Raghuram Rajan joins the RBI
Out of the frying pan
A star economist is put in charge of India’s central bank
Aug 10th 2013 | MUMBAI |From the print edition
RAGHURAM RAJAN is often described as one of the few economists to predict the financial crisis. In a speech in 2005 to the world’s top central bankers he said innovation had made finance more dangerous. At the time his view was dismissed by Larry Summers, now a front-runner to become chairman of the Federal Reserve (see article), as “slightly Luddite”.
Raghuram Rajan经常被说成是少数几个预测到金融危机的经济学家之一。2005年一次向世界顶级央行银行家的演讲中，他说道创新让金融业更危险。当时，Larry Summers并没有理会他的观点，说他有点卢德分子的感觉，恐惧技术变革。现在Larry Summers是美联储主席的热门人选。
Mr Rajan has also been right about India. In 2010, as hubris in the country soared, he warned that “growth can never be taken for granted” and that “self-delusion is the first step towards disaster.” As he prepares to succeed Duvvuri Subbarao at the helm of the Reserve Bank of India (RBI) in September that caution seems prescient. India’s economy is in a funk and it faces a balance-of-payments scare. The rupee has fallen by 12% against the dollar in the past three months.
Mr Rajan’s appointment, announced on August 6th, is welcome. As well as a stint as chief economist for the IMF and a star turn in academia, he has spent the past year advising the finance ministry and has been involved in efforts to get India’s reforms back on track (with mixed results). He believes in liberalisation, which India needs lots more of.
Yet his is an unenviable task. To stabilise the currency the RBI recently introduced a package of measures to suck liquidity out of the banking system and in turn raise short-term market interest rates (the RBI’s benchmark rate was unchanged). This seems to be working but may cause a credit crunch among firms and banks, pushing GDP growth below the present 4-5% rate. India’s position is better than some critics allow: relative to its GDP it has a moderate amount of foreign debt to refinance. Still, for now the RBI must choose between a currency slump or strangling the economy.
In the long run the solution is a big burst of government reforms that would restore confidence among foreign and domestic investors. But with an election due by May 2014, that looks unlikely. In the meantime, Mr Rajan will have to face other problems. India’s state banks are sitting on a pile of bad debts. The RBI’s recent decision, in principle, to allow India’s business houses to set up their own banks is also a headache. Mr Rajan is a critic of cronyism but he will have his work cut out to prevent licences going to well-connected tycoons.
Mr Rajan is no administrator but will also have to reform the RBI. It is a fine institution, but a stretched one. In the 1990s it toyed with relinquishing some of its vast empire—it runs everything from monetary policy to public-debt issuance and bank regulation. Recently it has clung to its powers only to find that its multiple goals of stability, growth and low inflation conflict. Mr Rajan’s task is to resolve those contradictions. If he succeeds, Western central bankers, who have seen a proliferation in their responsibilities since the crisis, will have another reason to listen to his views.