Raghuram Rajan has a fine balancing act to do
Although Mr Raghuram Rajan takes charge as the Governor of Reserve Bank of India in September, he must already be buzzing with ideas on how to contribute to the revival of the economy which has been plunging southward in the last few years. As a seasoned economist with decades of experience and an insight into the domestic fiscal and monetary policies, he will realise that his options are limited, more so when the country is headed for a general election in a few months' time. He has to deliver within those limitations and will doubtless find himself constrained on occasions. He is going to be judged by how much different he will be from his predecessor D Subbarao, who consistently took decisions that seemed at odds with what the Union Government wanted the RBI to do. For instance, while the Congress-led UPA regime wanted the apex bank to cut lending rates in a significant manner to boost spending and, thereby, propel growth, Mr Subbarao insisted that the Government first contain inflation and price rise before he could make the availability of funds more affordable. On more than one occasion, he told the regime that the RBI would not risk huge slashes in interest rates when the Government's fiscal policies were far from credible. He had a point — inflation still remains at a worrisome level and the Centre's economic policies have failed to work. In such a situation, the availability of cheap money can further escalate price rise and inflation. But his detractors were also not entirely off the mark when they argued that Mr Subbarao's obstinacy had made the uplift of the economy that much more difficult. It is certain that Mr Rajan will prove less stubborn and be more open to the idea of cutting interest rates substantially. The Manmohan Singh regime will welcome that, but it will also realise that the move can be a double-edged sword. If the Government continues to mishandle its fiscal policy like it has been doing until now, the RBI's liberalism will backfire and Mr Rajan will be in the dock.
There are two other areas where his initiatives will be keenly watched. The first is his intervention in the continuing slide of the rupee. Mr Rajan will have to work closely with the Government on ways to halt the depreciation. There is a lot of work to be done, since the few measures that the Government and the apex bank have taken so far haven't worked and the rupee continues to breach new lows. The second area will be the effective management of the banking sector with new players poised to join the field. After the RBI had invited applications from the desirables, as many as 26 hopefuls had queued up for consent by the closing hour on June 30. They include well-known corporates, non-banking finance companies and microfinance firms, among others. Mr Rajan must steer the new drive to success if India's under-banked image has to change. Innovations will play a critical role here.