The Governorship of Reserve Bank of India, like most other government posts, is something that most Indians do not and cannot relate to. We know that the man sitting in his plush office in Mumbai can make the markets tumble with a single statement. But like most government officers, we see very little of him, and therefore, know very little. While Bimal Jalan, C.Rangarajan and D.Subbarao were known to be upright men who took their job seriously and were pretty good at it, their speeches (if and when they made one) hardly made people sit up and take notice. It was always an old sage speaking to his learned disciples (read big business) while poor kids played around in the vicinity.It all changed on 4th September, 2013. Raghuram Govinda Rajan, former Chief Economic Advisor to India's Ministry of Finance and chief economist at the International Monetary Fund from 2003 to 2007 took over as RBI’s 23rd Governor. For the first time, there was mass media coverage of RBI Governor’s speech which was not restricted to business news channels and newspapers. Call it the desperation of a country reeling under record low rupee value and high food inflation, the entire nation was hooked to every word the man said in his first press conference. And if you think it was all hype and nothing concrete, picture this-On September 5, the benchmark S&P BSE Sensex soared 412 points to a three-week high. On September 6, the Sensex surged 290 points to close above the 19,000 level for the first time in three weeks as the rupee continued to strengthen.
So, the question is, what does Raghuram Rajan bring to the table that his predecessor D.Subbarao didn’t?
1. A different perspective: Subbarao was an IAS officer. Entrenched in the highly sophisticated, convoluted and legacy system called Indian Bureaucracy, which prides itself on its impenetrable layers of confidentiality and stiff upper-lip attitude, Subbarao always had an air of suspense around him. On the other hand, Rajan, a professor, has emphasized on need for transparency and stability to RBI’s monetary policy. This has led the market to believe that it won’t be taken by surprise after every policy announcement by the Central Bank.
2. An Insider: The cold war between Subaarao and FM Chidambram was never a secret. Subbarao was known not to toe Finance Ministry’s line. For better or for worse, he never let the Government affect his decisions. While Raghuram Rajan has at times been a vocal critic of certain government policies, the matter of fact is that he has been UPA’s chief economic adviser. This has given him ample insight and probably enough clout in the Finance Ministry. The common perception is, UPA, with elections round the corner would not have approved of Rajan if it didn’t expect him to be on the same page as Chidambram on major policy decisions. The market construes this as a harbinger of increased cooperation between the apex bank and Finance Ministry.
3. International Outlook: Rajan is a well-known face in the international academic and financial circles. He was appointed as the youngest-ever Economic Counselor and Director of Research (chief economist) at the International Monetary Fund (IMF) from October 2003 to December 2006. In 2003, he was also the inaugural recipient of the Fischer Black Prize awarded by the American Finance Association for contributions to the theory and practice of finance by an economist under age 40. The Center for Financial Studies (CFS) has awarded the 5th Deutsche Bank Prize in Financial Economics to Raghuram G. Rajan for his highly influential contributions in a remarkably broad range of areas in financial economics (source: Wikipedia). The industry and people hope that his exposure to international economy will help align RBI’s monetary policies with global challenges and opportunities.
Rajan has already announced a various measures to attract foreign investors, including the NRIs. Keeping an eye on foreign fund inflows and help banks get funds at cheaper rate, he announced a special window to swap foreign currency non-resident (FCNR) dollar funds mobilised by banks. RBI doubled the re-booking amount that exporters can do on their cancelled forward contracts to 50 percent from 25 percent. It also extended the facility to importers who were not allowed to re-book their cancelled forward contracts. Further, it restored the permission to invest 400 percent of a domestic corporate's net worth in foreign market provided it has raised the funds through external commercial borrowing (ECBs) route (source: Zee News).
The euphoria in the stock market may subside slowly. The Rupee may not stabilize any time soon. Raghuram Rajan doesn't have a magic wand. But he seems to have the will, right attitude and knowledge to steer our monetary policy in the right direction. If his first speech as the Governor is a cue, then that’s exactly what he intends to do.