next few years what emerges because of this political process. It is an exciting time."

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