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Of fiscal strings and heading RBI

The new governor of Reserve Bank of India, Raghuram Govind Rajan, previously the chief economic adviser to the finance ministry, and a visiting professor to the World Bank and the US Federal Reserve Board, also having served as the chief economist from October 2003 to December 2006, is a curious choice to lead the top banking body in India, to say the least. While his world class credentials are beyond a straw of doubt, predict as he did the global economic crash of 2008 way back in 2005, how successful he will be in turning the screws of the wobbly monetary policy and the near economic crisis that India is going through at present is a matter of concern.

While his predecessor, the current RBI governor Duvvuri Subbarao had tried his best to tackle the quandary of having to deal with slowing growth, steep inflation and managing dwindling exchange rates at once, Rajan is tasked with dealing head on with the triple whammy, while also wading through the choppy waters of RBI bureaucracy, the legislative and executive red tape in North Block as well as the private profit motives of the financial sector that simply wants more and more deregulation.

While RBI, over the years has maintained a tight leash over its own independence, and has acted with integrity most of the times, it has also had often run to troubles with the finance ministry, particularly in the open confrontation between Subbarao and P Chidambaram about banking rate cuts in the wake of weakening rupee crisis. Moreover, to check the monetary policy, manage government debt and regulate banks and banking licences all at once would mean inviting disaster, especially in an open economy with free capital flows.

What would Rajan, who has strong connections with the US Federal Reserve Board, do to stabilise the rupee, when it’s the Fed’s own withdrawal of the short-term loan scheme that ensured the Indian currency’s free fall in the first place. It also appears that Rajan could be unusually lenient to granting banking licence to Reliance Industries Ltd, which has made enormous investments in the US shale gas industry, thus bolstering further the connections between India’s finance sector and the American gas industry, thereby making the domestic arena vulnerable to shocks and threats from the US.         
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