New RBI governor Raghuram Rajan to step into eye of rupee storm

Sep 04 2013, 09:02 IST
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Raghuram Rajan takes over as the Reserve Bank of India's new governor on Thursday. (Reuters) Raghuram Rajan takes over as the Reserve Bank of India's new governor on Thursday. (Reuters)
SummaryBig question is whether former chief economist of IMF will take the helm with a whisper or a bang.

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 Reserve Bank of India's new governor and chief defender of a nose-diving rupee.

The currency has plunged nearly 20 per cent 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 per cent alone since Rajan's appointment on August 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 stimulus programme.

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 2008.

Rajan, 50, has raised expectations of out-of-the box thinking to rescue the rupee and boost economic growth.


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