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HindustanTimes Tue,23 Sep 2014

Raghuram Rajan has a demanding checklist
Hindustan Times
New Delhi, August 07, 2013
First Published: 23:53 IST(7/8/2013)
Last Updated: 19:07 IST(19/9/2013)
Raghuram Rajan at his office in New Delhi after he was appointed as the next governor of the Reserve Bank of India on Tuesday. PTI Photo

The change of guard at the Reserve Bank of India (RBI) has come at a time when the economy is battling to claw out of a decade-low crisis. The tenure of Duvvuri Subbarao, from whom Raghuram G Rajan will take over as India's central bank chief in September, has been dominated by a tug-of-war between rising inflation and sliding growth.

Mr Subbarao withstood mounting pressure from the government and industry bodies to cut interest rates. This sometimes evoked unusually firm comments from the government's fiscal managers, who hit out at the central bank's hawkish policy stance perhaps mirroring the growing difference between India's two topmost financial administrators on the optimal way to reverse a sharp economic slowdown.

Mr Rajan has a tough balancing act to implement: arrest the rupee's slide, cool inflation and spur growth. Economic theory describes this as the central banks' impossible trilemma. Let's examine each of these.

For the better part of the last 15 years, India's central bankers have had the relative comfort of not having to concentrate on the rupee. The period of relative calm offered the much-needed elbow room to central bankers to focus on measures for chasing the equilibrium between growth and inflation.

Mr Subbarao did not cut interest rates, despite growing demand from local business leaders, as he chose to be on the side of price control in the growth-versus-inflation debate. When growth falls, it is usually expected that the central bank cut interest rates to boost demand and spending.

The counter argument, however, is that people's higher purchase of goods prompted by lower interest rates will only help push up prices at this point. And till recently bank lending rates were still lower than what they were during 2003-08, India's high-growth phase. So, the reasons for slowdown lay elsewhere.

There is an emerging strand of thought that the economy is in the boondocks because the RBI did not aid growth and investment by offering a benign interest rate regime.

There is also a build-up of expectation that Mr Rajan, a former International Monetary Fund (IMF) chief economist and Chicago University professor, famed for his perceptive warnings about the global financial crisis of 2008, will herald a softer monetary regime.

His pro-growth image has also fuelled anticipation that the new RBI governor will quickly shift the balance towards growth in the price-investment trade-off.

The missing, but most important, variable in this equation is the currency, which no central banker will take as a constant in the existing conditions. In the trinity of problems — rupee, prices and growth — the choice for any central banker is limited.

For a net importing nation like India, halting the rupee's fall is critical. The path that Mr Rajan takes may not be very different from that of his predecessor.


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