Credit-Crisis Oracle Rajan to Head India’s Central Bank
Raghuram Rajan, whose 2005 warning of a financial crisis was described as “Luddite” by former Treasury Secretary Lawrence Summers, now has the chance to fix another fault line: one caused by foreign-capital flight from India.
Rajan, 50, a University of Chicago professor and ex-International Monetary Fund chief economist, was named the next governor of the Reserve Bank of India yesterday. He said there’s no “magic wand” to solve India’s problems instantaneously, while adding that the central bank and the government will deal with the challenges.
The immediate task is supporting a currency that slumped about 13 percent against the dollar in the past six months, adding to risks to economic stability. Rajan, the top adviser in India’s Finance Ministry since 2012, has signaled Asia’s No. 3 economy has the option of issuing foreign-currency sovereign bonds for the first time to garner dollars and bolster its ability to steady the rupee.
“Rajan’s appointment will be very reassuring for the markets and we could see more measures such as sovereign bond issuances to attract more inflows,” said Soumya Kanti Ghosh, chief economic adviser at State Bank of India in Mumbai.
The currency weakened 0.9 percent to 61.385 per dollar as of 1:45 p.m. in Mumbai. The S&P BSE Sensex index of stocks slid 0.5 percent. The yield on the 7.16 percent bond due May 2023 fell to 8.19 percent from 8.20 percent yesterday.
The rupee has been hurt by India’s current-account deficit, which widened to an unprecedented $87.8 billion in the 12 months through March. Concern the Federal Reserve could reduce monetary stimulus as the U.S. economy strengthens has also triggered capital outflows from emerging markets.
“The Reserve Bank is a great institution with a tradition of integrity, independence and professionalism,” Rajan said at a briefing in New Delhi yesterday. “These are challenging times for the Indian economy. No one can have doubt about the country’s promise. The government and the Reserve Bank are working together to address these challenges.”
Rajan, who was born in India and has an Indian passport, said July 12 a foreign-currency sovereign bond issue is an option to attract dollar inflows. Subbarao said July 30 such debt may compromise Indian financial stability.
“I don’t know how much he will be able to do because traditionally the RBI governor is under the firm influence of the Finance Ministry,” said Meghnad Desai, emeritus professor at the London School of Economics. “But he’s independent because he doesn’t need this job. He can walk out of it if he wants.”
Rajan has described himself as a “believer in free markets” rather than in “laissez-faire.”
He was IMF chief economist until 2006 and is Eric J. Gleacher Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. Rajan is on leave from the post, said Ethan Grove, a spokesman for the university.
Summers, now a candidate to replace Fed Chairman Ben S. Bernanke, in 2005 criticized aspects of Rajan’s analysis that a credit crisis was possible.
At a central bankers’ gathering that year at Jackson Hole, Wyoming, Rajan argued innovation had made the financial system more risky, not less and predicted the credit crisis. Summers, responding to Rajan’s paper, described himself as “someone who finds the basic, slightly Luddite premise of this paper to be largely misguided.”
Summers also said “while I think the paper is right to warn us of the possibility of positive feedback and the dangers that it can bring about in financial markets, the tendency toward restriction that runs through the tone of the presentation seems to me to be quite problematic.”
Rajan’s book, “Fault Lines: How Hidden Fractures Still Threaten the World Economy,” was the Financial Times and Goldman Sachs business book of the year in 2010.
He sparred with Nobel laureate Paul Krugman over arguments in the book about the cause of the global financial crisis.
Krugman co-wrote a review that said Fault Lines buys into “what is mainly a politically motivated myth” that Democrats contributed to the meltdown through programs in the U.S. that made more home loans available to lower-income families. Rajan wrote in a rejoinder that his criticism is “bipartisan throughout the book.”
In a speech in April 2012, Rajan said “India’s star has dimmed in the last few months, as our governance is besmirched by corruption scandals and our macroeconomic health has deteriorated,” adding that some key reforms have been stymied.
He warned of risks from fiscal and current-account deficits and called for India to be kinder to foreign investors.
Subbarao raised two rates July 15 and has capped cash injections into the banking system and tightened lenders’ reserve ratios to curb the supply of rupees, joining nations from Brazil to Indonesia in fighting currency weakness.
Costlier credit could hamper a government push to revitalize investment and revive growth from a decade low.
In an interview to Bloomberg TV India on July 25, Rajan said India will do whatever it takes to stabilize the rupee. The measures taken by the central bank to curb currency swings will help contain inflation and will give the monetary authority room to be “more accommodative,” he said.
Rajan and Finance Minister Palaniappan Chidambaram have helped lead the effort since September to spur India’s expansion. The steps taken have included easing restrictions on foreign direct investment in industries such as aviation and retailing to woo inflows and avert a credit-rating downgrade.
India’s gross domestic product growth slowed to 5 percent last fiscal year, the weakest pace since 2003. The rupee’s drop threatens to stoke inflation, with consumer prices climbing almost 10 percent in June from a year earlier.
Rajan’s initial education was in the South Asian nation. He took further studies in the U.S. and has a doctorate from the Massachusetts Institute of Technology.
Elsewhere in the Asia-Pacific region, employment in New Zealand rose 0.4 percent in the three months through June from the first quarter, while the jobless rate rose to 6.4 percent as more people sought work, data released today showed. Australia’s home-loan approvals rose 2.7 percent in June from the previous month.
In Europe, Germany and Ireland are scheduled to report June industrial production data. U.S. mortgage applications data are also due today.
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