Dr. Raghuram Rajan took office as the new Governor of the Reserve Bank of India (RBI) on September 4, 2013, and his appointment appears highly welcome.
He certainly brings strong credentials, as most recently Dr. Rajan was the Chief Economic Advisor for the Indian Ministry of Finance. He previously spent time as a finance professor at the University of Chicago’s Booth School and as Chief Economist and Director of Research at the International Monetary Fund (IMF). In January 2003, he was awarded the Fischer Black Prize for the “best finance researcher under the age of 40” by the American Finance Association.1 In a number of articles discussing his appointment, Dr. Rajan is being referred to as India’s rock-star economist.2 He is well known for warning about the build-up of financial sector risks at a meeting of central bankers in 2005.
In typical rock-star fashion, he came out with a bang at his first press conference. Currency strategists have expressed concern that the RBI lacks credibility and that this contributed to rupee volatility. It will be Dr. Rajan’s job to re-establish the RBI’s credibility—and the reaction in both the currency and equity markets, at least initially, was a positive sign. [All is Not Lost for India ETFs]
Dr. Rajan underscored the importance of predictable monetary policy, inclusive growth and development, and improving India’s financial infrastructure. Key highlights of new initiatives and his research:
• Monetary Policy Framework Review: Dr. Rajan wants to establish a panel to review and strengthen the RBI’s monetary policy framework. This may be a tacit acknowledgement that the RBI must establish more predictable policies to fix its credibility problem.
• Inclusive Development
o Dr. Rajan mentioned that rural areas, as well as small and medium-size industries across the country, have been important engines of growth for India. However, access to finance is still difficult for them. He argued that faster, broad-based, inclusive growth would lead to a rapid drop in poverty.
o He made the case that the Indian public would benefit from more competition among banks and that banks would benefit from more freedom in their decision making.
• Speeding Up Approvals of New Branches: The RBI intends to make it easier for commercial banks to open new bank branches in every part of the country. A well-run domestic commercial bank will no longer have to approach the RBI for permission to open a branch. Regulations are often thought of as one of India’s challenges. The RBI’s cutting back red tape could prove a useful model for other parts of the economy.
• Opening Market to Foreigners: India has a number of foreign-owned banks that have helped fuel India’s growth in the past years. The RBI wants them to participate more in India’s growth but states that it would like “more regulatory and supervisory control over local operations so that the RBI is not blindsided by international developments.” Raising long-term foreign capital is key for the rupee’s future, and additional support for allowing those who receive rupees to reinvest them in India could also be very supportive of financing needs.