Lonely at the top

The appointment of Raghuram Rajan as the new Governor of the Reserve Bank of India comes at an extremely difficult time for the country’s economy and its financial sector. He will replace D Subbarao whose tenure comes to an end next month.

Subbarao also had a tough job at hand, which included handling  the consequences of the global economic meltdown and guiding the apex bank’s polices during a period of slowing economic growth and rising inflation.

If he was considered too hawkish that was another way of describing his positions and policies as independent. The Reserve Bank is not an appendage of the government and Subbarao has made it clear many times that monetary policy, which is the bailiwick of the apex bank, has limitations. He has maintained that  it would be most effective only in an environment in which other players, including the government, acted effectively. 

Rajan comes with a formidable reputation as an economist and a perceptive analyst of the financial scene at the global and national levels. As a former chief economist of the IMF and chief economic advisor of the government of India he is familiar with the issues that he has to deal with during his term at the helm of the bank in the short and longer terms. He has also made important recommendations on some of these issues as the chairman of the committee of financial sector reforms. These challenges are also formidable. The rupee is at an all-time low, in spite of many attempts to at least hold it. The economic growth is the lowest in many years. Inflation is still ruling high. The fiscal situation is deteriorating. There is a sense of despondency in all sectors of the economy.

Rajan has said that there is no magic wand to make these problems disappear. A situation which has gone from bad to worse over the years will need time to recover. He has also said that there is need for the government and the Reserve Bank to work together in addressing the problems. While this is true, this will hopefully not mean any dilution of the independence of the Reserve Bank in policy formulations. He has himself said that he will uphold its tradition of integrity, independence and professionalism and has in the past criticised the influence of narrow politics on economic decisions. There are testing times ahead when he assumes his new responsibility.