Promising start

The new Reserve Bank governor, Raghuram Rajan, was greeted with a very positive and enthusiastic response by both money markets and stock markets when he signed into his office on Wednesday. The exuberance was a result of hopes that he would be able to improve a monetary situation which has been deteriorating steadily. His personal and professional credentials are high and he has an intimate understanding of  national and international finance.

Even the players in the market know that the RBI can have only a limited role in lifting a situation which is a complex web of causes and effects involving the policies and actions of many institutions like the government, other agencies and foreign entities. But a change of leadership always inspires hope in difficult times.

On the very first day of his office the new governor has announced a package of measures, and it was received well. It is a mix of general ideas and specific steps.

Unsurprisingly, his  first priority is to protect the value of the rupee which has fallen steeply.  RBI’s policies alone cannot do this, and in fact the government has the major responsibility. External factors have also to be taken into account. Former governor D Subbarao had the grievance that the apex bank’s measures to curb inflation and to halt the slide of the rupee did not get adequate support from the government’s policies.

Rajan has said that he expects close co-operation and co-ordination with the government and the call should not go unattended. He has also spelt out plans to improve the monetary policy framework, strengthen the security market and move fast towards issue of new banking licences.  While stressing the need for banks to clean up their balance sheets he has also warned major defaulters of loans of strong actions.These do not make a comprehensive agenda. But the fact that he has spelt them out, unusually for an RBI governor on the first day of his office, shows that he thinks they are matters that need urgent attention. He has said that he has no magic wand to solve the problems and it will be wrong to consider him as a knight on the white horse, on an immediate rescue mission. He has declared that he is ready for risky change, because ‘not changing is even riskier’ and that may be the right approach to the job at hand. There is much firefighting to do without losing time.