Can the RBI's Rajan work with Narendra Modi?

When Rajan Met Modi

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Does Raghuram Rajanhave a reformist ally in Narendra Modi? Only time will tell if India's new Prime Minister Modi can scale up his fabled "Gujarat Model" to revitalize Asia's No. 3 economy. But there already are signs Rajan, India's central bank governor, is extending an economic olive branch to the new leader, which should cheer global markets.

The Reserve Bank of India is independent and Rajan, a respected University of Chicago professor, is no pawn. Nor can he afford to be a monetary pushover, given how India' 8 percent-plus inflation rate exacerbates the nation's crushing poverty. But Rajan seems willing to believeModi's pledges to bring down inflation -- and is willing to reciprocate the generosity. He did so this week by holding the benchmark repurchase rate at 8 percent and hinting that he's willing to ease policy if inflation pressures wane.

After all, much of India's inflation problem comes from the supply side: chronic inefficiency, terrible infrastructure and rampant corruption. Rajan has plenty of firepower to help Modi boost economic growth if, and only if, the government does its part. This unofficial pact between Rajan and Modi is a delicate one, and it could be scrapped at any moment. But if anyone in India has the gravitas to prod Modi to make good on his ambitious election pledges -- to trim debt, rein in the current-account deficit and cut poverty -- it's Rajan, who served as the International Monetary Fund's chief economist from 2003 to 2006.

I'm looking at this through the lens of my Washington days, when then-Federal Reserve Chairman Alan Greenspan joined forces with President Bill Clinton to balance the budget. While both the Fed and the White House were coy about the arrangement in public, the Fed agreed that it would go easy on interest-rate hikes so long as Clinton and Treasury Secretary Robert Rubin did their part to reduce public debt. The bargain paid huge dividends as the U.S. economy roared higher.

Can Rajan help unleash a similarly virtuous cycle in India? It's important to note that this is really the star economist's second big collision with Indian politics. The first, in October 2012, brought more frustration than success. Then-Prime Minister Manmohan Singh shocked many in New Delhi when he hired Rajan as a top adviser to the Finance Ministry. Rajan was perhaps the most acerbic critic of Singh's failure to deregulate the economy, liberalize the banking sector and reduce inflation. Soon enough, though, Rajan realized just how impossible a task that was when he saw the extent to which Singh was caught in the web of Gandhi family intrigue and corruption. And Rajan, too, came in for censure.

Now he has a second chance. Rajan has had considerable success at the RBI since September 2013, helping to stabilize the rupee and stopping India from becoming the first BRICs nation -- Brazil, Russia, India and China -- downgraded to junk. Now that Rajan has a potential reform ally in Modi, we could see some fascinating cooperation between Mumbai, where the RBI is based, and New Delhi. With luck, India's 1.2 billion people will be the beneficiaries.

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To contact the editor on this story:
Nisid Hajari at