Sept. 5 (Bloomberg) -- Raghuram Rajan said containing inflation expectations is the Reserve Bank of India’s key goal after becoming its 23rd governor, as the country grapples with a plunging currency and weakening economic growth.
Rajan, 50, said monetary stability is the RBI’s primary role and “this means low and stable expectations of inflation, whether that inflation stems from domestic sources or from changes in the value of the currency, from supply constraints or demand pressures.” He said inclusive growth and development, and financial stability, are important mandates too.
The former International Monetary Fund chief economist, giving his first briefing in Mumbai after taking office, said India remains a sound economy even as it faces challenges. The rupee has plunged 18 percent this year as the prospect of cooling U.S. monetary stimulus and India’s slowdown prompt investors to pull out funds. The decline risks stoking consumer-price inflation, already running at almost 10 percent.
“The RBI has been criticized earlier about losing track of this key goal -- that of getting monetary stability,” said Tirthankar Patnaik, a strategist at Religare Capital Markets Ltd. in Mumbai. “To that extent I will agree that inflation will be the first thing on his mind.”
Rajan, credited with predicting the 2008 global financial crisis, began a three-year term as RBI head yesterday after serving as top adviser to India’s finance minister since 2012.
The new head of the monetary authority said a panel will report in three months on how to “revise and strengthen” India’s monetary policy framework.
Delaying the next scheduled review of policy to Sept. 20, after the U.S. Federal Reserve’s meeting, Rajan said communication with the public will be key.
He inherits the challenge of helping to revive an economy that expanded 4.4 percent last quarter from a year earlier, the weakest pace since 2009, as investment fell and consumer spending in the nation of 1.2 billion people moderated.
India’s government is trying to pare its budget shortfall, narrow a record current-account deficit, and speed up stalled reforms and infrastructure projects ahead of polls due by May.
The deficits have jeopardized India’s investment grade credit rating. Slower expansion also risks impairing the country’s push to curb poverty.
The lower house of parliament yesterday passed a bill allowing overseas investment in the country’s pension providers for the first time, as the government tries to woo inflows.
The rupee strengthened 1 percent to 67.09 per dollar in Mumbai yesterday. Its drop this year is one of the steepest in the world. The S&P BSE Sensex index of stocks rose 1.8 percent. The yield on the 7.16 percent government bond due May 2023 slid to 8.39 percent from 8.58 percent on Sept. 3.
The requirement for banks to invest in government securities needs to be reduced in a calibrated way to free up funds for lending, Rajan said, while adding such a change can’t happen “overnight.”
India will push for more settlement of trade in rupees to bolster the internationalization of the currency, he said.
The currency’s woes have revived memories of India’s 1990s crisis, when the nation needed an IMF loan.
Rajan, on leave from his post as professor of finance at the University of Chicago Booth School of Business, said he wouldn’t use the word “crisis” in India’s context.
The RBI since July has raised two interest rates and capped cash injections into the banking system, seeking to curb the supply of rupees. Higher funding costs imperil the already subdued pace of expansion in Asia’s No. 3 economy.
“Rajan’s immediate challenge is to stabilize the currency and then get back to addressing growth concerns,” said Vivek Rajpal, a Singapore-based strategist at Nomura Holdings Inc. “A lot depends upon how the global picture pans out.”
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