[Interesting Readings] Dr. Raghuram Rajan Takes Charge of RBI, India's Central Bank

When Indian economy is struggling to achieve a growth of 4.5%-5% for this fiscal year (please note that it was 8% to 9% a few years ago), its foreign currency reserve (predominantly measured in terms of USD) is just enough to manage its foreign trades for about six months or so ($247, 402 Million as on 30 August, 2013; Source: Database on Indian Economy, RBI), its domestic currency Rupee (₹) is depreciating against US Dollar, including other hard currencies such as Pound Sterling and Euro, very swiftly (Rs.66.04/US$ as on 5 September, 2013), and foreign capital flows into its stock market is staggering (FIIs have been net sellers for past few weeks in a row, however, at the time of writing this article, some positive signs were observed, FIIs being net buyers with ₹800.71 Crore as on 6 September, 2013; I'll come to this point a li'l later), a University of Chicago's Booth School of Business Professor Dr. Raghuram Rajan has taken charge as the new Governor of the Reserve Bank of India (RBI), India's central bank. There has been positive news and reactions from all the corners about the suitability of the IIT Delhi-IIM Ahmedabad-MIT educated economist Dr. Rajan for this post in these tough times that India is witnessing. Dr. Rajan holds a rockstar appeal and has attracted lot of media attraction. Through this post of mine, I am trying to summarize what has been written about him across media reports (of course the list of articles/coverage is limited to what I could get access to; there could be several reports that I might have missed meanwhile).

Image courtesy: TheHinduBusinessLine.com

Dr. Rajan, who is the Eric J. Gleacher Distinguished Service Professor of Finance at the University of Chicago's Booth School of Business has been a proven track record as an economist. NDTV Profit crisply talks about 10 things to know about the new RBI Governor. It says about the economist-turned-banker that:

"This will be Mr. (sic.) Rajan's second assignment in the country. He was appointed the Chief Economic Adviser to the Finance Ministry last year... [He] was the Chief Economic Counselor and Director of Research (simply put, the Chief Economist) at the International Monetary Fund from September 2003 till January 2007."

His 2005 paper titled "Has Financial Development Made the World Riskier?" presented at the Fed conference at Jackson Hole, Wyoming, had attracted ire of the equals of (Alen) Greenspan and (Lawrence) Summers. This paper also used as a base for the 2010-documentary titled Inside Job which shows the Global Financial Meltdown. In his book, Fault Lines: How Hidden Fractures Still Threaten the World Economy, he talks about the hard choices that all economies must make to ensure greater stability and lasting prosperity. With respect to India's recent growth stories and successes, he argues that the country must act decisively to maintain its people-oriented growth. This unique development path, he outlines, will be a compelling role model for developing economies - a triumph of rapid growth in a flourishing democracy.

Well, on the day when the appointment of Dr. Rajan as next RBI Governor was announced, the Economic Times publishes the cover story with the headline "Rajan on a High, Re at a Low", as Rupee was trading against US Dollar at an all-time low level of 61.77. Dr. Rajan has the potential to transform India's fortune, Simon Flint writes in the Economic Times' Opinion  piece. There is no doubt about it, but wait a minute!

There was euphoria all around the proposed appointment of Dr. Rajan, when Swaminathan S. A. Iyer wrote in his column in the Economic Times, "...by trying to do so many things at once (working on inflation, exchange rates, and growth), RBI risks doing none of them well... Will Rajan put this vision into practice as RBI Governor? Not a chance. Indian politics will not permit an inflation-only focus for RBI. After his spell in the finance ministry (as the Chief Economic Adviser), Rajan must be well aware of the limits to the independence of any RBI Governor." Quite true...huh!

Adding to the issue is an opinion by Vivek Kaul that Dr. Rajan is not an instant coffee. He also cautions in First Post article on why Raghuram Rajan is not Amitabh Bacchan whose presence will solve all the problem, precisely there is nothing like "Aaya Toofan, Bhaaga Shaitaan".

On the day of taking charge, the good senses prevail across the market, economy and among the people. Financial Times reports the story as Rajan Enters RBI with a Big Bang, and mentions that, "A big package of financial sector reforms has been launched by India's high-profile new central bank chief as the country battles a currency crisis and slowdown in economic growth... He won a reputation as an economist for having warned of the financial crisis that precipitated the global crisis in 2008, but cautioned this week that there was no magic wand for India."

In the story titled India's New Central Bank Governor Seeks to Calm Investors, the Wall Street Journal writes, "India's new central bank governor announced fresh steps to stabilize the country's beleaguered currency and outlined an ambitious plan to shake up the country's conservative banking system... [He] also sought to reassure investors unnerved by the turmoil in local markets by emphasizing the importance of transparency and consistency in the central bank's actions."

Image courtesy: FinancialExpress.com

The speech (full text of which can be accessed here, here, and here) made by Dr. Rajan on the first day of his appointment does magic to the market sentiments, as the markets showed some signs of recovery, even for short time. Sensex on that day gave a 370-point salute to the new RBI chief. As on 6 September, Rupee comes back at ~65 per US Dollar and the Sensex gained over 1,000 points in last three trading sessions.

Also read: Seven Steps by Rajan that Propelled Sensex above 19000 and Raghuram Rajan's rupee gamble may help lure $30 billion.

In a story, NDTV Profit explains 10 reasons why markets are cheering Raghuram Rajan. To quote from the story, "...Analysts said they had expected the 50-year-old academic and celebrated economist to do his homework, but had not expected him to detail so comprehensive a plan in his first statement. The Reserve Bank of India under Raghuram Rajan has made an impressive start, global brokerage Nomura said."

One of the most interesting stories on Dr. Rajan's appointment as RBI governor is the one by The Economist. The story titled Into The Pressure Cooker, questions his credibility as a banker since he is not a specialist in monetary policy, has worked more on free-market persuasion, including worries about unintended consequences of regulation. As the article goes on to talk, "...[He] knows the ultimate solution for the droopy rupee is government action to address a weak manufacturing base, dodgy fiscal policy and sky-high gold-imports."

The WSJ piece also noted that Dr. Rajan will have to face issues with respect to the RBI's independence. Take the new banking licence issue for instance. Since the government wants the RBI to give bank licence to well-connected tycoons; he, sensibly, opposes this and wants more small banks to be created. Rightly put, India is lucky that Mr. Rajan is in the RBI job. He will be bulwark against populism and an advocate of liberalization. But his hardest task is to avoid being labelled a saviour. The country's economic future is largely in the hands of its government, not its central bank. When a minister next calls, he should remind them of that.

So far so good. All eyes are on the new RBI's governor. What would he take his next call about? As FT story says "[he] will make his first substantial statement on monetary policies in two weeks (on 20 September 2013, when mid-quarter monetary policy review is due.) Let's wait and watch! Meanwhile, let us wish him good luck as Rajan has the pluck, he also needs some luck...