Raghuram Rajan: The man who predicted the 2008 global financial crisis

Raghuram Rajan will take over as the next governor just in time for the next mid-quarter policy review on September 18. He will replace D. Subbarao, whose term ends in September. Raghuram Rajan will become the 23rd governor of the Reserve Bank.

After two IAS officers ‘Y V Reddy and Subbarao’ at the helm, the RBI governor’s post now goes to an economist. The other economist to be appointed as governor was Bimal Jalan. One of the youngest governors, Raghuram Rajan shares a common factor with Prime Minister Manmohan Singh, who was also 50-years-old when he became the RBI governor.

After being abroad for most part of his career, it was ‘duty towards the country’ that drew Raghuram Rajan back to India in 2012. He hopes to put ‘India back on the strong-growth path’. Raghuram Rajan, who was a gold medalist in IIT Delhi and IIM Ahmedabad, was featured on Foreign Policy magazine’s Top 100 Global Thinkers list in 2010 and 2012.

raghuram rajan- the new central bank chief

Rajan, 50, was born in Bhopal on February 3, 1963. He comes from a Tamil family and is married to Radhika, a classmate from IIM. They have two children.

Mr. Rajan has been frequently interacting with the media and investors to convey the message that the government is considering all possible measures to try to stabilize the currency. He has reiterated several times that the rupee’s recent woes are linked to a strengthening in the U.S. dollar as U.S. assets have become more attractive lately. Economists hope that Mr. Rajan’s stint at the finance ministry will ensure better coordination between the government and the Reserve Bank of India, after he takes over as chairman.

Mr. Raghuram Rajan is the author of ‘Fault Lines: How Hidden Fractures Still Threaten the World Economy’ which was published in India in August 2010, in which he argued that American politicians on both sides of the aisle looked the other way as cheap housing credit flowed to people in the middle class, letting them own homes and consume at a level that their earnings would not have allowed.

In 2008, Mr. Raghuram Rajan gave a speech at the Bombay Chamber of Commerce, in which he said that India’s actions in the next few years would determine whether the country would join nations such as South Korea and Taiwan that have made their way from poverty to moderate prosperity in a couple of generations. He warned that the unprecedented growth levels India enjoyed at the start of the 21st century could turn out to be ‘simply a spurt whose underpinnings are unstable.’

Raghuram Rajan wasn’t the only economist who warned of the financial crisis before it struck. He was, however, the sole one brave enough to make this prediction in front of Alan Greenspan at a 2005 Jackson Hole Conference devoted to celebrating the legacy of the once-seemingly infallible Fed chief.

raghuram rajan- the new rbi head

Now, five years on, with growth having fallen to a decade low of 5% and foreign capital fleeing the country, the second scenario appears to be playing out. India can only hope that as head of the central bank, Mr. Rajan is able to turn things round. The economist is likely to do this by offering his support for further liberalization of the economy and privatization of state firms. He is a firm believer that reforms to India’s economy in 1991 that set India on a high-growth path, need to be extended.

Important tasks for the new RBI Head Raghuram Rajan:

• Raghuram Rajan needs to take firm action to stabilize the currency market and stem the runaway depreciation of the rupee. The local currency hit its lifetime low of 61.81 a dollar on Aug 6th.
• He needs to roll back the liquidity tightening measures that RBI has taken over the past few weeks to drain liquidity in the system and increase the cost of money. This cannot be done overnight but he should have a plan on his table. It needs to be linked to a firm plan for stemming the fall of the rupee, both monetary and fiscal.
• After the roll back, there must be a plan to resume monetary easing, depending on the macroeconomic scenario. It’s not easy to take a call on this now, but the lowering of the interest rate is imperative to revive growth.
• Even though both wholesale price inflation and the so-called core inflation or the non-food, non-oil, manufacturing inflation are low and well within RBI’s comfort zone, retail inflation continues to be very high. That’s a big headache for RBI, and could stay the bank’s hand when it comes to easing monetary policy. Rajan needs to take care of that.
• Finally, Mr. Rajan needs to rebuild the market’s confidence in the banking regulator. RBI’s actions in the past few weeks and the reaction of the market have make it abundantly clear that the market has no confidence in the central bank.
• Mr. Rajan’s biggest task will be making the market listen to the regulator.

source : satyadeep.org