Millennium Post

Rajan to take office today... America to call RBI shots?

Faced with declining value of the rupee and widening CAD, Reserve Bank of India (RBI) Governor designate Raghuram Rajan has said that there is no magic wand to solve the challenges before the country overnight and he will endeavour to deal with them one at a time. Rajan, 50, who has been in the Finance Ministry as the chief economic advisor for barely a year, will replace Duvvuri Subbarao as RBI Governor who demits office on 4 September.

'We have enough ideas. It is not just the currency, it is financial inclusion, it is growth. I think there is a lot to do. There are challenges in the economy... These things are not going to be overcome overnight. There is no magic wand. But there are undoubtedly solutions to many of the problems that the RBI can tackle and the job is to go ahead and do it.
'We will do it one step at a time. Make sure that it progresses everyday,' he told reporters on his last day of office at the Finance Ministry.
Rajan, a former IMF chief economist, was appointed as the Chief Economic Advisor in the Finance Ministry in August last year. His appointment as the 23rd central bank chief comes at a time when the economy is battling industrial slowdown, declining rupee, rising prices and all-time high CAD.

'Expectations are challenging. I think the job is a complex one. There are many issues including managing institution itself... I think in some ways there are commonalties among bureaucracies but each organisation has its own culture, has its own tempo... I am looking forward,' he said.
Besides combating the key issues like volatile rupee and CAD, Rajan will have to take a call on continuing with RBI's practice of mid-quarter policy review every 45 days, which was initiated by Subbarao.  

There has been a speculation that Rajan is not in favour of mid-quarter reviews and could dispense with the practise, although the scheduled mid-quarter review due later in the month would be brought out. As regards the current account deficit (CAD), there has been some signs of improvement in the first quarter mainly on account of decline in gold imports.

However, the government and the RBI will have a difficult task of bringing CAD down to $70 billion in the current fiscal, from $88.2 billion last year. The rising cost of crude oil import will continue to put pressure on the CAD.

On the positive side, the good monsoon and pick up in exports may provide some support to Rajan's efforts. However, he will face a tough time in drawing a balance between the competing needs of keeping inflation under control and promoting growth.

His biggest challenge, however, will be to neutralise the impact of tapering of US bond purchases on which a decision would be taken by the Federal Open Market Committee (FOMC) in its meeting on 17-18 September. Known for his frank views, Rajan was acclaimed for predicting the 2008 global financial crisis. In 2005, he had delivered a lecture critical of the financial sector, arguing that a financial disaster might be looming.

Rajan, who was an honorary economic advisor to the Prime Minister earlier, is an alumni of IIM-Ahmedabad and IIT-Delhi. He had replaced Kaushik Basu as Chief Economic Advisor in the Finance Ministry last year.  
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