Pacific Money

Raghuram Rajan: A Flying Start

India’s new central banker gets off to a promising start. But there is only so much he can fix.

This week finally saw the esteemed Raghuram Rajan (previously introduced in this blog) take up his new office as governor at the Reserve Bank of India (RBI), India’s central bank. Very likely few people envied Rajan his new high-profile job, given the recent troubles plaguing India’s currency and balance of payments position.

Capital flows ahead of the U.S. Fed’s expected “tapering,” a current account deficit, government budget deficits and a lack of confidence in the process of economic and financial reforms have all conspired to send the rupee plummeting in recent weeks. The sense of crisis had been growing steadily, with fears about inflation on the back of import cost increases, possible U.S. strikes on Syria pressuring the current account further through oil prices, and a drop in New Delhi’s foreign exchange reserves as the RBI sold dollars to buy rupees. It seemed that a miracle was needed.

Despite his proclamation that there is “no magic wand” for India, markets certainly treated Rajan’s arrival as though he held just that. Both the embattled currency, and its sister the embattled equity market, perked up towards the weekend after Rajan made what was considered a “flying start” in his new post.

Rajan did indeed hit the ground running (or with a “big bang” as the Financial Times described it), as he unveiled a series of measures on his very first day in the job (read his statement here). Some of the worries facing the banking sector were addressed as he announced the removal of the need to obtain licensing permission for “well-run” banks looking to open further branches. He also unveiled a currency swap plan that will alleviate pressure on the country’s forex reserves. For monetary policy in general, he announced the formation of a panel that will announce recommendations on reform in just three months. 

With other changes including an easing of certain rules for foreigners wishing to invest in Indian equities, and further banking regulation changes that will provide a boost to the country’s financial sector, it seems that there may be brighter days ahead for India. Rajan has done a pretty good job of convincing the markets that he won’t have to crush the economy to save the currency.

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A word of caution is probably in order, however. Even if the rupee’s recent falls were somewhat overdone, India’s central bank does not have the ability to influence the entire economy by itself, no matter how much love the markets show Rajan. The near euphoria that surrounded the central banker’s first days on the job should be considered in light of the other serious problems that confront the gigantic nation: a looming budget deficit, a lack of movement on other reforms outside the RBI’s brief, and elections on the horizon.

There may be further volatility in the currency, even if a “bounce” gains momentum in the near term.  Encouragingly, Rajan is keenly aware that there are tougher weeks ahead, noting in his own modern style that “The Governorship of the Central Bank is not meant to win one votes or Facebook ‘likes.’” Rajan will need all the skills and wisdom for which he is renowned if he is to successfully navigate India out of those troubles he has the authority to handle.