The insider

After being part of the problem, RBI’s new boss is now expected to be the solution


By Mohan Sule

The appointment of Raghuram Rajan as the new governor of the Reserve Bank of India was greeted with a giddy reception generally reserved for the coronation of a new captain for India’s cricketing squad, who is expected to lift sagging team morale. Impressive qualities were discovered, not the least his three-year stint as the youngest chief economist at the IMF in Washington and his prescient warning three years ahead of the global financial crisis. As is so typical of such rituals heralding the close of an era and beginning of a new phase, the hard knocks of the past year were attributed to the outgoing chief’s slopping fielding including failure to catch the hurtling rupee, inability to duck the bouncers thrown by speculators, and arranging the field to contain inflation rather than shaking up the opening batting lineup to speed up the run rate. The central bank has blamed speculation in the overseas markets, while the government has attributed ballooning imports of oil and gold for the woes of the Indian rupee. Currency manipulators are like short sellers in the equity market, spotting a stock whose future is likely to be worse than its present. They can also be compared with acquirers in the corporate world, hunting for undervalued preys. Unutilized cash and valuations below assets in hand reveal a driver sleeping at the wheel.

The similarities end here. Bears can drive down a currency or a stock, creating panic and pain. On the contrary, mergers and acquisitions can help a stock to regain some of its shine in anticipation of a better tomorrow. Whatever the aim, the process of beating down value or purchasing an asset cheaply hinges on the underlying weakness. To fend itself, the target can utilise its reserves to make an offer that cannot be matched by the attacker or enlist a white knight. The end result could be a hollow victory as the company may have staved off a takeover but is left depleted of its cash and could have ceded even some control. Though the RBI has not dipped into the reserves, tightening of liquidity and imposition of import barriers by the government will raise the level of stress for its citizens. Hike in FDI caps in various degrees in some sensitive sectors without paying attention to ground-level problems like dodgy infrastructure and convoluted regulations seems a desperate rather than a logical measure. Rajan can continue the process of making money costly and scarce and thereby set back the timetable for India’s recovery. He can hope that the higher interest rates could make some foreign money on its way out to the recovering US economy pause and rethink. At best, the quality of this money would be questionable. Perhaps the realization that the scope for the incoming governor to undertake radical steps to stem the fall of the rupee is so limited that the market hardly blinked. The BSE Sensex lost 0.36% and the rupee sunk 42 paise to 61.21 a US dollar the day after the announcement.

Also, despite his foreign stint, Rajan was the ultimate insider as the head of a committee on financial reforms, honorary economic advisor to the Prime Minister and lately the chief economic advisor to the finance minister. When he returned to India in November 2008, the economy was already slowing down after a spectacular 9.32% annual growth in the year ended March 2008 (FY 2008). Economic output was up just 4.99% last fiscal. Though wholesale prices are down, consumer inflation has risen 1.68% points in this period after peaking at 13.37% in FY 2010. Current account deficit has nearly doubled. The rupee was 45.91 to a US dollar end FY 2009. FDI is down by US$ 3500 million from a four-year-ago level. On the positive side, fiscal deficit has narrowed by nearly 1% point and forex reserves surged by US$ 40,000 million end last fiscal. Due to his low profile, it is difficult to know the policies that had Rajan’s stamp unlike the Sonia Gandhi-headed National Advisory Council, which is the source of the rural guarantee employment scheme and the food security legislation. What was the economist’s contribution in freeing the pricing of petroleum products? How much of his inputs were responsible for retrospective taxation on transfer of Indian assets owned by foreign companies or giving tax men the discretion to determine if foreign investors registered in offshore havens had done so to avoid tax? Has he agreed with the decision to ramp up natural gas prices? Did he concur with former Finance Minister Pranab Mukherjee’s creation of a super financial oversight body ostensibly for better coordination among various regulators but in practice an encroachment on their autonomies? With his cover of anonymity gone, the central bank’s new chief will have to take credit or discredit for his actions. Besides shoring up of the rupee, how he tackles the new round of licensing of private banks will also test his mettle.